This chapter presents information on small- and medium-sized enterprise (SME) performance and entrepreneurial dynamics in Brazil from an international comparative perspective. One of the main features of Brazil’s industry composition is the large share of wholesale and retail trade in the total stock of companies and national employment. SMEs account for a significant proportion of total employment and national value added in Brazil, but less than the OECD average. Labour productivity levels between Brazil and the OECD have diverged in the last 15 years. Against this backdrop, the gap in labour productivity between Brazil and the OECD is the largest in industry and trade, while it is narrower in construction and services. From a firm-size perspective, productivity gaps between SMEs and large companies are particularly wide in industry, which is also an outcome of the low innovation and export propensity of Brazilian manufacturing SMEs. As to entrepreneurial dynamics, Brazil shows a high rate of entrepreneurial activity, but growth-oriented entrepreneurship and business scale-up are much less common.
SME and Entrepreneurship Policy in Brazil 2020
Chapter 2. SME performance and entrepreneurial dynamics in Brazil
Abstract
The structure of the business sector
Sector analysis
Wholesale and retail trade have an unusual weight in the Brazilian business sector1
Data from the OECD Structural and Demographic Business Statistics (SDBS) database shows that Brazil, relative to OECD member countries, has a very large share of companies in wholesale and retail trade (henceforth, trade). More than half of Brazilian (formal) enterprises are registered in the trade sector (53%), compared with 26% in the OECD area. Conversely, Brazil has fewer companies in construction (4% of the total compared with 15% in the OECD area) and “other services” (32% of the total compared with 49% in the OECD area).2
Employment statistics confirm the prominence of trade in the Brazilian business sector, but also point to the average small size of trade-based enterprises. While more than half of Brazilian firms are in trade, these companies only generate one-third of national employment (33%). On the other hand, the occupational weight of industry and construction in Brazil is similar to the OECD average: 26% (Brazil) versus 23% (OECD) for industry and 8% (Brazil) versus 10% (OECD) for construction.
These figures point to some relevant stylised facts about Brazilian enterprises in the formal economy. First, while Brazil’s share of industry employment is similar to the OECD average, it is lower than in other main emerging-market economies.3 Second, most employment in services is in low-skilled activities: services account for 65% of national employment, nearly as much as in the OECD area (67%), but half of this employment is in wholesale and retail trade. Third, employment in construction is driven by large companies, to the extent that 4% of the total stock of companies generate 8% of national employment.
Wholesale and retail trade features low average labour productivity
Trade-based enterprises account for 33% of total employment but for only 25% of national value added in Brazil, whereas they generate 24% of total employment and 19% of value added in the OECD area, pointing to low average productivity in the Brazilian trade sector. Industry accounts for 36% of national value added in Brazil, which is in line with the OECD average (33%) but again less than in other large emerging economies. Finally, the share of construction in Brazil’s national value added is similar to the OECD average, suggesting that this sector is not too large compared to the rest of the economy.
Figure 2.1 summarises the information presented so far, highlighting how Brazil compares to the OECD average in terms of number of companies, employment and value added across the four sectors of industry, construction, trade (wholesale and retail), and “other services”.
Figure 2.1. Brazil and OECD sector composition of the business economy, 2016
Percentage values
Note: Due to missing information for some countries and sectors and to keep the OECD value consistent, the OECD average does not include the following 7 countries: Canada, Chile, Colombia, Japan, Korea, Mexico and the United States. Data for Brazil are from 2014.
Source: OECD calculations based on OECD Structural and Demography Business Statistics (SDBS).
Firm-size analysis
SMEs play an important role in the Brazilian economy and contribute adequately to gross output (but less so in industry)4
The SME definition in this section follows the one most commonly used within the OECD area, i.e. companies employing less than 250 people. The SME category is further broken down in micro-enterprises (1-9 people employed), small enterprises (10-49 people employed) and medium-sized enterprises (50-249 people employed).5 In the whole business sector, only one in every 300 companies has more than 250 workers, thus falling under the definition of a large company. Only 1 in every 50 companies has at least 50 employees, falling under the definition of a mid-sized firm.
Brazilian (formal) SMEs account for 62% of national employment and for 50% of national value added, which are relevant values although they are lower than the corresponding OECD averages: 70% and 55%. On the other hand, the contribution of Brazilian SMEs to industry employment and industry value added is much less significant, respectively 50% and 29% of the total, compared to 56% and 39% in the OECD area.
There is a lack of business scale-up in the trade sector
SMEs account for 79% of trade-based employment in Brazil, more than in the OECD area (73%). A further disaggregation shows that the share of trade-based employment in micro-enterprises is relatively similar between Brazil and the OECD area (39% and 40%), whereas the main difference is in the subsequent small size class (10-49 employees). In Brazil, this accounts for 28% of trade-based employment compared with 20% in the OECD area, suggesting the existence of possible barriers to business scale-up in the trade sector.
Figure 2.2 summarises information on SME shares in total employment and value added by sector in Brazil and in the OECD area.
Figure 2.2. SME contributions to employment and value added across sectors, Brazil and the OECD area, 2016
Percentage values
Note: SMEs are defined as companies employing up to 249 people. The OECD average does not include the following 9 countries for which information is missing or partial: Australia, Canada, Chile, Japan, Korea, Italy, Lithuania, New Zealand and the United States. Data for Brazil are from 2014.
Source: OECD calculations based on OECD Structural and Demography Business Statistics (SDBS).
The main findings from this section can be summarised as follows:
By international standards, Brazil has a very large share of companies and employment in wholesale and retail trade. However, these companies are on average very small and display low average labour productivity.
Brazil’s shares of employment and value added in industry, which mostly consists of manufacturing, are in line with the OECD average but are lower than in other large emerging economies.
SME shares in total employment and national value added are significant but lower than those in the OECD area; this is especially the case in industry.
Labour productivity
Labour productivity levels between Brazil and the OECD have diverged in the last 15 years
Brazil grew rapidly between 2001 and 2016, at an annual average GDP growth rate of 2.5% – 3.3% if the recession years of 2015 and 2016 were not included – compared with the OECD average of 1.8%. Brazil’s growth since the turn of the millennium has mostly been driven by employment growth – between 1996 and 2014 total employment grew from 72 to 106 million people – whereas productivity growth has played a subdued role. Between 2001 and 2016, growth in labour productivity (measured as GDP per person employed) averaged 0.7% in Brazil, compared with 0.9% in the OECD. Labour productivity levels between Brazil and the OECD have, therefore, diverged since 2001 (Figure 2.3). 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%) (Figure 2.4). Brazil’s productivity trends have followed closely those of the whole Latin America and the Caribbean (LAC) region, growing at very similar rates between 1995 and 2014 and both experiencing a decline since 2014 (Qian et al., 2018).
Figure 2.3. Growth in GDP per person employed, 2001-16
Total economy, percentage change at annual rate
Source: OECD (2018), OECD Compendium of Productivity Indicators 2018, https://doi.org/10.1787/pdtvy-2018-en.
Figure 2.4. GDP per person employed, 2016
As a percentage of the OECD average (OECD=100), current prices and current purchasing power parity (PPP)
Source: OECD (2018), OECD Compendium of Productivity Indicators 2018, https://doi.org/10.1787/pdtvy-2018-en.
Brazil’s slow productivity growth has been the outcome of different factors, among which limited structural change in the economy and poor productivity growth at the sector level. The main structural change in the last 20 years (between 1996 and 2014) has consisted in employment moving from agriculture (from 24.6% to 13.4% of total employment) to services (from 23.9% to 30.7%), whereas the employment share of wholesale and retail trade stalled (around 18.5%) and the one of manufacturing declined (from 12.8% to 11.3%).6 While employment has shifted from less to more productive sectors (i.e. from agriculture to services), the sector with the highest productivity (i.e. industry) has seen a decline in the employment share of its main component (manufacturing). Productivity growth at the sector level has also been modest. With the exception of agriculture, where productivity has doubled, other sectors experienced growth in labour productivity (value added per worker) of at most 20% (services) in the period 2000-13. In particular, labour productivity increased by 16% in wholesale and retail trade, while it declined by 8% in manufacturing (Qian et al., 2018).
Poor productivity growth is also observed, among other things, in the lack of business scale-up in Brazil, especially among SMEs. OECD data show that the average SME size did not increase at all between 2008 and 2014, although this was a period of rapid growth at the national level, while the average size of large companies surged by 4%.
The Brazil-OECD labour productivity gap is largest in industry and trade7
Sector-level data show that Brazilian labour productivity (measured as value added per person employed) is highest in industry (nearly USD 50 000), followed by construction and “other services” (USD 36 000 each) and wholesale and retail trade (USD 28 000). Brazil’s labour productivity in industry and trade is 51% of the one of the OECD area, compared with 58% and 64% in services and construction (Figure 2.5).
Figure 2.5. Average labour productivity in Brazil and the OECD area across sectors, 2016
USD PPP
Note: Average labour productivity is measured as value added over people employed. Local currency values are converted to USD at purchasing power parity (PPP) for GDP. The OECD average does not include Canada, Japan, Korea, Mexico and the United States for which information is partial or missing, as well as Chile and Colombia in the case of construction. Brazil’s data are from 2014.
Source: OECD calculations based on OECD Structural and Demography Business Statistics (SDBS).
The largest productivity gap between Brazil and the OECD is, therefore, in industry, which is also the sector where productivity gaps between SMEs and large companies are much wider than in the OECD area (see below). This has been associated with large economies of scale in Brazilian industrial groups, lack of competition, support policies mostly geared towards the large corporate sector (especially innovation policies), as well as low technology-intensity and innovation propensity of Brazilian SMEs.
Brazil’s labour productivity gaps by firm size are particularly wide in industry
Within the Brazilian business sector, the average labour productivity of micro and small enterprises is very similar; i.e. about 53% of labour productivity in large companies (BRL 84 500). Average productivity only becomes higher from mid-sized companies (BRL 59 200), standing at 70% of the large-company average (see Figure 2.6).
Productivity gaps between SMEs and large firms are very significant in industry. Here, average labour productivity in micro and small enterprises is relatively similar (BRL 46 500 vs. BRL 42 700), while it grows a bit among mid-sized firms (BRL 57 300). However, labour productivity more than doubles in large companies (BRL 123 600), suggesting the importance of reducing the large productivity gap between SMEs and large companies in industry.
Finally, labour productivity grows quite linearly along with the firm size distribution in trade. In Brazil, trade-based micro-enterprises have productivity levels about half of those of large companies (53%), while for small enterprises the rate is about three-quarters (74%). Interestingly, trade-based mid-sized companies have productivity levels above the large-company average (107%). The main problem in trade, therefore, lies with the average low productivity of the whole sector and the large proportion of employment in it, which together slow down aggregate productivity growth and impact on income inequalities.
Figure 2.6. Average labour productivity by firm size across sectors in Brazil, 2014
BRL (thousands)
Note: Labour productivity measured as value added per person employed. Micro, 1-9 people employed; small, 10-49 people employed; medium, 50-249 people employed; large, 250+ people employed.
Source: OECD calculations based on OECD Structural and Demography Business Statistics (SDBS).
The main findings from this section can be summarised as follows:
Labour productivity levels between Brazil and the OECD area have diverged in the last 15 years.
Productivity levels between Brazil and the OECD diverge the most in industry and trade, while the gap is narrower in construction and services.
From a firm-size perspective, labour productivity in the whole business sector grows less linearly in Brazil than in the OECD area. Micro and small companies have, indeed, similar average labour productivity, with this only starting to grow from mid-sized firms.
Productivity gaps by firm size are particularly wide in industry. Industry-based mid-sized firms have productivity levels only a bit higher than those of micro and small companies, but average labour productivity in industrial large companies is more than twice the one in mid-sized firms.
Productivity levels by firm size in trade grow quite linearly, although mid-sized firms are on average more productive than large companies. Thus, the main problem in trade lies in rather low labour productivity in the whole sector and the large proportion of the workforce employed in it.
The performance of SMEs: innovation and export
This section looks at the innovation and export performance of Brazilian SMEs. Two different SME definitions are used. With respect to innovation, which draws on data from national innovation surveys, SMEs are companies employing between 10 and 249 people employed, similarly to the definition used until now in this chapter.8 With respect to export, small enterprises are defined as those complying with Lei Complementar 123/2006 (i.e. those with annual gross revenues up to BRL 4.8 million).
SME innovation
Business research and development is largely concentrated in large companies in Brazil9
Business research and development (R&D) is a major source of technological innovation, but Brazil’s business R&D in relation to GDP was only 0.6% in 2016, compared with an OECD average of 1.6%. Most R&D and innovation activity in Brazil is undertaken by large companies: only 4% of small companies (10-49 people employed) undertake R&D in Brazil with an average investment of BRL 355 000, compared with 18% of mid-sized companies (50-249 people employed) with an average investment of BRL 1.87 million, and 34% of large companies (250+ people employed) with an average investment of BRL 14 million. On the whole, SMEs account for 21% of total innovation spending by innovative companies.
Innovation survey data point to mixed results in terms of SME innovation
While few Brazilian SMEs carry out R&D, 30.3% of them report that they introduced product/process and marketing/organisational innovations in the period 2012-14 (Figure 2.7), which is high by international standards (OECD median: 25%). However, when it comes to product/process innovation only, which is more closely related to technological innovation, Brazil’s performance is less good: only 4.8% of Brazilian SMEs have introduced product or process innovation, compared with the OECD median of 12%.
Figure 2.7. SMEs introducing product/process and marketing/organisational innovation, 2012-14
Percentage of all businesses in each size category
Note: Percentage of all businesses in each size category within the scope of national innovation surveys, where SMEs are companies with 10-249 people employed. Data for Colombia only refer to manufacturing.
Source: OECD (2017a), OECD Science, Technology and Industry Scoreboard 2017: The Digital Transformation, https://doi.org/10.1787/9789264268821-en.
New-to-market products are typically considered the highest form of business innovation. Only 3.7% of Brazilian SMEs report having introduced products new to the market in the period 2012-14, compared with 18.5% of large firms (Figure 2.8). Both figures are low by international standards, although the gap between large firms and SMEs in Brazil is similar to the one in the OECD area (15 vs. 17 percentage points), and Brazilian SMEs do better than SMEs in other OECD Latin American countries (Colombia and Chile).
Innovation in small companies often occurs through collaborative arrangements with other companies and research organisations. The following information on collaboration in innovation is based on “innovative SMEs”, i.e. those SMEs that have introduced product/process innovation (i.e. 4.8% of the total in Brazil).
Only 4.5% of innovative SMEs have collaborated in innovation with universities; given that 4.8% of SMEs engage in product/process innovation, this means that only one every five-hundred SMEs in Brazil (0.2%) collaborate with universities or other higher education institutions in innovative projects. Collaboration with either clients or suppliers is more common: about 10% of innovative SMEs report that they have engaged in this type of collaboration. In broader terms, this means that one every two-hundred SMEs (0.5%) has carried out innovative projects together with clients or suppliers in Brazil.
Figure 2.8. SMEs introducing new-to-market products, 2012-14
Percentage values
Note: Percentage of all businesses in each size category within the scope of national innovation surveys, where SMEs are companies with 10-249 people employed. Data for Colombia only refer to manufacturing.
Source: OECD (2017a), OECD Science, Technology and Industry Scoreboard 2017: The Digital Transformation, https://doi.org/10.1787/9789264268821-en.
To summarise, business R&D and innovation activity in Brazil is relatively limited by international standards and mostly concentrated in large companies. Going forward, the government should seek to encourage more SME innovation, notably by enhancing targeted measures for SMEs such as R&D grants and innovation-oriented collaborative projects with larger companies and research organisations. These policy leads are further elaborated in Chapters 5 and 7 of the report.
There is a big divide between digital-savvy SMEs and the rest
Another form of business innovation beyond R&D and product development involves the use of digital technologies to increase market shares or make production more efficient. The first step in the business digitalisation journey is typically for a company to have a website to promote and sell online its products or services. Only about half (51%) of Brazilian small businesses (10-49 people employed) have a website in Brazil, which is less than any OECD country including Colombia (59%). The gap between small and large companies in the use of a company website is also large at 38 percentage points, i.e. twice as much as the OECD average (Figure 2.9).
Figure 2.9. Small enterprises with a company website, 2018
Percentage values
Note: Percentage values within the context of OECD and EUROSTAT national surveys. Small companies are companies employing 10-49 people. Large companies are companies employing 250+ people.
Source: OECD ICT Access and Use by Businesses Database.
However, when it comes to the proportion of small businesses receiving orders online, Brazilian small companies (10-49 people employed) do better than many of their peers in the OECD area. Twenty-one percent of them report that they have received orders online, above the OECD median value (19.6%) and very close to the value of Brazil’s large companies (250+ people employed), i.e. 22.5% (Figure 2.10). There is, therefore, potential for expanding the use of e-commerce in Brazil starting from a good base of businesses receiving orders online.
A further step in the business digitalisation journey is the use of digital technologies such as cloud computing services, Enterprise Resource Planning (ERP) and Custom Relations Management (CRM) software. Brazilian companies, including small companies, do relatively well in the use of these technologies. In particular, Brazilian companies are as likely as Japanese companies (44.6%) to use cloud computing services, while the use of ERP (27%) and CRM (20%) is below the corresponding OECD median values (33% and 30%). These trends are confirmed when looking at the subgroup of small enterprises (10‑49 people employed): 22% of Brazilian small companies (10-49 people employed) use ERP and 18% use CRM, compared with OECD median values of 26% in both cases.
Figure 2.10. Small enterprises receiving orders over computer networks, 2018
Percentage values
Note: Percentage values within the context of OECD and EUROSTAT national surveys. Small companies are companies employing 10-49 people. Large companies are companies employing 250+ people.
Source: OECD ICT Access and Use by Businesses Database.
To summarise, a small proportion of Brazilian companies has a presence online through the use of a company website. However, those companies that are online, often receive orders online and are active users of cloud computing services. Moreover, a fair share of companies, including small companies, use more complex software such as EPR and CRM. Against this backdrop, business digitalisation policies should prioritise increasing the number of SMEs exposed to digital technologies, with a view to bridging the divide between digital-savvy SMEs and the rest. This will mostly involve framework policies such as reducing the cost of broadband connection through increased competition in telecommunications. At the same time, the use of more sophisticated technologies, such as ERP and CRM, could be subsidised for those companies readier to tap into global supply chains and/or export. These policy ideas are further elaborated in Chapter 6 of the report.
SME exports
Micro and small enterprises have a marginal role in national exports
This section draws on a publication by SEBRAE (2018) in collaboration with the former Ministry of Industry, Foreign Trade and Services (MDIC) and the National Statistical Office (IBGE). The definition of micro and small enterprises (micro e pequenas empresas, MPE) is the one in Lei Complementar 123/2006, although the study dates back to 2017 when the MPE revenue threshold was BRL 3.6 million rather than BRL 4.8 million as from 2018.
In 2017, there were about 22 000 exporting companies in Brazil, up from about 19 000 in 2009. This figure, however, does not include exports made through commercial exporting companies (comerciais exportadoras).10 Of the 22 000 exporting companies in 2017, about 9 000 were MPEs, i.e. 41% of the total. However, when it comes to export volumes, the contribution of MPEs is almost trivial: only BRL 1.2 billion out of the total BRL 217.6 billion of Brazilian exports originated from MPEs in 2017, i.e. 0.54% of the total (Figure 2.11). The average export value of an MPE was only USD 131 600, which is the result of many MPEs being one-off exporters (i.e. 37% of micro-enterprises and 23% of small enterprises).
Figure 2.11. Share of Brazilian micro and small enterprises (MPEs) in total exporters and total export volume, 2009-17
Percentage values
Note: Micro and small enterprises (micro e pequena empresas, MPE) defined as per Lei Complementar 123/2006, i.e. annual gross revenues up to BRL 3.6 million at the time of the study. The annual gross revenues threshold has since then been revised upward, to BRL 4.8 million.
Source: OECD based on SEBRAE (2018), As Micro e Pequenas Empresas nas Exportações Brasileiras, 2009‑2017, SEBRAE, Brasília.
According to the study by SEBRAE, some of the reasons behind the small export propensity of MPEs are their concentration in labour-intensive sectors exposed to price competition from Asia, their poor integration into global supply chains, and their difficult access to distant foreign markets. Indeed, the Mercosul trade bloc is the main destination of MPE products (21% of total volume), followed by the United States and Canada (20%), and the EU (20%),11 whereas the main destination of products from medium and large companies is the Asia-Pacific region (34.4%).
Exporting MPEs and medium/large companies also differ with respect to sector composition. While large-company exports are mostly concentrated in manufacturing (83% of total volumes), wholesale and retail trade accounts for 43-45% of total export volume in the case of MPEs. One-third of export products of MPEs are low-tech (33%), but a relatively large share also features medium-high technology intensity (27%).
Finally, the SEBRAE study presents information on the use by MPEs of the Simplified Export Declaration (Declaração Simplificada de Exportação, DSE), a simplified custom document which was in use until recently only for exports of value below USD 50 000 over six consecutive months. Unsurprisingly, given the small export threshold, three-quarters of DSE users were MPEs. However, in 2017, only 2 200 MPEs opted for the DSE, i.e. one‑quarter of the total 9 000 exporting MPEs. In terms of volumes, only USD 23.3 million were exported through the DSE in 2017. The DSE has recently been replaced by the Single Export Declaration (Declaração Única de Exportação, DUE), a new export document which merges different forms and is available to all exporting companies regardless of their size.
On the whole, the role of MPEs in Brazilian exports is quite marginal, thus calling for a comprehensive government strategy to address this issue. The government should certainly strengthen the export culture of SMEs, something which has started to do through the National Export Culture Plan (Plano Nacional da Cultura Exportadora, PNCE) in selected pilot states. After a first evaluation of the pilot initiative and setting appropriate performance indicators, the PNCE should be rolled out to all states of the Federation to increase the total number of small exporting businesses. At the same time, the government should work more closely with existing SME exporters, especially those which are not one‑off exporters and have exported, in a sustained manner, volumes above the MPE export average (i.e. USD 131 600). These policy issues are further discussed in Chapter 6 of the report.
Entrepreneurship performance and entrepreneurial dynamics
Entrepreneurial attitudes and business ownership
Personal and societal attitudes towards entrepreneurship influence the rate of business ownership and business growth, although both business creation and business growth also depend on macroeconomic conditions and policies, making the relationship between entrepreneurial attitudes and entrepreneurial activity not always straightforward.
Business ownership is common in Brazil, but there is a lack of growth-oriented entrepreneurship
Data on entrepreneurial attitudes from the Global Entrepreneurship Monitor (GEM) research consortium show that only about one-third (31%) of Brazilian adults (aged 18-64) perceive good opportunities to start a business in the area where they live, less than the OECD simple average (38%) and all Latin American countries taken into consideration except Uruguay (29%). On the other hand, Brazil does better than the OECD average (33% vs. 38%) when it comes to “fear of failure”, which points out the share of those who perceive local market opportunities but who state that fear of failure will prevent seizing such opportunities. Nonetheless, fear of failure in Brazil is still higher than all other Latin American countries taken into consideration (Figure 2.12).
Figure 2.12. Perceived opportunities and fear of failure, 2018
Percentage values (adult population aged 18-64)
Note: Perceived opportunities: Percentage of total adult population (aged 18-64) who see good opportunities to start a business in the area where they live. Fear of failure: Percentage of total adult population (aged 18-64) with positive perceived opportunities who indicate that fear of failure would prevent them from setting up a business. The OECD value is the simple average of the values of the 31 OECD countries for which there is recent information (2016-18).
Source: OECD calculations based on Global Entrepreneurship Monitor (GEM) database.
Moving from attitudes to activity, GEM’s total entrepreneurial activity (TEA) rate measures the proportion of the adult population who is either a nascent entrepreneur or a new business owner.12 Brazil’s TEA rate is significantly higher than the OECD average (18% vs. 11%), but only 6% of those involved in TEA in Brazil expects 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 (Figure 2.13).
Figure 2.13. Total early-stage entrepreneurial activity (TEA) and high job creation expectations, 2018
Percentage values (adult population aged 18-64)
Note: The total early-stage entrepreneurial activity (TEA) rate provides estimates of the proportion of the adult population (aged 18-64) who have either been involved in a start-up for less than three months (i.e. nascent entrepreneurs), or who have been business owners for less than three-and-a-half years (i.e. new business owners). The high job creation expectation rate gives the percentage of those involved in TEA who expect to create six or more jobs in five years. The OECD value is the simple average of the values of the 31 OECD countries for which there is recent information (2016-18).
Source: OECD calculations based on Global Entrepreneurship Monitor (GEM) database.
National official statistics reflect these survey data, showing that many Brazilians are already business owners or are involved in the act of business creation, but that the overwhelming majority of businesses are very small and find it difficult to grow. For example, Brazil’s self-employment rate (32%) – which measures the proportion of employers and own-account workers in total employment – is twice as high as the OECD median value (15%) (Figure 2.14). Self-employment can be linked to the desire of being one’s own boss, but when it is so common it is also likely to include a great deal of necessity-driven entrepreneurship.
Brazil’s high self-employment rate is, therefore, also linked to lack of business scale-up and related job opportunities in Brazil. As mentioned above, between 2008 and 2014, when the Brazilian economy grew at an annual average rate of 2.6%, the average SME size did not change, whereas the average size of large companies increased by 4%. This has led some analysts to talk of “missing middle” (Coelho et al., 2017), i.e. the lack of larger SMEs more able than the others to create good quality jobs.
Figure 2.14. Self-employment rates, 2017
Percentage of total employment
Note: Self-employment is defined as the employment of employers, workers who work for themselves (own-account workers), members of producers’ co-operatives and unpaid family workers. This indicator is measured as a percentage of the employed population.
Source: OECD Labour Force Statistics.
Entrepreneurial dynamics
There is substantial business churning in the Brazilian economy
Business demography indicators show that there is substantial enterprise churning in the Brazilian economy. Taking into consideration only employer enterprises – which have a stronger impact on employment than own-account workers (people working on their own without employees) – Brazil exhibited in 2014 an enterprise birth rate of 13.3% and an enterprise death rate of 10.6%, meaning that in 2014 the number of employer companies increased by 2.7%. Brazil’s enterprise birth and death rates are higher than the respective OECD median values (i.e. 10.4% and 8.7%), proving that it is relatively easy to start and close a (small) business in Brazil (Figure 2.15). Nonetheless, the birth rate of employer enterprises declined between 2010 and 2014, from 17.1% to 13.3%, which also led to a drop in the net business creation rate, from 6.9% to 3.4%.
Figure 2.15. Employer enterprise birth rate and death rate, 2016
Percentage values of total employer enterprises
Source: OECD calculations based on OECD Structural and Demography Business Statistics (SDBS).
Business survival rates are high by international standards
Brazil’s enterprise survival rate is also relatively high by international standards, standing at 76.6% in 2012. However, it was only 55.4% in 2009, before the introduction of the Micro Empreendedor Individual (MEI) tax and regulatory regime which since 2009 has supported business formalisation. Indeed, disaggregated data on the company legal status show that the average survival rate over the period 2009-12 was much higher for companies under the MEI regime (91%) than for micro-enterprises opting for the Simples Nacional regime (51%), confirming that MEI is helping mostly own-account workers to operate more sustainably in the formal sector. However, the SEBRAE study on business survival also shows that, regardless of the specific firm size, companies which opt for the preferential regime Simples Nacional have two-year survival rates twice as high as of those that do not operate under this regime, e.g. 83% vs. 38% in 2014 (SEBRAE, 2016) (Figure 2.16).
New companies, however, generate few jobs and find it difficult to grow
The entrepreneurial process of “creative destruction” is a main source of job creation and growth. Figure 2.17 shows a negative relationship between “net business creation” (i.e. the difference between enterprise birth and enterprise death rates) and the share of total employment deriving from this process, which is the result of most new businesses starting smaller than the average enterprise size. Against this backdrop, the case of Brazil is interesting because a high “net business creation” rate (2.7%) only generates 0.5% of total employment, whereas other countries achieve a similar employment result through a lower rate of net business creation. This means that new companies generate relatively fewer jobs in Brazil than in most OECD countries.
Figure 2.16. Two-year enterprise survival rate, 2015
Percentage values
Note: The two-year survival rate is measured as follows: number of enterprises in the reference period (t) newly born in t-2 having survived to t divided by the number of enterprise births in t-2. Brazil MEI indicates the average two-year survival rate over the period 2009-12 for companies under the MEI regime. Brazil (micro‑SN) indicates the average two-year survival rate over the period 2009-12 for micro-enterprises opting for Simples Nacional.
Sources: OECD calculations based on OECD Structural and Demography Business Statistics (SDBS) and SEBRAE (2016), Sobrevivência das empresas no Brasil, October 2016, Brasília.
This finding is also supported by empirical research. Coelho et al. (2017), for example, find that the average size (employee-based) of companies in their first year of life is only 2.4. The average number of employees grows almost fivefold in the first 12 years of life, from 2.4 employees to 12 employees. However, if the population of enterprises is divided by firm size at birth, micro-enterprises (1-9 employees) do not mature from their own category even after 12 years in the formal sector, i.e. they do not overcome the threshold of nine employees. Similarly, Bastos and Silva (2017) find that less than 1% of new companies account for over a third of the new jobs created by the same birth year cohort 13 years later.
To wrap up, more than business creation as such, what appears to be a priority for Brazil is to encourage growth-oriented entrepreneurship and business scale-up among SMEs, two objectives that require broad tax and regulatory reforms more closely analysed in Chapter 3 of the report.
Figure 2.17. Relation between net business churning and its employment contribution, 2015
Percentage values
Note: Net business churning is calculated as the difference between the birth and death rates of employer enterprises. The employment contribution from net business churning is calculated as the difference between the employment shares of employer enterprise births and deaths in total employment.
Source: OECD calculations based on OECD Structural and Demography Business Statistics (SDBS).
Brazil has a high but declining number of high-growth firms13
High-growth firms (HGFs) are enterprises which grow fast over a short period of time.14 While Brazil has a relatively high rate of HGFs by international standards, recent IBGE data show that this rate declined between 2013 and 2015 from 7% to 5.4% (IBGE, 2017). The total number of HGFs also dropped by 29%, from 33 373 in 2013 to 25 796 in 2015, and so did the share of employment in HGFs, from 14.2% to 10.4% of total employment. On the other hand, the average salary in HGFs did not decrease significantly between 2013 and 2015, only sliding from 2.8 to 2.7 times the minimum wage.
While HGFs pay salaries almost three times the minimum wage, their average labour productivity (BRL 70 200 per employee) is 10.3% lower than the average productivity of active companies (with 10 or more people employed).15 Moreover, the average age of HGFs in Brazil is 13.7 years, slightly lower than the average age of companies with at least 10 employees (15.3 years), but not as young as HGFs are typically believed to be. This is also confirmed by data on “gazelles” (HGFs aged less than 5); in 2015, these were only 0.75% of Brazilian enterprises with at least 10 employees, a low value from an international comparative perspective (OECD, 2017b).
Information on the size of Brazilian HGFs also offers interesting insights. Over half (55.2%) of Brazilian HGFs are small (10-49 people employed), but altogether these companies only employ 12.6% of total employment in HGFs. On the other hand, while large companies (250+ people employed) account for 8% of total HGFs, they host 60% of the total workforce in HGFs. Finally, in line with the experience of other countries, Brazilian HGFs are unlikely to repeat their growth spurt. Over 60% of them experience a decline in employment in the following observation period; about 20% continue to grow, but at a pace slower than 20% per year; and 13% continue on their high-growth trajectory.
This statistical profile corroborates the paucity of growth-oriented entrepreneurship in Brazil and should be borne in mind in the design and implementation of specific programmes aimed at high-growth firms or firms with high-growth potential.16 These programmes should not overlook the role of mid-sized companies in business high-growth and should not be limited to start-ups and young companies only. At the same time, a deficit in competition may help explain the average old age of Brazilian HGFs and the fact that large established companies account for most HGF employment, pointing to the role of competition policy reforms to increase the number of gazelles (younger HGFs).
The informal sector
Brazil’s share of informality is higher than in other countries at similar levels of income
The analysis so far has only focused on the formal sector. However, similarly to other emerging economies, Brazil’s informal economy is large and cannot be completely overlooked in an analysis of the domestic business sector. Figure 2.18 shows a clear negative relationship between the size of the informal sector and the level of income across OECD and Latin American countries.17 Brazil’s position above the trend line indicates that informality in Brazil is more common than in other countries at similar levels of income. More specifically, the average size of Brazil’s informal sector was estimated at 38% of GDP between 1991 and 2015, higher than in the three OECD member countries from Latin America (Colombia, 33%; Mexico, 32%; Chile, 17%), the emerging-market average (32%) and the advanced-economy average (17%) (Medina and Schneider, 2018).18
Turning to the informal business sector, estimates from SEBRAE based on data from IBGE (SEBRAE, 2019) set the total number of business owners in Brazil at 27.5 million, 71% of whom (19.5 million) are not registered with the National Registry of Legal Entities (Cadastro Nacional de Pessoas Jurídicas, CNPJ), which can be considered a proxy of informality. As could be expected, business owners without a CNPJ number are more common among own-account workers (i.e. self-employed people without employees) than among employers (Table 2.1).19
Figure 2.18. The long-term relation between the size of the informal economy and income per capita, 1991-2015
Percentage of GDP (informal economy) and natural logarithm of GDP per capita
Note: Informal economy as a percentage of GDP, based on estimates from Medina and Schneider (2018). GDP per capita at current prices and current PPPs, US dollars.
Source: OECD calculations based on OECD National Accounts Database and Medina L. and F. Schneider (2018), Shadow Economies Around the World: What Did We Learn Over the Last 20 Years?, IMF Working Paper 18/17, Washington DC.
Table 2.1. Brazilian business owners with and without a CNPJ number, 2018
Note: CNPJ (Cadastro Nacional de Pessoas Jurídicas) is Brazil’s National Business Registry.
Source: SEBRAE (2019), Estudo sobre o Empreendedorismo Informal no Brasil, SEBRAE, Brasília.
The sectors in which informality is most common in Brazil are trade and other services such as repair shops and restaurants, which account respectively for 26% and 33% of the value added generated by the informal economy. Average labour productivity in the informal sector is estimated to be only one-quarter of average labour productivity in the formal sector (Nogueira, 2017). This wide productivity gap is partially linked to the sectors in which informality is concentrated (trade and services), which have knowledge and capital intensity below the economy average, but also to other firm-level factors such as low managerial and workforce skills, inadequate use of technology and lack of external finance.
Different sources point to a decline in the size of the informal sector since the early 2000s, which has been fuelled by uninterrupted GDP growth between 2000 and 2014 (Nogueira, 2017).20 Government policies have also supported business formalisation, notably the Micro Empreenderor Individual (MEI), a special regime introduced in 2009 that applies to business owners with annual revenues below BRL 81 000 and who employ no more than one person. As of January 2019, nearly 8 million people had registered with MEI. Based on estimates by SEBRAE, about 600 000 people have formalised their business through MEI since 2009, and between 50 000 and 70 000 upgrade every year from MEI to the Simples Nacional regime for companies with annual turnover up to BRL 4.8 million (SEBRAE, 2019).
Overall, the MEI appears to be working well in favouring the formalisation of the self-employed, as also shown by the high survival rate of MEI users. One of its strengths consists in the creation of a parallel, permanent and extremely simplified tax and legal system aimed at own-account workers and micro-employers who would otherwise be unlikely to operate in the formal economy.21 At the same time, international experience suggests that targeted policies are attractive especially to companies that already operate close to the formal sector (Perry et al., 2007). Hence, the importance of improving the overall business environment and quality of public institutions – e.g. in terms of tax law, labour market regulations, quality of government services – to achieve a deeper and more lasting impact on the reduction of informality.
Conclusions and policy recommendations
This chapter has looked at the industry structure, SME performance and business dynamics of Brazil from an international comparative perspective. The first part of the chapter has shown how wholesale and retail trade plays a very large role in the Brazilian economy: more than half of the total stock of (formal) companies and one-third of (formal) employment belong to this sector. However, trade-based companies are on average very small and feature low average labour productivity, making a large trade sector one of the reasons behind slow productivity growth in Brazil. On the other hand, Brazil’s share of industry in national value added is in line with the OECD average, but lower than in other large emerging economies.
Labour productivity levels between Brazil and the OECD have diverged in the last 15 years. The gap in average labour productivity between Brazil and the OECD is the largest in industry and wholesale and retail trade, while it is narrower in construction and services. From a firm-size perspective, Brazil’s labour productivity grows less linearly than in the OECD area. Micro and small companies have similar average productivity levels, with average labour productivity only starting to grow from mid-sized firms. In industry, labour productivity along the firm size distribution is even flatter: average labour productivity in micro, small and medium-sized companies does not change much, but it is double the one in mid-sized firms among large industrial companies. Overall, this suggests the need to reduce productivity gaps between SMEs and large companies, especially in industry, and to foster business scale-up, especially in trade.
The second part of the chapter has looked at the performance of SMEs in terms of innovation and export. Few SMEs do R&D, introduce new products or collaborate in innovation with universities and suppliers. This calls for remedial policies supporting more actively SME innovation, including in collaboration with research organisations and within the context of open innovation systems (see Chapters 5 and 7 for more details).
Closely related to innovation is the use of digital technologies. From an international comparative perspective, a small proportion of Brazilian small companies has a website presence, but a relatively large share of them receive orders online and use more sophisticated technologies such as ERP and CRM. This points to a relatively big divide between digitalised and non-digitalised SMEs, calling for framework policies (e.g. more competition in telecommunications) that can bridge this gap and for targeted approaches that further promote the use of more sophisticated digital technologies in SMEs ready to enter international markets or tap into global supply chains.
Data on exports by micro and small enterprises (Micro e Pequena Empresas, MPEs), as defined by Lei Complementar 123/2006, show that exporting MPEs are only a small fraction of the total and account for a tiny share of Brazilian exports (0.54%). There is, therefore, scope for increasing the number of exporting MPEs and boosting the volume of MPE exports by, inter alia, nurturing the export culture of micro and small companies and developing an account management system to provide tailored assistance to those which export more regularly (see Chapter 6 for further details).
With respect to entrepreneurial dynamics, Brazil exhibits higher-than-average rates of business creation and business destruction, showing that it is relatively easy to start and close a small or sole-proprietor business in Brazil. However, high business churning is not associated with much job creation, and there is evidence that most companies, both new and existing ones, find it difficult to grow, pointing to a lack of business scale-up.
Interestingly, Brazil has a relatively high rate of high-growth firms (HGFs). Most HGFs are small (10-49 people employed), but most HGF employment is found in a small number of large HGFs. Moreover, the average age of HGF is not particularly young, confirming the lack of growth-oriented entrepreneurship in Brazil. This profile suggests that programmes aimed at growth-oriented SMEs should be as open as possible to firms of different size, age and sector. At the same time, competition policy reforms can help increase the number of younger high-growth firms (i.e. gazelles).
Finally, similarly to other emerging-market economies, Brazil’s informal sector is large. The MEI preferential tax and regulatory regime has been the main formalisation policy of Brazil, and there is indeed evidence that this policy has helped the formalisation of micro-enterprises and boosted their survival rate in the formal economy. However, there are also some problems associated with MEI (see Chapter 3) and the road towards a smaller informal sector is likely to require broader reforms of the business environment, notably in areas such as taxation, product market regulations and employment legislation.
Policy 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.
Further promote the use of digital technologies such as ERP and CRM among SMEs ready to export and/or tap into global supply chains.
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.
References
Bastos, P. and J. Silva (2017), The Origins of High-Growth Firms: Evidence from Brazil, Mimeo, World Bank, Washington, DC.
Coelho, D., C.H. Corseuil and M.N. Foguel (2017), “Employment growth of establishments in the Brazilian economy: Results by age and size groups”, in OECD, Business Dynamics and Productivity, OECD Publishing, Paris, https://doi.org/10.1787/9789264269231-en.
IBGE (2017), Estatísticas de Empreendedorismo, Instituto Brasileiro de Geografia e Estatística, Rio de Janeiro.
Medina, L. and F. Schneider (2018), “Shadow economies around the world: What did we learn over the last 20 years?”, IMF Working Paper, Vol. 18(17), Washington, DC, https://www.imf.org/en/Publications/WP/Issues/2018/01/25/Shadow-Economies-Around-the-World-What-Did-We-Learn-Over-the-Last-20-Years-45583.
Nogueira, M. (2017), Um Pirilampo no Porão: Um Pouco de Luz nos Dilemas da Produtividade das Pequenas Empresas e da Informalidade no Brasil, Instituto de Pesquisa Econômica Aplicada (IPEA), Brasília.
OECD (2018), OECD Compendium of Productivity Indicators 2018, OECD Publishing, Paris, https://doi.org/10.1787/pdtvy-2018-en.
OECD (2017a), OECD Science, Technology and Industry Scoreboard 2017: The Digital Transformation, OECD Publishing, Paris, https://doi.org/10.1787/9789264268821-en.
OECD (2017b), Entrepreneurship at a Glance 2017, OECD Publishing, Paris, https://doi.org/10.1787/entrepreneur_aag-2017-en.
Perry, G. et al. (2007), Informality: Exit and Exclusion, Latin American and Caribbean Studies, World Bank, Washington, DC, https://openknowledge.worldbank.org/handle/10986/6730.
Qian, R., J. Araújo and A. Nucifora (2018), Brazil’s Productivity Dynamics (English), World Bank Group, Washington, DC, http://documents.worldbank.org/curated/en/195351520427970225/Brazil-s-productivity-dynamics.
SEBRAE (2019), Estudo sobre o Empreendedorismo Informal no Brasil, SEBRAE, Brasília.
SEBRAE (2018), As Micro e Pequenas Empresas nas Exportações Brasileiras, 2009-2017, SEBRAE, Brasília.
SEBRAE (2016), Sobrevivência das empresas no Brasil, SEBRAE, Brasília.
Notes
← 1. When talking of business sector (or business economy), neither government activities nor agriculture is taken into consideration; as a result, industry or services shares of employment and value added in the business sector are not the same as those for the whole economy. Information in this section comes 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. This results into different figures from those based on Brazil’s Continuous National Household Sample Survey (Pesquisa Nacional por Amostra de Domicilios Continua, PNADC). Due to missing information for some sectors in some countries and in order to keep the OECD value consistent throughout the analysis, OECD averages in the sector analysis do not include the following 7 countries: Canada, Chile, Colombia, Japan, Korea, Mexico and the United States.
← 2. “Other services” include all other services except wholesale and retail trade and financial and insurance activities. Industry encompasses mining, manufacturing and electricity and gas supply; within industry, manufacturing typically takes the lion’s share, especially in terms of employment.
← 3. For example, the share of industry employment in two other upper-middle income countries such as Mexico and Turkey is respectively 31% and 30%.
← 4. Due to missing information the OECD value in this section does not include the following 9 countries: Australia, Canada, Chile, Japan, Korea, Italy, Lithuania, New Zealand and the United States. It should be noted that figures on SMEs in this section are also affected by the size and performance of the large business segment; for example, higher SME contributions to value added can partly be the outcome of low average productivity in large companies. Similarly, the exclusion of the United States and Japan from the OECD average is likely to make the OECD SME average (both in terms of employment and value added) larger than it would be otherwise.
← 5. In Brazil a more common small business definition is the one that follows Lei Complementar 123/2006, by which micro and small companies are defined as those with annual gross revenues below BRL 4.8 million. These companies receive preferential regulatory and fiscal treatment through the Simples Nacional regime (see Chapter 3) and are the target of the programmes of SEBRAE (Serviço Brasileiro de Apoio às Micro e Pequenas Empresas), Brazil’s micro and small business agency.
← 6. These proportions, which are taken from Qian et al. (2018), refer to the whole economy (including agriculture and government activities), not only to the business sector.
← 7. The OECD average does not include Canada, Japan, Korea, Mexico and United States for which information is partial or missing, as well as construction in the case of Chile and Colombia. The lack of data on these countries makes the gap in labour productivity by sector between Brazil and the OECD smaller than it would be otherwise.
← 8. National innovation surveys do not collect information on micro-enterprises, i.e. companies employing less than 10 people.
← 9. Detailed information on R&D spending in Brazil are available at the MCTIC’s website: https://www.mctic.gov.br/mctic/opencms/indicadores/detalhe/recursos_aplicados/indicadores_consolidados/2_1_3.html. Data in this section are mostly OECD calculations, based on data from the IBGE national innovation survey, 2014.
← 10. Commercial exporting companies (comerciais exportadoras) are companies whose activities include the trading of goods.
← 11. Mercosul (Mercosur in Spanish) is a trade bloc consisting of Brazil, Argentina, Uruguay and Paraguay.
← 12. “Nascent entrepreneurs” are those who have been involved in a start-up for less than three months, whereas “new business owners” have been owners of a new business for less than three-and-a-half years.
← 13. Statistical data on high-growth firms in Brazil draw on the 2017 IBGE publication, Estatísticas de Empreendedorismo.
← 14. The OECD defines high-growth firms as enterprises with average annualised growth in employment or turnover greater than 20% per year, over a three-year period, and with ten or more employees at the beginning of the observation period.
← 15. Because productivity is a revenue-based indicator over total employment, lower-than-average productivity in HGFs can be explained either by fast employment growth or by aggressive price-based strategies to gain new markets or by both factors.
← 16. Programmes for high-growth firms, such as business accelerators, are typically aimed at companies that have the ambition and potential to grow fast over a short period of time, rather than at a specific subset of firms complying with a strict statistical definition.
← 17. Methods to measure economic informality can be grouped under monetary or non-monetary approaches. The first, such as the currency demand approach or the discrepancy between national expenditure and income statistics, gauge the shadow economy as a proportion of national GDP, whereas the latter, which makes the distinction between informal employment and employment in the informal sector, measure informality as a share of total employment.
← 18. Currency-based estimates of informality tend to fluctuate from one year to another more than employment-based estimates, which is why an average over a long period of time gives a better appraisal of the size of the informal sector. At the same time, currency-based measurement approaches take a fuller picture of informality than those only based on informal employment.
← 19. It should be noted that the same business can have more than one owner and the same person can be owner of more than a business. This means that the rate of business owners without CNPJ cannot be considered tout court as the rate of business informality.
← 20. More recently, the IBGE reports that after the 2015-2016 recession, the share of workers in the informal sector has increased again (see Chapter 3).
← 21. For example, based on SEBRAE data, only 19% of MEI entrepreneurs have a bank account and only 8% of this group has ever received a loan.