smes in turbulent times – a comparative analysis between argentina, brazil and european countries....
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SMEs in turbulent times – A comparative analysis between Argentina, Brazil and European countries. Carolin Häner.TRANSCRIPT
Master Thesis
In partial fulfillment of the requirements for the degree of
Master of Arts in
International Business Administration
at Hochschule RheinMain
University of Applied Sciences
Wiesbaden Business School
SMEs in turbulent times –
A comparative analysis between
Argentina, Brazil and
European countries
Referee: Prof. Dr. Klaus North
Co-referee: Prof. Dr. Günther Abstein
Written by: Carolin Häner
Konrad-Adenauer-Allee 19
64569 Nauheim
Wiesbaden, October 15, 2011
II
Executive Summary: SMEs in turbulent times – A comparative analysis
between European Countries, Brazil and Argentina
The four year project ‘Sustainable competitiveness of SMEs in turbulent
economic and social environment – a network approach’ was initiated in 2011 and
aims to “ (…) create a co-evolvement process towards a successful management
model for SMEs that combines the European innovation and organizational
learning model with Latin American survival strategies in turbulent economies
(…)”.
As part of this project, the objective of this thesis is to investigate SMEs (small
and medium-sized enterprises) in turbulent times and compare them among
European countries, Brazil and Argentina.
Definition of SMEs
In Europe an enterprise is considered to be an SME if it employs fewer
than 250 persons and has an annual turnover not exceeding US$ 66 million
(50 million euro) and/or an annual balance sheet total not exceeding US$
57 million (43 million euro).
SMEs in Brazil are characterized by a multitude of definitions and
therefore it is hard to give one general definition. SMEs in Brazil are
defined as clearly smaller in size (annual turnover) compared to Europe.
In Argentina there is one official accepted SME definition, which is
broadly applied. This definition differs by sector of activity and
approximates to that of Brazil.
Contribution to the economy
In all researched countries SMEs play a key role in the economy. The following
table provides an overview of the contribution of European, Brazilian and
Argentinean SMEs:
III
Note: * This number refers only to micro and small enterprises (medium-sized enterprises are not
considered)
Challenges SMEs face
European, Brazilian and Argentinean SMEs share in common, that globalization
has an enormous impact on them. Increased competition and low cost products
imported from the Asian countries that threaten their internal market, are just
some examples. Another similarity is the economic crisis in 2008/2009 that
affected SMEs causing a stall in the growth of the number and employment of
SMEs, a decrease in exportations, difficulties to obtain credit and shortages of
working capital.
In Europe additional factors that influence SMEs are the EU enlargement
process and the trend towards a knowledge-based economy.
Brazilian SMEs suffer from a high bureaucracy, continuous tax changes and
poor business management.
Inflation and the political situation and a lack of sufficient infrastructure are
issues that Argentinean SMEs have to deal with.
EU-27 Brazil Argentina
Total 99.8% 99.7% 98.2%
Micro 91.8% 94.0% 71.2%
Small 6.9% 5.1% 21.7%
Medium-sized 1.1% 0.6% 5.3%
41.7 30.4 11.9
6.4 4.2 10.3
Total 67.4% 68.3% 51.8%
Micro 29.7% 24.5% 12.7%
Small 20.7% 27.7% 19.2%
Medium-sized 17.0% 16.0% 19.9%
58% 20%* 40%
24% 19.7% 10.7%
Contribution to GDP
Export turnover
Number of
SMEs/total of
enterprises
Density of SMEs
(per 1,000 inhabitants)
Average size of an enterprise
(employee/enterprise)
Number of
persons
employed by
SMEs/total of
enterprises
IV
Coping in a turbulent environment
There is not a single resolution on how to overcome these challenges. This thesis
analyzed the SMEs’ actions in terms of competence development, building co-
operations and innovation, as part of the answer to overcome the challenges.
While neither of them can be elected as the single savior for SMEs, they can be
used as drivers that will direct SMEs through turbulent times and towards a bright
future.
It is important to mention that it is challenging to get a response when asking a
company ‘How do you cope with a turbulent environment in order to survive and
still stay competitive?’. They likely will not have a simple answer to this question.
Some companies survive and are successful, so they are doing things right, but
often they are not conscious of how they do the right things.
Studies show that European SMEs are well prepared with plenty of formal courses
offered to employees, their stable long-lasting co-operations and high level of
innovation. All of this contributes to their success and to the fact that European
SMEs are the engine of the European economy. But at the same time, this formal
or well organized approach contributes also to the fact that they are helpless at
first, when the environment starts to become unstable. They rely too much on
their plans and consultants do not have a quick answer to challenges they face in
turbulent times. Conversely, in Brazilian and Argentinean SMEs, competence
development is not a priority and non-formal in most cases. Furthermore they
have a rather imitative character, their business is managed in an unorganized
way, they trust on their gut feeling and are intuitive.
One of Brazil’s secret recipes can be summarized with just one word – Jeitinho.
The ‘jeitinho’ is basically a way of working around things. No matter what
problem or challenge Brazilians face, they always have a way to figure it out,
solve or bypass it. This flexibility, detached of all narrow-minded thoughts, is in
Brazil essential to survive in turbulent times.
European and Latin American SMEs are poles apart but they can and should learn
from each other.
Table of contents V
Table of contents
List of abbreviations ............................................................................................. X
List of figures ..................................................................................................... XII
List of tables ...................................................................................................... XIV
1 Introduction ................................................................................................... 1
1.1 Scope ........................................................................................................ 1
1.2 Objectives ................................................................................................. 2
1.3 Methodology ............................................................................................ 3
2 Overview of SMEs ......................................................................................... 4
2.1 Definition of SMEs .................................................................................. 4
2.1.1 European SME definition .................................................................. 4
2.1.2 Brazilian SME definition .................................................................. 9
2.1.2.1 Brief introduction ....................................................................... 9
2.1.2.2 Definition by the general law of micro and small enterprises ... 9
2.1.2.3 Definition by Sebrae ................................................................ 11
2.1.2.4 Definition by IBGE .................................................................. 12
2.1.2.5 Definition by BNDES .............................................................. 12
2.1.3 Argentinean SME definition ........................................................... 13
2.1.3.1 Brief introduction ..................................................................... 13
2.1.3.2 Definition by SePyME ............................................................. 13
2.1.3.3 Definition by Fundación Observatorio PyME ......................... 15
2.2 Types of SMEs ....................................................................................... 16
2.2.1 Brief introduction ............................................................................ 16
Table of contents VI
2.2.2 Europe ............................................................................................. 17
2.2.2.1 Knowledge intensity ................................................................ 17
2.2.2.2 Sectors ...................................................................................... 19
2.2.2.3 Internationalization .................................................................. 20
2.2.3 Brazil ............................................................................................... 21
2.2.3.1 Knowledge intensity ................................................................ 21
2.2.3.2 Sectors ...................................................................................... 23
2.2.3.3 Internationalization .................................................................. 23
2.2.4 Argentina ......................................................................................... 25
2.2.4.1 Knowledge intensity ................................................................ 25
2.2.4.2 Sector ....................................................................................... 27
2.2.4.3 Internationalization .................................................................. 28
2.3 Comparison ............................................................................................ 29
3 Contribution to the economy ..................................................................... 35
3.1 Brief introduction ................................................................................... 35
3.2 Europe .................................................................................................... 36
3.2.1 Number of enterprises ..................................................................... 36
3.2.2 Number of persons employed ......................................................... 40
3.2.3 GDP / Value added at factor costs .................................................. 44
3.2.4 Labor productivity ........................................................................... 47
3.2.5 Export turnover ............................................................................... 48
3.3 Brazil ...................................................................................................... 50
3.3.1 Number of enterprises ..................................................................... 50
3.3.2 Number of persons employed ......................................................... 52
3.3.3 GDP ................................................................................................. 54
Table of contents VII
3.3.4 Productivity ..................................................................................... 55
3.3.5 Export turnover ............................................................................... 56
3.4 Argentina ................................................................................................ 58
3.4.1 Number of enterprises ..................................................................... 58
3.4.2 Number of persons employed ......................................................... 60
3.4.3 GDP ................................................................................................. 62
3.4.4 Labor Productivity .......................................................................... 62
3.4.5 Export turnover ............................................................................... 63
3.5 Comparison ............................................................................................ 65
4 Challenges SMEs face ................................................................................. 68
4.1 Brief introduction ................................................................................... 68
4.2 Europe .................................................................................................... 68
4.2.1 The impact of EU enlargement ....................................................... 68
4.2.2 Globalization ................................................................................... 69
4.2.3 Trend toward a knowledge-based economy .................................... 70
4.2.4 Economic crisis 2008/2009 ............................................................. 73
4.2.5 Others .............................................................................................. 75
4.3 Brazil ...................................................................................................... 76
4.3.1 Globalization ................................................................................... 76
4.3.2 High bureaucracy ............................................................................ 76
4.3.3 Business management ..................................................................... 77
4.3.4 Tax changes ..................................................................................... 78
4.3.5 Informal business ............................................................................ 79
4.3.6 Economic crisis 2008/2009 ............................................................. 80
4.3.7 Others .............................................................................................. 80
Table of contents VIII
4.4 Argentina ................................................................................................ 81
4.4.1 Globalization ................................................................................... 81
4.4.2 Inflation ........................................................................................... 82
4.4.3 Infrastructural problems .................................................................. 84
4.4.4 Economic crisis 2008/2009 ............................................................. 84
4.4.5 Others .............................................................................................. 85
4.5 Comparison ............................................................................................ 86
5 Coping in a turbulent environment ........................................................... 87
5.1 Europe .................................................................................................... 87
5.1.1 Brief introduction ............................................................................ 87
5.1.2 Competence development ............................................................... 87
5.1.3 Co-operations .................................................................................. 96
5.1.4 Innovation ..................................................................................... 102
5.2 Brazil .................................................................................................... 105
5.2.1 Brief introduction .......................................................................... 105
5.2.2 Competence development ............................................................. 105
5.2.3 Co-operations ................................................................................ 106
5.2.4 Innovation ..................................................................................... 107
5.2.5 Management of the enterprise ....................................................... 109
5.3 Argentina .............................................................................................. 113
5.3.1 Brief introduction .......................................................................... 113
5.3.2 Competence development ............................................................. 113
5.3.3 Co-operations ................................................................................ 115
5.3.4 Innovation ..................................................................................... 116
5.3.5 Management of the enterprise ....................................................... 117
Table of contents IX
5.4 Comparison .......................................................................................... 119
6 Conclusion .................................................................................................. 122
7 Appendices ................................................................................................. 125
Calculations ..................................................................................................... 125
Appendix 1: High-tech enterprises in EU-27 – No. of Enterprises (2008) ..... 125
Appendix 2: High-tech enterprises in EU-27 – Employment (2008) ............. 125
Appendix 3: High-tech enterprises in Argentina – No. of enterprises (2009) 126
Appendix 4: High-tech enterprises in Argentina – Employment (2009) ........ 126
Appendix 5: SME density in the EU-27 (2008) .............................................. 127
Appendix 6: SME density in Brazil (2008) .................................................... 127
Appendix 7: SME density in Argentina (2009) .............................................. 127
Appendix 8: Average size of an enterprise in the EU-27 (2008) .................... 128
Appendix 9: Average size of an enterprise in Brazil (2008) ........................... 128
Appendix 10: Average size of an enterprise in Argentina (2009) .................. 128
Appendix 12: Evolution and growth rate of employment in Brazil (2000-2008)
......................................................................................................................... 129
Appendix 13: Employment by sector in Brazil (2008) ................................... 129
Appendix 14: Export turnover in Brazil (1998 – 1st semester of 2009) .......... 130
8 Bibliography .............................................................................................. 131
9 Declaration of authenticity ....................................................................... 142
List of abbreviations X
List of abbreviations
€ Euro
Art. Article
AWU Annual Work Unit
BNDES Banco Nacional de Desenvolvimento Econômico e Social
BRIC Brazil, Russia, India, China
CEPAL Comisión Económica para América Latina y el Caribe
CEPyMECE Centro de estudios de la pequeña y mediana empresa (Centro
PyME)
e.g. exempli gratia (for example)
EC European Commission
EIB European Investment Bank
EIF European Investment Fund
et al. et alii
etc. et cetera
EU European Union
EU-19 European Union (19 stands for the 19 member states)
EU-27 European Union (27 stands for the currently 27 member states)
FDI Foreign Direct Investment
GDP Gross Domestic Product
GDRC The Global Development Research Center
IBGE Instituto Brasileiro de Geografia e Estatística
ICMS
Imposto sobre Operações relativas à Circulação de Mercadoria
e sobre Prestação de Serviços de Transporte Interestadual e
Intermunicipal e de Comunicação
INDEC Instituto Nacional de Estadística y Censos
IRS Internal Revenue Service
IRSES International Research Staff Exchange Scheme
IT Information Technology
LSE Large scale enterprise
List of abbreviations XI
MERCOSUR Southern Common Market
MTEySS Ministerio de Trabajo, Empleo y Seguridad Social
n.d. no date
N° Número (number)
NACE
Nomenclature Generale des Activites Economiques dans
I`Union Europeenne (General Name for Economic Activities
in the European Union)
p./pp. Page/Pages
PME Pequena e média empresa
PyME Pequeña y mediana empresas
R$ Brazilian Real
R&D Research and Development
SC Santa Catarina
Sebrae Serviço Brasileiro de Apoio às Micro e Pequenas Empresas
SePyME Secretaría de la Pequeña y Mediana Empresa y Desarrollo
Regional
SME Small and medium-sized enterprises
UEAPME Union Européenne de l'Artisanat et des Petites et Moyennes
Entreprises
UK The United Kingdom
US$ United States Dollar
USA The United States of America
VAT Value added tax
List of figures XII
List of figures
Figure 1: Autonomous enterprise ............................................................................ 7
Figure 2: Partner enterprise ..................................................................................... 8
Figure 3: Linked enterprise ..................................................................................... 8
Figure 4: High-tech sectors, 2008, EU-27 ............................................................ 19
Figure 5: Number of SMEs by sector, 2008, EU-27 ............................................. 19
Figure 6: SMEs according to the level of innovation, 2008, Brazil ...................... 21
Figure 7: Number of SMEs by sector, 2008, Brazil .............................................. 23
Figure 8: Export development from 1998 – 2008, Brazil ..................................... 24
Figure 9: High-tech sectors, 2009, Argentina ....................................................... 27
Figure 10: Number of SMEs by sector, 2009, Argentina ..................................... 27
Figure 11: Density of SMEs, 2008, EU-27 ........................................................... 37
Figure 12: Average size of an enterprise, 2008, EU-27 ........................................ 38
Figure 13: Development of the number of enterprises by size class, 2002-2008,
EU-27 .................................................................................................................... 39
Figure 14: Number of persons employed by enterprise size class, 2008, EU-27 . 43
Figure 15: Value added by SMEs (EUR 1,000 million), 2008, EU-27 ................ 46
Figure 16: Proportion of enterprises with revenue from exports, 2005, EU-27 ... 48
Figure 17: Development of the number of micro and small enterprises, 2000-
2015, Brazil ........................................................................................................... 52
Figure 18: Development of employment in SMEs and LSEs, 2008, Brazil ......... 53
Figure 19: Distribution of employment by sector, 2008, Brazil ........................... 54
Figure 20: Relative share of export turnover, 2004-2008, Brazil ......................... 57
Figure 21: Development of the export turnover for SMEs in absolute numbers,
2004-2008, Brazil .................................................................................................. 57
Figure 22: Development of the number of enterprises, 2003-2009, Argentina .... 59
Figure 23: Development of the number of persons employed .............................. 61
Figure 24: Number of persons employed by sector and by size class, 2009,
Argentina ............................................................................................................... 61
Figure 25: Development of labor productivity of industrial SMEs ...................... 62
Figure 26: Export turnover, 2005, Argentina ........................................................ 63
List of figures XIII
Figure 27: Countries responsible for strong competitive pressure in Argentina .. 82
Figure 28: Frequency of renegotiations of industrial SMEs, 2010, Argentina ..... 83
Figure 29: Electric power/gas and industrial SME capacity, 2006, Argentina ..... 84
Figure 30: Formal and non-formal cooperation by enterprise size ....................... 97
Figure 31: Formal and non-formal cooperation by sector, percentage of European
SMEs ..................................................................................................................... 98
Figure 32: Number of partners in formal and non-formal co-operations (in % of
European SMEs) ................................................................................................... 99
Figure 33: Contact frequency in SME co-operation (in percentage of European
SMEs) .................................................................................................................. 100
Figure 34: Duration of SME co-operation (in percentage of European SMEs) .. 101
Figure 35: Level of involvement in co-operations by extinct and active SMEs,
2000-2005, Brazil ................................................................................................ 107
Figure 36: Comparison among highly innovative, innovative and non-innovative
SMEs ................................................................................................................... 108
Figure 37: Co-operations of SMEs among different activity sectors, ................. 116
List of tables XIV
List of tables
Table 1: The thresholds of the European SME definition....................................... 6
Table 2: The thresholds of the Brazilian SME definition by ‘Lei Complementar
N° 123/06’ ............................................................................................................. 10
Table 3: The thresholds of the Brazilian SME definition by Sebrae .................... 11
Table 4: The thresholds for exporting SMEs in Brazil by Sebrae ........................ 12
Table 5: The thresholds of the Brazilian SME definition by BNDES .................. 13
Table 6: The thresholds of the Argentinean SME definition by SePyME ............ 14
Table 7: The thresholds of the Argentinean SME definition by the Fundación
Observatorio PyME ............................................................................................... 15
Table 8: High-tech SMEs, 2008, EU-27 ............................................................... 18
Table 9: High-tech SMES, 2008, Santa Catarina .................................................. 22
Table 10: High-tech SMEs, 2009, Argentina ........................................................ 26
Table 11: Comparison of SME definitions ........................................................... 31
Table 12: Comparison of types of SMEs .............................................................. 33
Table 13: Number of enterprises (non-financial business economy), 2008, EU-27
............................................................................................................................... 36
Table 14: Number of persons employed, 2008 ..................................................... 41
Table 15: Value added in million Euro (non-financial business economy), 2008,
EU-27 .................................................................................................................... 44
Table 16: Labor productivity (1,000 Euro/occupied person), 2008, EU-27 ......... 47
Table 17: Exporters by industry sector, 2005, EU-27 ........................................... 49
Table 18: Calculation of the export turnover, 2005, EU-27 ................................. 49
Table 19: Number of enterprises, 2008, Brazil ..................................................... 50
Table 20: Number of persons employed, 2008, Brazil ......................................... 52
Table 21: Growth rate of persons employed, 2002-2008, Brazil .......................... 53
Table 22: Export turnover (in million US$), 2008, Brazil .................................... 56
Table 23: Number of enterprises, 2009, Argentina ............................................... 58
Table 24: Number of persons employed, 2009, Argentina ................................... 60
Table 25: Comparison of SMEs’ contribution to the economy ............................ 67
Table 26: Forecasts of real production growth of gross value added at factor costs
(annual growth rates in %), by size class, 2009-2011, EU-27 .............................. 73
List of tables XV
Table 27: Forecast of employment growth (annual growth rates in %), by size
class, 2009-2011, EU-27 ....................................................................................... 74
Table 28: Indicators from the report ‘ease of doing business 2011’ for Brazil .... 77
Table 29: Methods of developing in-house competencies, 2003, EU-19 ............. 89
Table 30: Sources of external competencies, 2003, EU-19 .................................. 91
Table 31: Main occupational groups benefiting from competence development
activities ................................................................................................................ 93
Table 32: Extent and formalization of co-operation between European SMEs,
2003 ....................................................................................................................... 96
Table 33: Supportive skills for innovation .......................................................... 103
Table 34: Indicators of open innovation ............................................................. 103
Table 35: Activities to support innovation .......................................................... 104
1. Introduction 1
1 Introduction
1.1 Scope
The daily news is dominated by large and multinational corporations with their
global expansion plans, billion dollar takeovers or bankruptcy headlines. This
could easily give an impression that those companies are leading the economy.
But appearances can be deceiving because in reality, the so-called SMEs (small
and medium-sized enterprises) play a major role in the economy.
In fact, 99 percent of all European businesses are SMEs. They provide two out of
three of the private sector jobs and contribute to more than half of the total value
created by enterprises in the EU. Besides their key role in innovation, R&D and
entrepreneurial skills, they are responsible for the economic growth and wealth.
What is really striking about the before-mentioned facts is that nine out of ten
SMEs are actually micro enterprises, consisting of less than ten employees.
Hence, micro enterprises build the basis of the European economy. Günter
Verheugen, member of the European Commission and responsible for Enterprise
and Industry, even calls SMEs “(…) the engine of the European economy”
(European Commission, 2005, p. 3).
In Latin America, in particular in Brazil and Argentina, the situation is similar:
More than 98 percent of their companies account for SMEs, they provide more
than half of the jobs and an economy without SMEs is unthinkable.
However, there are significant differences when comparing Latin American SMEs
to European SMEs. On the one hand, are the European SMEs, which are well
organized, structured and innovative and on the other hand are the Brazilian and
Argentinean SMEs, which are rather intuitive and unorganized but have the right
feeling, or call it a ‘special talent’, to survive in turbulent times.
The once stable European business environment is no longer, as today they have
to deal with a changing turbulent environment. With all these globalization
effects, interdependency of businesses and markets, financial or economic crisis
and so forth, normal operations will not be the norm in the future anymore.
1. Introduction 2
On the other hand, Brazil and Argentina regularly encounter turbulences and it
seems that they are ‘used to’ this kind of environment.
This thesis will deal with SMEs in turbulent times and compares the SMEs of
Europe, Brazil and Argentina.
1.2 Objectives
This thesis has been conducted within the framework of the project ‘Sustainable
competitiveness of SMEs in turbulent economic and social environment – a
network approach’, which is sponsored by the Marie Curie’s International
Research Staff Exchange Scheme (IRSES). The projects’ main objective is “(…)
to create a co-evolvement process towards a successful management model for
SMEs that combines the European innovation and organizational learning model
with Latin American survival strategies in turbulent economies (…)” (Anon.,
2011, p. 2).
This four year project is still in its early stages and therefore it is of high
significance to first provide a solid basis for the project. The definition of SMEs
has to be clarified, which is one of the main objectives of this thesis. Further
objectives are to give a comprehensive overview of SMEs in Europe, Argentina
and Brazil and compare them.
The central questions are:
What is a SME? How are they defined? What is a typical
European, Brazilian and Argentinean SME?
What do SMEs contribute to the economy?
What are the factors affecting SMEs, especially in turbulent times?
How are SMEs coping with turbulent environments?
1. Introduction 3
1.3 Methodology
This thesis is divided into four main chapters. In order to compare SMEs in
Europe, Brazil and Argentina, it is necessary to first understand how SMEs are
defined and typified. This will be done by the second chapter, which builds the
foundation of this paper. Furthermore, it highlights similarities and differences in
their definition.
To show the importance of SMEs the third chapter gives a statistical overview of
the role that they play in the economy. Indicators, such as the number of
enterprises, number of employed persons in SMEs and the contribution to the
GDP are used to assess their economic contribution and have been compared.
Turnover has not been regarded, since GDP is a more common and widespread
economic indicator.
This statistical overview, especially the comparison, reveals differences among
European, Brazilian and Argentinean SMEs. To understand the reason for these
differences, the environment in which SMEs reside and run their day-to-day
business has been analyzed in chapter four.
The environment has proven to be turbulent, in particular in Latin American
countries. In order to stay competitive and survive these turbulent times, SMEs
have adopted different actions and manners. These have been described in chapter
five.
Note: Chapter two to five are structured in the same way: First each ‘country’
(Europe, Brazil and Argentina) will be analyzed separately and at the end of each
chapter they will be compared.
Finally, the main findings of this thesis are consolidated in the conclusion.
2. Overview of SMEs 4
2 Overview of SMEs
2.1 Definition of SMEs
2.1.1 European SME definition
In a single frontierless market, like the European Union, the importance of a
common SME definition is eminent. A common definition allows a better basis of
comparison, an improvement of consistency and effectiveness, and at the same
time it limits distortions of competition.
In April 1996, the European Commission (EC) adopted the ‘Recommendation
96/280/EC’, which established the first common SME definition in the European
Union (EC, 2005, p. 6). The idea of a common definition found great acceptance
by the member states. Thus the definition has widely been applied throughout the
EU, so that other definitions within the European Union became relatively
irrelevant (and therefore will be disregarded in this thesis). On May 6, 2003, this
recommendation has been replaced by the ‘Recommendation 2003/361/EC’,
which entered into force on January 1, 2005. This revision, which gives a new
common definition for small and medium-sized enterprises, considers among
other things the economic developments since 1996 (EC, 2005, p. 8). The use of
the new common European definition is not mandatory but the Commission,
together with the European Investment Bank (EIB) and the European Investment
Fund (EIF) are inviting all member states to apply it as widely as possible (EC,
2005, p. 6). It only becomes mandatory for national state aid schemes and
community programs (EC, 2009a, p. 2).
To fully understand the common definition of SMEs, it is indispensable to have a
closer look in the ‘Recommendation 2003/361/EC’ and its annex:
What is an enterprise?
At first it is important to define the terminology ‘enterprise’. An enterprise is
“(…) any entity engaged in an economic activity, irrespective of its legal form.”
(Annex of the ‘Recommendation 2003/361/EC’, Art. 1, 2003). This wording is
taken from the European Court of Justice, which uses it for its decisions (EC,
2. Overview of SMEs 5
2005, p. 12). The scope involves “(…) self-employed persons and family busi-
nesses (…), and partnerships or associations regularly engaged in an economic
activity” (Annex of the ‘Recommendation 2003/361/EC’, Art. 1, 2003). Thus, the
economic activity is the crucial aspect and not the legal form (EC, 2005, p. 12).
What are the thresholds?
An enterprise qualifies as a micro, small or medium-sized enterprise if it fulfills
the criteria laid down in Article 2 of the annex of the recommendation (2003). The
criteria are the followings:
staff headcount,
annual turnover, and
annual balance sheet.
The staff headcount threshold is compulsory, while an SME can choose either
annual turnover or annual balance sheet as financial ceiling (EC, 2005, p. 13). It
does not need to meet the needs of both. Due to the fact that enterprises involved
in the trade and distribution sectors have higher turnover than those in
manufacturing, the option of the financial ceiling ensures that SMEs are treated
fairly irrespective of the type of economic activity.
Micro enterprises are characterized as enterprises that have fewer than ten em-
ployees with either an annual turnover or an annual balance sheet total not exceed-
ing two million euro (Annex of the ‘Recommendation 2003/361/EC’, Art. 2.3,
2003).
Small enterprises are characterized as enterprises that have fewer than 50 employ-
ees with either an annual turnover or an annual balance sheet total not exceeding
ten million euro (Annex of the ‘Recommendation 2003/361/EC’, Art. 2.2, 2003).
Medium-sized enterprises are characterized as enterprises that have fewer than
250 employees with an annual turnover not exceeding 50 million euro or an
annual balance sheet total not exceeding 43 million euro (Annex of the
‘Recommendation 2003/361/EC’, Art. 2.1, 2003).
The following table will give an overview of the above-mentioned information.
2. Overview of SMEs 6
Enterprise
category
Staff headcount:
Annual Work
Unit (AWU)
Annual
turnover
Annual
balance sheet
total
Micro < 10 ≤ € 2 million ≤ € 2 million
Small < 50 ≤ € 10 million ≤ € 10 million
Medium-sized < 250 ≤ € 50 million ≤ € 43 million
Table 1: The thresholds of the European SME definition (Source: Annex of the ‘Recommendation 2003/361/EC’ Art. 2, 2003)
What is staff headcount?
The staff headcount is the first and compulsory factor for determining if the
enterprise qualifies as an SME and if so in which category the SME falls. It
corresponds to the number of annual work units (AWU), thus, it consists of full-
time, part-time and seasonal workers, which are counted only as fractions of one
unit (Annex of the ‘Recommendation 2003/361/EC’, Art. 5, 2003). According to
Art. 5 staff headcount includes:
employees;
persons working for the enterprise being subordinated to it and deemed to
be employees under national law;
owner-managers;
partners engaged in a regular activity in the enterprise and benefiting from
financial advantages from the enterprise.
What is annual turnover and balance sheet total?
The financial threshold is covered in Article 4. Annual turnover is the annual in-
come, excluding value added tax (VAT) or other indirect taxes (Annex of the
‘Recommendation 2003/361/EC’, Art. 4.1, 2003). The annual balance sheet total
refers to the value of the enterprise’s main assets (EC, 2005, p. 15).
What to consider when establishing the data of an enterprise?
The relationship with other enterprises has to be taken into account because
enterprises, that are part of a larger grouping, could benefit from a stronger
or
2. Overview of SMEs 7
economic backing compared to ‘genuine SMEs’. Hence it ensures that those
enterprises do not benefit from SME support schemes (EU, 2005, p. 10)
An enterprise can be autonomous, a partner or linked.
Autonomous enterprise
An enterprise is autonomous if it is indepen-
dent, in other words, it has no participation in
other enterprises and vice-versa (EC, 2005, pp.
16-17). The holding cannot be higher than 25
percent of the capital or voting rights. If the
enterprise has several investors each with a
stake of less than 25 percent, it still remains
autonomous as long as the investors are not
linked to each other.
Exceptions
If any of the following investors reach or exceed the 25 percent but do not exceed
50 percent, the enterprise remain autonomous (Annex of the ‘Recommendation
2003/361/EC’, Art. 3.2 a-d, 2003; EC, 2005, pp. 18-19).
Public investment corporations, venture capital companies and business
angels.
Universities and non-profit research centres.
Institutional investors, including regional development funds.
Autonomous local authorities with an annual budget of less than ten
million euro and fewer than 5,000 habitants.
When calculating the data, autonomous enterprises use only the number of
employees and the financial data of their enterprises in order to check in which
category the enterprise belongs according to the thresholds (Annex of the
‘Recommendation 2003/361/EC’ Art. 6 1., 2003).
Figure 1: Autonomous enterprise (Source: EC, 2005, p. 17)
2. Overview of SMEs 8
Partner enterprise
This kind of relationship corresponds to enter-
prises which established major financial partner-
ships with other enterprises, without one exer-
cising effective direct or indirect control over the
other (Annex of the ‘Recommendation 2003/
361/EC’, Art. 3.2, 2003; EC, 2005, pp. 20-21).
Partner enterprises hold at least 25 percent but
not more than 50 percent.
Determining the eligibility for the SME status, Partner enterprises add a pro-
portion of the other enterprise’s staff headcount and financial details to its own
enterprise (Annex of the ‘Recommendation 2003/361/EC, Art. 6.2, 6.3 and 6.4,
2003; EC, 2005, p. 21). This proportion reflects the percentage of shares or voting
rights.
Linked enterprise
Enterprises are linked to each other when the
enterprise holds more than 50 percent of the
shareholders’ or members’ voting rights in an-
other enterprise and vice-versa (EC, 2005, p. 23).
Enterprises are also considered as linked enterprises when any of the following
relationships occur (Annex of the ‘Recommendation 2003/361/EC’, Art. 3.3,
2003; EC, 2005, p. 23)
One enterprise holds a majority of the shareholders’ or members’ voting
rights in another.
One enterprise is entitled to appoint or remove a majority of the
administrative, management or supervisory body of another.
Figure 2: Partner enterprise (Source: EC, 2005, p. 20)
Figure 3: Linked enterprise (Source: EC, 2005, p. 24)
2. Overview of SMEs 9
A contract between the enterprises, or a provision on the memorandum of
articles of association of one of the enterprises, enables one to exercise a
dominant influence over the other.
One enterprise is able, by agreement, to exercise sole control over a
majority if shareholder’s or members’ voting rights in another.
In this case, all 100 percent of the linked enterprise’s data must be added when
establishing the data of the enterprise.
2.1.2 Brazilian SME definition
2.1.2.1 Brief introduction
SMEs in Brazil are known as “pequena e média empresas” (PMEs) and are
characterized by numerous definitions depending on the institution or bank
considered. This makes it hard to give one generally accepted definition of SMEs.
In the below sections, the different concepts to classify the size of an enterprise
will be discussed.
2.1.2.2 Definition by the general law of micro and small enterprises
The basis of many concepts is the general law of micro and small enterprises (the
so-called ‘Lei Complementar N° 123/6’), which has been established on
December 14, 2006 (Sebrae, 2007a, p. 69). It contains a definition of micro and
small enterprises as well as general regulations and favorable conditions for micro
and small enterprises.
What is an enterprise?
This law uses the general definition of enterprises as written in the law ‘Lei N°
10.406’ from January 10, 2002, in article 966 (Lei Complementar N° 123/06,
Capítulo II, Art. 3°, 2006). According to this law, an enterprise is run by an
2. Overview of SMEs 10
entrepreneur who has professionally organized economic activity for the
production or circulation of goods or services (Lei N° 10.406, Art. 966, 2002).
What are the thresholds?
According to this law, the threshold to determine whether the enterprise is a micro
or a small enterprise is only the annual turnover (Lei Complementar N° 123/06,
Capítulo II, Art. 3°, I and II, 2006). The general law defines the enterprise
category micro and small but does not consider medium-sized.
In the case of a micro enterprise, in each calendar year, the annual turnover cannot
exceed R$ 240,000.
Small enterprises are defined as enterprises, which have an annual turnover of
more than R$ 240,000 but do not exceed R$ 2,400,000 in each calendar year.
Enterprise category Annual turnover
Micro ≤ R$ 240,000
Small > R$ 240,000 to ≤ R$ 2,400,000
Medium-sized Does not exist
Table 2: The thresholds of the Brazilian SME definition by ‘Lei
Complementar N° 123/06’ (Source: Sebrae, 2007a, p. 70)
What is annual turnover?
Annual turnover is the annual income including all taxes (Lei Complementar N°
123/06, Capítulo II, Art 3°, §1°, 2006). The average tax rate in Brazil is
approximately 34 percent (KPMG, 2010, p. 17).
When the activity of an enterprise begins during the calendar year, the threshold
will be proportional according to the number of months, in which the enterprise
has been active (Lei Complementar N° 123/06, Capítulo II, Art 3°, §2°, 2006).
2. Overview of SMEs 11
2.1.2.3 Definition by Sebrae
Sebrae (Serviço Brasileiro de Apoio às Micro e Pequenas Empresas) – Brazilian
agency for micro and small enterprises is a non-profit organization, which has
been established in 1972 to promote competitiveness and sustainable development
of micro and small enterprises (Sebrae, n.d.).
They give another definition of SMEs that is currently based on two criteria: Staff
headcount and annual turnover (Sebrae, 2009, pp. 46-51). These two criteria do
not have to be met at the same time and therefore provide an option (personal
communication with Marcondes da Silva Cândido and Kátia Rausch, August 1,
2011). The access to staff headcount is easier but after the end of this year (2011)
Sebrae will limit its definition to annual turnover to align with the general law of
micro and small enterprises. Table 3 gives an overview over the current
classification by Sebrae, whereupon it is important to mention that the staff
headcount is differentiated according to the business activity of the enterprise.
Enterprise
category
Industry, Construction,
Agriculture, others Commerce, Service
Staff Headcount
Micro 1 to 19 1 to 9
Small 20 to 99 10 to 49
Medium-sized 100 to 499 50 to 99
Annual turnover (see general law for SMEs)
Micro ≤ R$ 240,000
Small > R$ 240,000 to ≤ R$ 2,400,000
Table 3: The thresholds of the Brazilian SME definition by Sebrae (Source: Sebrae, 2009, p. 47)
The complementary law N° 123 (‘Lei Complementar N° 123’) establishes
standards for credit support to foreign trade operations of micro and small
businesses. The complementary Law N° 123/06 uses for exporting enterprises the
same parameters framework approved by the “Common Market of the South” –
MERCOSUR (personal communication with Marcondes da Silva Cândido and
Kátia Rausch, August 1, 2011).
In this case, only the threshold for micro and small enterprises are different:
2. Overview of SMEs 12
Enterprise
category
Industry, Construction,
Agriculture, others Commerce, Service
Staff Headcount
Micro 1 to 10 1 to 5
Small 11 to 40 6 to 30
Annual turnover
Micro US$ 400,000 US$ 200,000
Small US$ 3,500,000 US$ 1,500,000
Table 4: The thresholds for exporting SMEs in Brazil by Sebrae (Source: Sebrae, 2011)
2.1.2.4 Definition by IBGE
Another institution, which provides a different definition of SMEs, is the Brazil-
ian Institute of Geography and Statistics. In Brazil it is known as the ‘Instituto
Brasileiro de Geografia e Estatística’ (IBGE) and is responsible for statistical,
geographic, cartographic, geodetic and environmental information in Brazil
(IBGE, n.d.).
IBGE uses the same definition as Sebrae (see table 3), except that IBGE does not
have the intent to limit its definition to turnover (Sebrae, 2011). They continue
using staff headcount.
2.1.2.5 Definition by BNDES
Another important institution is the Brazilian Development Bank (in Portuguese:
Banco Nacional de Desenvolvimento Economico e Social, abbreviated: BNDES),
which is the main financing agent for development in Brazil (BNDES, n.d.). Since
its foundation, in 1952, it plays a key role in stimulating the expansion of industry
and infrastructure in the country, providing special conditions for micro, small
and medium-sized enterprises.
The classification of company size adopted by BNDES is applicable to all sectors
(BNDES, 2010a, pp. 1-2). It has been updated on March 5, 2010 and defined in
document number 11/2010. In this revision the size classification for enterprises
rose from four to five: micro, small, medium-sized, medium-large, and large
2. Overview of SMEs 13
scaled enterprises (LSE). That was done to support the growth of companies in the
segment between medium-sized and large companies that are in expansion
(BNDES, 2010b).
Enterprise Category Annual Turnover
Micro ≤ R$ 2,400,000
Small > R$ 2,400,000 to ≤ R$ 16,000,000
Medium-sized > R$ 16,000,000 to ≤ R$ 90,000,000
Medium-large > R$ 90,000,000 to ≤ R$ 300,000,000
Large scaled > R$ 300,000,000
Table 5: The thresholds of the Brazilian SME definition by BNDES (Source: BNDES, 2010a, pp. 1-2)
2.1.3 Argentinean SME definition
2.1.3.1 Brief introduction
SMEs in Argentina are known as “pequeña y mediana empresas” (abbreviated:
PYMEs). There is one official accepted definition for SMEs, which is defined by
SePyME and can be found in the law ‘Resolutión N° 21/2010’. As this thesis also
contains a lot of information from studies by the Fundación Observatorio PyME,
their definition will also be presented.
2.1.3.2 Definition by SePyME
The Ministry of Small and Medium-sized Enterprises and Regional Development
(Secretaría de la Pequeña y Mediana Empresa y Desarrollo Regional, abbreviated:
SePyME) has been established in July 1, 2010, by the Ministry of Industry
(Ministerio de Industria) (SePyME, 2010). The last modification of the law took
place on August 19, 2010. The term ‘enterprise’ is not defined or referred to in
this law.
2. Overview of SMEs 14
What are the thresholds?
The one and only threshold is annual turnover, which differs by sector of activity
(Resolución N° 21/2010, Artículo 1º, 2010). The classification depends on the
following scheme of tax-free annual turnover expressed in Argentinean pesos:
Enterprise
category
Agriculture Industry,
Mining Commerce Service Construction
Annual Turnover
Micro 610,000 1,800,000 2,400,000 590,000 760,000
Small 4,100,000 10,300,000 14,000,000 4,300,000 4,800,000
Medium-sized 24,100,000 82,200,000 111,900,000 28,300,000 37,700,000
Table 6: The thresholds of the Argentinean SME definition by SePyME (Source: Resolución N° 21/2010, 2010)
What is total annual turnover?
Total annual turnover is the value of sales arising from the average of the last
three balance sheets or equivalent financial information, excluding value added
tax (Resolución N° 21/2010, Artículo 1º, 2010). In the case of companies whose
age is less than that required for the calculation, the average proportion of annual
sales are considered. If the enterprise has sales in more than one sector, the
enterprise should only consider the sector, in which it had the highest sales during
the last year.
What to consider when establishing the data of an enterprise?
When calculating the level of sales of the enterprise to compare with the official
limit, it is allowed to deduct the total sales from exports, up from 35 percent of
total sales (Resolución N° 21/2010, Artículo 1º, 2010). Thus, for every $100 of
sales the company can detract from exports up to $35.
Once the enterprise has been classified as a SME, it maintains that status for 24
months, regardless of the actual change in sales (Resolución N° 21/2010, Artículo
2°, 2010).
2. Overview of SMEs 15
These two measures are intended to encourage exports of SMEs, and facilitate
access to government programs. It also allows the company to temporarily exceed
the turnover limit, as it can happen with an extraordinary export.
2.1.3.3 Definition by Fundación Observatorio PyME
The SME Observatory Foundation is a nonprofit organization, which has been
established in 1996 (Fundación Observatorio PyME, n.d.). Their mission is to
promote cultural appreciation of the role of small and medium enterprises in the
society, applied microeconomic research and public policy support for productive
development.
They define the micro, small and medium-sized enterprises by staff headcount and
differentiate between four different sectors.
Enterprise
category
Industry
Software
and IT
Services
Production
Services and
Wholesale Trade
Construction
Staff headcount
Micro < 10 < 5 < 5 < 5
Small 10 - 50 5 - 20 5 - 20 5 - 50
Medium-sized 51 - 200 21 - 150 21 - 150 51 - 150
Table 7: The thresholds of the Argentinean SME definition by the Fundación
Observatorio PyME (Source: personal communication with Laura Mastroscello, September 16, 2011)
2. Overview of SMEs 16
2.2 Types of SMEs
2.2.1 Brief introduction
The definition of SMEs varies from country to country. While in some countries a
multitude of definitions for SMEs exist, some other countries have one common
definition for what types of enterprises can be considered an SME.
In general SMEs can be typified by three keywords – small, single and local
(GDRC, n.d.):
SMEs are small in nature. Primarily in the number of employees and/or in
turnover (see the definition in chapter 2.1). Moreover SMEs are also small
in capital and assets, in the sense of limited know-how and access to new
technology (knowledge intensity).
Most of the SMEs have a single owner, who could in fact be the sole
employee. This ‘single’ also refers to single products or services provided.
SMEs usually focus on their core business or product in a certain sector.
SMEs are basically local in nature because their market is usually
localized to the area where they are located (e.g. same city, district or
state).
As a matter of fact, it is not possible to lump all together. There are exceptions to
the above, especially when comparing the European countries with Brazil and
Argentina. Because of this, it is interesting to analyze:
Does ‘small’ capital and asset necessarily mean low knowledge intensity
(measured by level of innovation, education of employees and high-tech
SMEs)?
In which sectors are SMEs predominantly active?
Are SMEs local or international oriented?
2. Overview of SMEs 17
2.2.2 Europe
2.2.2.1 Knowledge intensity
Innovation
Indeed, SMEs are small in their definition (few employees, low turnover) but in
reality they are the powerhouse of the European economy in many aspects.
Besides their importance in terms of number and jobs, one of the European SMEs’
key strengths is their innovation activities (EC, 2010a). Innovation contributes
immensely to economic growth because it has a positive effect on productivity,
which in turn is essential for competing in a globalized world.
On an average, European SMEs are more innovative than one might think (EC,
2007a, p. 25). According to the fourth Community Innovation Survey
approximately 33 percent of small enterprises and about 40 percent of medium-
sized enterprises can be considered innovative (in this context innovation means,
that these companies introduced new or significantly improved products or
processes in the period from 2002 to 2004). SMEs even have certain advantages,
in flexibility and adaptability, compared to large enterprises. Large enterprises
have an advantage in terms of resources (e.g. easy access to finance and
technology). Small enterprises are not that much dependent on resources in order
to be innovative because they are less R&D-driven and innovation is more
informally developed.
The ‘Innovation Union Competitiveness Report 2011’ (EC, 2011a, p. 10)
confirms that European SMEs are innovative but criticized that they do not grow
sufficiently.
High-tech SMEs
There is no broadly accepted definition for high-tech SMEs, neither in the
academic nor in the economic policy in general (EC, 2002, pp. 13-14). There are
different indicators, which are used to measure high-tech orientation at a firm
level, such as R&D expenditure (e.g. % of turnover), R&D personnel (e.g. % of
personnel), R&D intensity (e.g. R&D person year as % of total labor input),
number of patents, share of turnover attributable to innovation and so on.
2. Overview of SMEs 18
Sometimes enterprises, which belong to certain industries, are altogether viewed
as high-tech (e.g. biotechnology or information and communication technology).
Due to the fact that there is no clear cut and uniform definition of high-tech
SMEs, data on high-tech SMEs across Europe are scarce. A research paper of the
European Commission (2002, pp. 17-18) published estimates on high-tech SMEs
with a definition, where eight business sectors are considered to be typical high-
tech (the selection is based on the following two considerations: (1) The industries
shall represent those sectors which are generally viewed as being dominated by
high-tech firms, i.e. information and communication technology; (2) furthermore,
an OECD classification grouping industries by R&D intensity is taken into
account.): Manufacture of chemicals, chemical products and man-made fibres
(NACE 24), manufacture of machinery and equipment (NACE 29), manufacture
of office machinery & computers (NACE 30), manufacture of electrical
machinery (NACE 31), manufacture of radio, television & communication
equipment (NACE 32), manufacture of medical, precision & optical instruments
(NACE 33), computer & related activities (NACE 72) and R&D (NACE 73)).
Based on the above-mentioned definition, table 8 presents the data from 2008 for
high-tech SMEs (Eurostat, 2011a). It is very important to take into account that
these estimates are highly sensitive to their underlying definition.
SMEs LSE
All size
classes
High-tech
sector
Enterprise 4.94% 0.04% 4.97%
Employment 5.12% 4.45% 9.57%
Non high-
tech sector
Enterprise 95% 0.17% 95.03%
Employment 62.32% 28.10% 90.43%
All Sectors Enterprise 99.79% 0.21% 100.00%
Employment 67.44% 32.56% 100.00%
Table 8: High-tech SMEs, 2008, EU-27 (Source: Eurostat, 2011a)
According to this definition a total of 4.97 percent of all enterprises were active in
the high-tech sector. They created a total of 9.57 percent jobs. Around 4.94
percent of all enterprises were high-tech SMES and employed 5.12 percent of the
total workers employed. In contrast to that, large scale enterprises represented
2. Overview of SMEs 19
0.04 percent of all enterprises in the high-tech sector but employed 4.45 percent
workers in this sector. So, the number of persons employed in high-tech by SMEs
and LSEs is roughly even.
The following figure reveals important differences between industries in high-tech
SMEs.
Figure 4: High-tech sectors, 2008, EU-27 (Source: Eurostat, 2011a)
When considering the number of enterprises, high-tech SMEs are dominating in
the computer & related activities (55%) and are followed by the machinery and
equipment (17%) and medical, precision & optical instruments industry (10%).
2.2.2.2 Sectors
In 2008, SMEs across the EU-27’s
non-financial business economy were
concentrated in particular in the
service sector (74%). The share of
construction (14%) and industry
(12%) is almost even and plays a
smaller role for European SMEs.
3%
17%
1%
7%
3%
10%
55%
4%
Chemicals, chemical products and man-made fibres
Machinery and equipment
Office machinery and computers
Electrical machinery
Radio, television & communication eqipment
Medical, precision & optical instruments
Computer & related activities
R&D
Figure 5: Number of SMEs by sector,
2008, EU-27 (Source: Eurostat, 2011a)
74%
14% 12%
Service Construction Industry
2. Overview of SMEs 20
2.2.2.3 Internationalization
Internationalization does not only mean exporting but rather refers to all kind of
business activities that a SME could have with a foreign partner. Examples of
those kind of relationships are: subcontracting, foreign direct investment (FDI)
and technical co-operations.
The following information is based on a survey by the European Commission
(2010b, p. 5), where they analyzed data during the period 2006-2008:
The most common form of internationalization is to export and to import.
Around 25 percent of SMEs within the EU-27 export, but only half of
them go beyond the internal market (approximately 13%). The rates for
the import are similar: 29 percent of SMEs within the EU-27 import, but
only half of them import from countries outside of EU (14%).
Only seven percent of the SMEs have a foreign subcontractor, as well as
seven percent are a subcontractor for a foreign partner.
Around two percent are active in foreign direct investments.
SMEs involved in co-operations with a foreign partner amount to seven
percent of SMEs within the EU-27.
To sum it up, a significant number of SMEs in the European Union are active in
internationalization activities, but only a small number are actually involved in
activities that go beyond the internal market (outside of EU).
Another finding in this study is, that the larger the company, the higher the level
of internationalization. For example 24 percent of micro, 38 percent of small and
53 percent of medium-sized enterprises were active in exports. Imports account
for 28 percent for micro, 39 percent for small and 55 percent for medium-sized
enterprises.
Conclusion: A typical European SME
After all, what is a typical European SME? It is small in definition (less than 250
workers, a turnover of less than €50 million or a balance sheet total of less than
€43 million) but relatively ‘big’ in innovation and the technology sectors,
2. Overview of SMEs 21
compared to its low resources. They are mainly active in the services sector and
are on a great part international oriented.
2.2.3 Brazil
2.2.3.1 Knowledge intensity
Innovation
A study by the National Association for Research and Development of Innovative
Companies (Associação Nacional de Pesquisa e Desenvolvimento das Empresas
Inovadoras), in a sample of 96 SMEs, shows that 40 percent of them developed
new products in the last three years (Sebrae, 2007b, p. 48). This underpins the
study of Sebrae from
2008, where they found
out that around 53 percent
of SMEs were not in any
aspect innovative, 43
percent were somewhat
innovative and four per-
cent were very innovative
(Sebrae/SC, 2010a, p.4).
The three parameters signify: Twelve months before the study took place, the
non-innovator did not realize any innovation, the innovator realized an innovation
in a product or process or market and the high-innovator realized innovation in a
product, process and market.
In an interview with Sebrae Santa Catarina, Florianópolis (personal com-
munication with Mariana Grapeggia, September 5, 2011), it was confirmed that
only a small part of SMEs are highly innovative and the majority only copies.
They also appointed to the fact that innovation is to a great extent dependent on its
human capital (e.g. knowledge and educational level of the workforce). According
to Sebrae (2010, pp. 155-169), around 1.9 percent of the persons employed in
Figure 6: SMEs according to the level of
innovation, 2008, Brazil (Source: Sebrae/SC, 2010a, p.4)
53% 43%
4%
Non-innovator Innovator High-innovator
2. Overview of SMEs 22
SMEs are illiterate. Around 24 percent did not finish middle school (until 9th
grade) and another 18 percent finished middle school but not high school (until
12th
grade). To sum it up, around 43 percent of the workers in Brazilian SMEs did
not finish high school, which is rather low than high.
High tech
In Brazil, just like in Europe, information about high-tech SMEs is scarce. In
general the data and information published are estimates that are highly sensitive
due to their underlying definition. There are no recent data available for high-tech
SMEs in whole Brazil but Sebrae published data from the state Santa Catarina,
which gives a rough idea of high-tech SMEs.
Sebrae calls the sector ‘tecnologia’ (technology) and considers the following
fields: IT, electronics, energy, new materials, health, nanotechnology, robotics
and others (Sebrae/SC, 2010b, pp. 11-12).
The following table gives an overview of the situation in the state Santa Catarina
in the year 2008.
SMEs LSE
All size
classes
High-tech
sector
Enterprise 1.4925% 0.0075% 1.5%
Employment 0.8% 0.7% 1.5%
Non high-
tech sector
Enterprise 98.2% 0.3% 98.5%
Employment 63.0% 35.5% 98.5%
All Sectors Enterprise 99.7% 0.3% 100.00%
Employment 63.8% 36.2% 100.00%
Table 9: High-tech SMES, 2008, Santa Catarina (Source: Sebrae/SC, 2010b, pp.11-12)
In 2008, there were around 1.5 percent high-tech enterprises in Santa Catarina that
created about 1.5 percent of employment in this sector. The majority, about
1.4925 percent were SMEs and 0.0075 percent large scale enterprises. But both,
SMEs and LSE created approximately an even amount of employment (respective
0.8% and 0.7%).
2. Overview of SMEs 23
2.2.3.2 Sectors
Brazilian SMEs are primarily active in the
commerce and service sector. These
sectors are represented by respectively
52.9 percent and 32.2 percent (in total
85%) of all SMEs (Sebrae, 2010, pp. 41,
47, 53 and 59). It is followed by the
industry sector with 11 percent and the
construction sector with 4 percent.
2.2.3.3 Internationalization
Brazil registered in the year 2008 a total of 19,797 companies that exported, in
relative terms: 0.34 percent out of all companies were active in exports (Sebrae
2009, p. 57). Concerning the SMEs, around 0.31 percent (17,920 enterprises)
exported in the year 2008, while of the large enterprises only about 0.03 percent
(1,877 enterprises) exported. There are much more exporting SMEs than
exporting large scaled enterprises.
The total number of exporting SMEs split up in the following four size-classes:
Micro (32.2%), small (39.1%), ‘micro and small special’ (7.5%) (Sebrae created
this group for micro and small enterprises whose export turnover exceeded the
threshold associated with small enterprises, in order to avoid distortions (Sebrae,
2009, pp. 47-48)) and medium-sized (21%) enterprises. Here the small enterprises
represented the highest number of exporting enterprises within the SME group.
After that the micro enterprises and then the medium-sized enterprises follow. The
size of the enterprise has no connection to the number of the exporting enterprises.
The figure below demonstrates the development of the number of enterprises
involved in exportation from 1999 – 2008 referring to its size-class (micro, small,
‘micro and small special’, medium-sized or large). Since 1998 until 2004 the
number of enterprises that are active in exportations continually increased. In
particular the development of the number of exporting SMEs was very favorable
85%
4% 11%
Service and Commerce
Construction
Industry
Figure 7: Number of SMEs by
sector, 2008, Brazil (Source: Sebrae, 2010, pp. 41, 47, 53, 59)
2. Overview of SMEs 24
during this period. In 2004 they reached a peak of 21,031 enterprises (19,278
SMEs) involved in export activities. Since then the number of micro and small
enterprises decreased, while the number of medium-sized and large scale
enterprises rose. In the first half of 2009 the number of exporting enterprises
decreased in all size classes due to the financial crisis (-3.7 percent compared to
the same period in 2008).
Figure 8: Export development from 1998 – 2008, Brazil (Source: Sebrae, 2009, p. 57)
There is no data available for the other internationalization forms like FDIs,
subcontracting, etc.
Conclusion: A typical Brazilian SME
In a nutshell, what is a Brazilian SME? They are small in their numerous
definitions and small in their innovativeness and high-tech sector. Brazilian SMEs
are mainly active in the service and commerce sector and focus more on their
local market.
0
5000
10000
15000
20000
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
Large
Medium-sized
"Micro and Small
special"
Small
Micro
2. Overview of SMEs 25
2.2.4 Argentina
2.2.4.1 Knowledge intensity
Innovation
The Fundación Oberservatorio PyME (2010a, pp. 16-17) analyzed in one of their
studies the innovativeness of Argentinean industrial SMEs. During 2009, around
50 percent of the industrial SMEs achieved product innovations either through
significant improvements of existing products or through expansions of the prod-
uct mix. Moreover, one out of three enterprises reported that they had a significant
optimization in the organization of the product process. Another 31.1 percent has
significant modifications in different aspects, which are related to the organization
of the enterprise.
Argentina in general is ranked 87 (out of 139) in the ‘Global Competitiveness
Report 2010-2011’ (World Economic Forum, 2010, p. 15). In the sub index
‘innovation and sophistication factors’ it is ranked on 71 and in the innovation
pillar on 73 (World Economic Forum, 2010, p. 22). When comparing Argentina’s
national innovative capacity to the other 139 countries, its ranking is low. This is
so, due to a number of reasons: low spending on R&D by private sector
corporations, the quality of its research institutions, the availability of scientists
and engineers and the non-use of government procurement to encourage
innovation (White et al., 2011, p. 2).
The majority of Argentinean SMEs, innovation is carried out on the base of
informal projects (White et al., 2011, p. 23). Whereby in particular in Argentinean
SMEs innovation adopts an imitative character. Therefore networks that the
enterprises belong to are essential for SMEs innovation. These networks also
involve the relationships between suppliers and clients, and they could be very
dynamic if they can capture the ‘learning by using’ of the clients and feedback
this knowledge through the net. But to capture this knowledge and transform this
into innovation, depends to a great extent on its human capital (e.g. knowledge
and educational level of the workforce). In 2006, around 6.1 percent of the
workers employed in industrial SMEs were illiterate, 39.6 percent finished
primary education (1st grade to 7
th grade) and another 42.6 percent finished
2. Overview of SMEs 26
secondary education (8th
grade to 12th
grade) (Fundación Observatorio PyME,
2008, p. 66). Around 0.06 percent finished tertiary education (one year technical
school, which is optional) and only 5.7 percent finished university. Similar to
Brazil, the education level in Argentinean SMEs does not tend to be very high.
High-tech
One commonly accepted definition of high-tech SMEs does not exist in
Argentina. In order to create a consistent basis as well as for comparison
purposes, the definition of high-tech SMEs, which was used for the European
SMEs, will be considered. This definition, which consists of eight business
sectors, accord to a great extent with the OECD classification (they define four
sectors as high-technology: space and aviation, computers and office machinery,
electronics-communications, pharmaceuticals) and are complemented by other
sectors (see all eight sectors in chapter 2.2.1.1).
According to this definition, in the year 2009, a total of approximately 2.33
percent of all Argentinean enterprises were active in the high-tech sector
(Ministerio de Trabajo, Empleo y Seguridad Social (MTEySS), 2011). They
created a total of 5.58 percent jobs. Around 2.21 percent of all enterprises were
high-tech SMES and employed 2.37 percent of the total workers employed. In
contrast to that, large scale enterprises represented 0.13 percent of all enterprises
in the high-tech sector and employed 3.2 percent workers in this sector.
SMEs LSE All size classes
High-tech sector Enterprise 2.21% 0.13% 2.33%
Employment 2.37% 3.20% 5.58%
Non high-tech sector Enterprise 96% 1.67% 97.67%
Employment 49.43% 45.00% 94.42%
All sectors Enterprise 98.20% 1.80% 100.00%
Employment 51.80% 48.20% 100.00%
Table 10: High-tech SMEs, 2009, Argentina (Source: MTEySS, 2011)
The following figure shows important differences between industries in high-tech
SMEs.
2. Overview of SMEs 27
Figure 9: High-tech sectors, 2009, Argentina (Source: MTEySS, 2011)
Note: No data available for office machinery and computers; medical, precision & optical
instruments; and R&D.
The main part of the number of high-tech SMEs are in the computer and related
activities (36%), Machinery and equipment (31%) and chemicals, chemical
products and man-made fibres (22%). Radio, television & communication
equipment play a minor role in the number of high-tech SMEs.
2.2.4.2 Sector
When considering the sectors in Argentina, they are split up in service, commerce
and industry - construction is never considered (MTEySS, 2011).
According to the ministry of labor, em-
ployment and social security in the year
2009, Argentinean SMEs are mainly re-
presented in the service and the com-
merce sector, with respective 55 percent
and 33 percent. It is followed by the
industry sector with around 12 percent.
The proportion between the three
branches did not have any significant changes over the last decade.
22%
31%
10% 1%
36%
Chemicals, chemical products and man-made fibres
Machinery and equipment
Electrical machinery
Radio, television & communication eqipment
Computer & related activities
55% 33%
12%
Service Commerce Industry
Figure 10: Number of SMEs by
sector, 2009, Argentina (Source: MTEySS, 2011)
2. Overview of SMEs 28
2.2.4.3 Internationalization
In the year 2005 there were around 14,722 enterprises that exported (3.38%)
(CEPAL, 2010, p. 50). The main share of the exporting companies were SMEs
(around 13,885 SMEs). In relative terms, it is around 3.18 percent exporting
SMEs and 0.19 percent exporting large scale enterprises. Considering the SME
class, 56.6 percent of the exporting SMEs are micro enterprises and the remaining
are small or medium-sized enterprises. The size of the enterprise has no
connection to the number of the exporting enterprises.
Thus, only a small part of Argentinean SMEs are active in exports. But due to the
strong international competition, Argentinean SMEs recently started to focus on
their local market (Fundación Observatory PyME, 2011, pp.10-12).
Conclusion: A typical Argentinean SME
In conclusion, Argentinean SMEs are small in definition and relatively small in
innovation and high-tech sectors. They are mainly in the service and commerce
sector active, and focus more and more on their internal market.
2. Overview of SMEs 29
2.3 Comparison
After having analyzed the definition and type of SMEs for Europe, Brazil and
Argentina separately, it is now interesting to compare them and to carve out
similarities as well as differences. This will be done in the following.
When considering the definition of SMEs, it is remarkable that the number of
SME definitions vary from country to country. The European Commission
established one common definition for all member states in the EU, which has
asserted itself and is widely applied. In contrast to that, in Brazil there are
numerous SME definitions, which are all in use depending on the institution or
bank considered. There is not one definition, which asserts itself and is the most
common definition used. In Argentina there is, like in Europe, one common
definition, which has asserted itself. (The second SME definition of Argentina,
has been touched on in 2.1.3.3 because studies that have been used in this work
were published by the Fundación Observatorio PyME, which defines SMEs
differently. But their definition is of minor significance.) There is no clear
similarity in the number of SME definition among Europe, Brazil and Argentina.
But what all of them have in common is that in each country exists one SME
definition by law. In Europe and Argentina this definition by law is widely
accepted and applied. Thus, it becomes the main definition used. The SME
definition by law in Brazil is for many definitions the basis but is often modified
or supplemented. Hence, it is just one out of many definitions.
When regarding the thresholds of the different definitions it is obvious that there
are different thresholds. Nevertheless, it becomes apparent that there are also
similar thresholds: staff headcount and annual turnover. But depending on the
country, the threshold annual turnover is defined differently. While in Europe and
Argentina taxes are excluded in annual turnover, in Brazil the taxes in annual
turnover are included. In some definitions, for instance in Argentina and in Brazil
(definition by BNDES) the threshold annual turnover differentiates among
sectors, but this is not the case in Europe. Another difference within the threshold
is that in Europe there are at least two thresholds that have to be satisfied at the
2. Overview of SMEs 30
same time, while in Brazil and Argentina just one threshold has to be satisfied, in
order to classify the enterprise.
Furthermore the enterprise category also differs. In Europe and in Argentina there
are three size classes defined: micro, small and medium-sized. In Brazil,
depending on the institution, there are different enterprise size classes, e.g. just
micro and small (see the definition by the general law of micro and small
enterprises) or there is micro, small, medium-sized and medium-large (see the
definition by BNDES), and so on.
When calculating the data to classify the enterprise, there are special regulations
that vary from country to country. For example, Europe puts a focus on the
relationship with other enterprises and for instance, in Argentina, the focus lies
within export regulations. These extra regulations are laid down in the
corresponding law of the definition. In other words, each country has another
focus for extra treatments given in their law or their own definition.
Table 11 provides an overview of all definitions with their respective thresholds,
which has been discussed in chapter 2.1. In addition, the threshold turnover has
been converted in US$ with the yearly average exchange rate from 2010 in order
to better compare those (IRS, 2011).
2. Overview of SMEs 31
Sta
ff
Headcount
Annual
turn
over
in
local curr
ency
Annual
turn
over
in
US
$
Sta
ff
Headcount
Annual tu
rnover
in local curr
ency
Annual
turn
over
in
US
$
Sta
ff
Headcount
Annual tu
rnover
in local
curr
ency
Annual
turn
over
in
US
$
Eu
rop
eE
C (
Recom
mendation
2003/3
61/E
C)
all
secto
rs<
10
≤ €
2,0
00,0
00
$2,6
49,0
07
< 5
0≤
€ 1
0,0
00,0
00
$13,2
45,0
33
< 2
50
≤ €
50,0
00,0
00
$66,2
25,1
66
Lei C
om
ple
menta
r N
°
123/0
6all
secto
rsnot
consi
dere
d≤
R$ 2
40,0
00
$135,8
23
not
consi
dere
d≤
R$ 2
,400,0
00
$1,3
58,2
34
Indust
ry, C
onst
ruction,
Agri
culture
, oth
ers
<
20
≤ R
$ 2
40,0
00
$135,8
23
< 9
9≤
R$ 2
,400,0
00
$1,3
58,2
34
< 5
00
Com
merc
e, S
erv
ice
< 9
≤ R
$ 2
40,0
00
$135,8
23
< 4
9≤
R$ 2
,400,0
00
$1,3
58,2
34
< 1
00
Indust
ry, C
onst
ruction,
Agri
culture
, oth
ers
<
20
≤ R
$ 2
40,0
00
$135,8
23
< 9
9≤
R$ 2
,400,0
00
$1,3
58,2
34
< 5
00
Com
merc
e, S
erv
ice
< 9
≤ R
$ 2
40,0
00
$135,8
23
< 4
9≤
R$ 2
,400,0
00
$1,3
58,2
34
< 1
00
BN
DE
Sall
secto
rsnot
consi
dere
d≤
R$ 2
,400,0
00
$1,3
58,2
34
not
consi
dere
d≤
R$ 1
6,0
00,0
00
$9,0
54,8
95
not
consi
dere
d≤
R$ 9
0,0
00,0
00
$50,9
33,7
86
Agri
culture
≤ $
610,0
00
$155,5
73
≤ $
4,1
00,0
00
$1,0
45,6
52
≤ $
24,1
00,0
00
$ 6
,146,3
91
Indust
ry, M
inin
g≤
$ 1
,800,0
00
$459,0
67
≤ $
10,3
00,0
00
$2,6
26,8
81
≤ $
82,2
00,0
00
$20,9
64,0
40
Com
merc
e≤
$ 2
,400,0
00
$612,0
89
≤ $
14,0
00,0
00
$3,5
70,5
18
≤ $
111,9
00,0
00
$ 2
8,5
38,6
38
Serv
ice
≤ $
590,0
00
$150,4
72
≤ $
4,3
00,0
00
$1,0
96,6
59
≤ $
28,3
00,0
00
$ 7
,217,5
47
Const
ruction
≤ $
760,0
00
$193,8
28
≤ $
4,8
00,0
00
$1,2
24,1
78
≤ $
37,7
00,0
00
$ 9
,614,8
94
Indust
ry<
10
< 5
1<
201
Soft
ware
and I
T
Serv
ices
< 5
< 2
1<
151
Pro
duction S
erv
ices
and W
hole
sale
Tra
de
< 5
< 2
1<
151
Const
ruction
< 5
< 5
1<
151
not
consi
dere
d -
not
consi
dere
dnot
conis
dere
d -
-
not
consi
dere
d
not
consi
dere
d
not
consi
dere
d
-
Co
un
try
Org
an
zati
on
/Law
Se
cto
rs
not
consi
dere
d
Bra
zil
Fundació
n
Obse
rvato
rio P
yM
E
Arg
en
tin
a
SeP
yM
E (
Reso
lutión
N°
21/2
010)
Mic
roS
mall
Me
diu
m-s
ize
d
Sebra
e
IBG
E
No d
efi
nitio
n f
or
this
ente
rpri
ses
size
not
consi
dere
d -
Tab
le 1
1:
Com
pari
son
of
SM
E d
efin
itio
ns
(So
urc
e: s
ee c
hap
ter
2.1
)
No
te:
Th
e E
uro
pea
n t
hre
sho
ld ‘
ann
ual
bal
ance
sh
eet’
has
bee
n d
isre
gar
ded
in
th
e co
mp
aris
on
, b
ecau
se n
o o
ther
def
init
ion
co
nsi
der
s th
is t
hre
sho
ld.
Th
e ad
dit
ion
al e
nte
rpri
se s
ize
‘med
ium
-lar
ge’
def
ined
by
BN
DE
S i
n B
razi
l h
as b
een
dis
reg
ard
ed i
n t
his
co
mp
aris
on
bec
ause
no
oth
er d
efin
itio
n c
om
pri
ses
this
siz
e cl
ass.
Ex
chan
ge
rate
: U
S$
1 =
€ 0
.75
5;
R$
1.7
67
; $ 3
.92
1 (
Arg
enti
nea
n P
eso
)
2. Overview of SMEs 32
The table gives basically three conclusions:
First of all, it shows that the different SME definitions vary greatly and for
that reason it is very hard to compare them.
Secondly, when considering the threshold staff headcount, the differences
among the different definitions vary but are alike. The big difference is
that in Europe, the threshold staff headcount is an inherent part in its SME
definition by law, while in Brazil, this is not the case for all definitions but
for the definition by Sebrae and IBGE. In Argentina staff headcount is not
used by the SME definition by law but by the Fundación Observatorio
PyME.
The third conclusion one can draw from the comparisons of the different
definitions, is that each of them define the threshold turnover extremely
different. As the table shows very clearly, the turnover by European
definition is by far the highest of all.
The only close relations that can be recognized, in terms of turnover, are
between the definition of Brazil (except the definition by BNDES) and
SePyME in Argentina with the definition of the sectors: agriculture,
service and construction. The definition by BNDES in Brazil approximates
to the European definition but still differs considerably.
When considering the type of SMEs there are differences among European,
Brazilian and Argentinean SMEs. In order to find out differences and similarities,
three main areas were analyzed:
The first area was the knowledge intensity of SMEs, which was measured
on different indicators, like the level of innovation, the education of
employees and the participation of SMEs in high-tech sectors.
The second area shows in which sectors SMEs are predominantly active.
And in the last step it was analyzed if the SMEs are more local or
international oriented. The rate of exporting SMEs has been regarded as
the main indicator.
2. Overview of SMEs 33
Europe Rating Brazil Rating Argentina Rating
Innovation high medium/low low
Education of
employeesn.a. - low low
SMEs in high-tech
sector4.94% 1.49% * 2.21%
Service/
Commerce
(85%)
Service/
Commerce
(88%)
3.18%Local or international
(export)
Knowledge
intensity
SectorsService
(74%)
25%/11%** 0.31%
Table 12: Comparison of types of SMEs (Source: see chapter 2.2)
Note: * Data correspond to the state of Santa Catarina
** Export within/outside EU
The confidence level of the data rated by the author
high
medium
low
When regarding knowledge intensity of European, Brazilian and Argentinean
SMEs, there is a huge difference among these three. While in Europe, SMEs stand
for innovation, in Brazil and in Argentina SMEs have an imitating character. Only
a small number is highly innovative, the remaining SMEs are involved in some
minor modifications, which cannot really be called innovation. But Brazil in
general might be a step ahead Argentina because when having a look at the Global
Competitive Index, Brazil is on the overall rank 58, while Argentina only on 87
(out of 139 countries) (World Economic Forum, 2010, p. 15, 22). In particular, the
sub index ‘innovation and sophistication factors’, Brazil ranks on 38, while
Argentina ranks on 71. And being even more specific, in the innovation pillar,
Brazil ranks 42 and Argentina 73. This general innovation tendency in the
respective country leads to the assumption that Brazil is one step ahead in terms of
innovation. When comparing Europe with Brazil and Argentina, their share of
participation in the high-tech sector is high (double of Argentina and threefold of
Brazil). Argentina seems to be more involved in high-tech sectors than Brazil, but
since in Brazil this is only the result from Santa Catarina, it could change when
considering the country average. Therefore, Argentina and Brazil do not
differentiate significantly. Data for the educational level in Europe is not available
2. Overview of SMEs 34
but since they are innovative and also participate with a great part in the high-tech
sector, it can be assumed that their educational level is also medium to high. In
contrast to that, in Brazil and Argentina most of the workers did not graduate from
high-school.
In conclusion, the knowledge intensity in European SMEs is higher than in Brazil
and Argentina. Due to the upswing of the Brazilian economy and Brazil perceived
as one of the in the future global supplier of raw material and the so-called BRIC
member, is in some issues one step ahead of Argentina.
SMEs from Europe, Brazil and Argentina share in common, that most of them are
active in the service sector. Apart from many other reasons, this is because service
businesses do not need a large amount of seed capital, which most of the SMEs do
not have available. Businesses in other sectors, such as the industry sector, rely on
machinery, equipment, warehouses and so on. Thus, they require a lot of re-
sources.
European SMEs are very active in exports. More than one fourth of the European
SMEs are involved in export activities. Their market is no longer just the local
market. The bigger the European SME, the higher the export share (micro 24%,
small 38% and medium-sized enterprise 53%). These numbers are valid for
European SMEs that export within Europe. The share of SMEs that export outside
of Europe is around 11 percent. In Brazil the export share by SMEs is extremely
low (0.31%). But when considering that the size of Brazil is almost the size of
Europe, it is more understandable that the export share of Brazilian SMEs is so
low. In other words, Brazil has a huge internal market that is served by Brazilian
SMEs. Argentinean SMEs used to be more involved in export activities but the
international competition was too strong and they could not keep up with them, so
they started to focus on their internal market. In the year 2005, 3.18 percent of the
Argentinean SMEs were involved in export activities.
As a result, European SMEs are international oriented, while Argentinean SMEs
used to be international oriented but have moved back to their internal market due
to the strong international competition. In contrast to that, Brazilian SMEs mainly
focus on their home market.
3. Contribution to the economy 35
3 Contribution to the economy
3.1 Brief introduction
In Europe as well as in Latin American countries, such as Brazil and Argentina,
more than 98 percent of all enterprises are SMEs. However, they do not have as
many resources (land, labor and capital, as well as information, expertise and
management) as large-scaled enterprises, which could throw out some doubts
about their importance and their contribution to the economy. On the other hand
many people talk of SMEs as ‘the engine’ (EC, 2005, p. 3) or ‘the backbone’ (EC,
2010a) of the economy. This chapter will analyze how much SMEs in fact
contribute to its respective economy.
Apart from the analysis of the European Union as a whole, some selected
European countries (Germany, France, the United Kingdom, Italy, Spain and the
Czech Republic) will be analyzed. Germany, France, the United Kingdom, Italy
and Spain are the five most important countries of the European Union in terms of
GDP and of the number of enterprises. They represent more than 70 percent of the
total European GDP (The World Bank, 2011a) and around 60 percent of the total
enterprise population (Eurostat, 2011a). In order to also have Eastern Europe
represented, the Czech Republic has been chosen.
Brazil with an area of 8,547,400 square kilometers is the fifth largest country in
the world (Economist Intelligence Unit, 2011, p. 27). It consists of 26 states and
one federal district. It almost measures the size of Europe. Similar to the European
countries, the development between the Brazilian States differs greatly and
therefore Brazil is split up in five main regions: north, northeast, southeast, south
and mid-west.
Due to the relatively small size of Argentina, there will be no further break down.
However in some parts, there were no data available for the whole country and
therefore studies had been used, that focused only on the industrial sector of the
SMEs. If this is the case, though, it is emphasized.
3. Contribution to the economy 36
3.2 Europe
3.2.1 Number of enterprises
In the European Union, in 2008, there were approximately 21.0 million
enterprises in the non-financial business economy (Eurostat, 2011a). Only around
43,178 (0.2%) were considered as large scale enterprises. The majority of
enterprises, about 99.8 percent, were represented by SMEs.
The majority of SMEs are micro enterprises, which account for 91.8 percent (19
million). That means that more than nine out of ten SMEs in the EU-27 are micro
enterprises. Hence, a typical European company can be viewed as a micro
enterprise. Small enterprises and medium-sized enterprises amount to 6.9 percent
(1.4 million) and 1.1 percent (0.2 million).
Micro Small Medium-
sized SMEs LSEs Total
EU-27
%
19,075,952
91.8
1,425,346
6.9
226,094
1.1
20,727,392
99.8
43,178
0.2
20,770,570
100
Germany
%
1,520,873
83.1
257,525
14.1
42,777
2.3
1,821,175
99.5
8,840
0.5
1,830,015
100
France
%
2,208,562
92.3
155,000
6.5
23534
1.0
2,387,096
99.8
5,050
0.2
2,392,146
100
UK
%
1,420,417
87.5
170,372
10.5
27,348
1.7
1,618,137
99.6
5,970
0.4
1,624,107
100
Italy
%
3,731,348
94.6
189,294
4.8
20,151
0.5
3,940,793
99.9
3,096
0.1
3,943,889
100
Spain
%
2,487,681
92.2
184,117
6.8
22,048
0.8
2,693,846
99.9
3,268
0.1
2,697,114
100
Czech
Republic
%
856,261
95.1
35,285
3.9
7,212
0.8
898,758
99.8
1,513
0.2
900,271
100
Table 13: Number of enterprises (non-financial business economy), 2008, EU-
27 (Source: Eurostat, 2011a)
In table 13 the European average, which is displayed by the EU-27, is compared
to the six selected countries: Germany, France, UK, Italy, Spain and Czech
Republic. Here it is important to focus on two different aspects:
3. Contribution to the economy 37
The first aspect comprehends a comparison between SMEs and large scale
enterprises because it is very interesting to see that similar proportions are
reflected by each country. At least 99.5 percent (see Germany) of all enterprises
accounted to SMEs. Italy and Spain recorded the highest percentage (99.9%) of
all selected countries, which shows that the relative importance of SMEs in the
southern member states is very high. This above-mentioned difference between
Germany and Italy/Spain can be explained by means of the relative importance of
a certain sector in the national economy or the differentiation among cultures
(Eurostat, 2011b, p. 11). In some cultures the preference of self-employment
and/or to run a family business is higher than in other cultures.
The second aspect to consider lies within the SME sector. In Germany and the
United Kingdom the number of micro enterprises was lower compared to the
European average, as well as to the other selected countries. In Germany and in
the United Kingdom, the micro enterprises accounted to a percentage share of
respectively 83.1 percent and 87.5 percent, while the European average was 91.8
percent. Thus the importance of SMEs and in particular micro enterprises varies
from country to country. The indicators ‘density of SMEs’ and ‘average size of an
enterprise’ confirm the above-mentioned statements and will be discussed in the
following:
Density of SMEs
The density of SMEs is the number of SMEs per 1,000 inhabitants. In the year
2008 the density of SMEs
was about 41.7 in the
European economy (Eu-
rostat, 2011a and Euro-
stat, 2009). France was
close to the European
average with a density of
SMEs of 37.4. Italy,
Spain and the Czech Figure 11: Density of SMEs, 2008, EU-27 (Source: Eurostat, 2011a; Eurostat 2009)
41.7
22.3
37.4 26.5
66.2 59.6
86.7
0.0
20.0
40.0
60.0
80.0
3. Contribution to the economy 38
Republic had a very high density of SMEs, respectively 66.2, 59.6 and 86.7. In
contrast to that Germany and the United Kingdom showed a very low density of
SMEs and were far under the European average, respectively 22.3 and 26.5.
Average size of an enterprise
The average size of an enterprise is the total number of persons employed per
enterprise.
Figure 12: Average size of an enterprise, 2008, EU-27 (Source: Eurostat, 2011a)
While the European average reached 6.4 persons employed per enterprise, in
Germany there were about 12 persons and in the UK there were about 11 persons
employed per enterprise. In other words, the number of persons employed per
enterprise in Germany and the UK was considerably higher (almost double of the
average) than of the EU-27. On the other hand, France, Italy, Spain and the Czech
Republic has been very close or even lower than the average and therefore express
the significant importance of micro enterprises.
After having analyzed the number of enterprises with the selected countries and
the EU-27, it is interesting to see how the number of enterprises developed in the
last years.
6.4
12.1
6.3
10.9
3.9 5.3
4.1
0.0
2.0
4.0
6.0
8.0
10.0
12.0
3. Contribution to the economy 39
Development of the number of enterprises
The development of the number of enterprises by size class is uneven (EC, 2010c,
p. 16). Over the period 2002 – 2008, the number of SMEs has grown faster than
the number of large scale
enterprises. The number of
SMEs increased by 2.4
million (13%), while the
number of large scale
enterprises increased only
by 2,000 enterprises (4.1%).
Especially the micro and
small enterprises recorded
the highest growth rate,
respectively 13.1 percent
and 12.5 percent.
The development of number of enterprises in the SME sector during the period
2002 – 2008 of the selected countries ranged from a three percent dip in the Czech
Republic (EC, 2009b, p. 2) to an 18 percent peak in Spain (EC, 2009c, p. 2).
Whereby the growth in the Czech Republic was very low and the growth in Spain
was high compared to the EU average of 13 percent.
In Germany the number of SMEs has grown by 12 percent from 2002 to 2008,
which is very close to the EU average of 13 percent (EC, 2009d, p. 2). One
important point to mention is that the net growth in the number of enterprises
occurred for the most part in the group of micro enterprises. During the period
2003-2008 about 30-50 percent of the newly founded businesses were start-ups by
previously unemployed. This development can be explained by a special support
instrument, which was put in place by the German government during this period.
In France the number of SMEs has grown 17 percent from 2002 to 2008 (EC,
2009e, p. 2). It is a bit higher compared to the average EU growth (13%). The net
Figure 13: Development of the number of
enterprises by size class, 2002-2008, EU-27 (Source: EC, 2010c, p. 16)
Note: Index 2002 = 100; 2007 and 2008 estimates
3. Contribution to the economy 40
growth in the number of enterprises mainly took place in the group of micro
enterprises.
In the United Kingdom, during the period from 2002 to 2008, the number of
SMEs has grown nine percent (EC, 2009f, p. 2). It is significantly lower than the
average EU growth rate of 13 percent. Like in the above-mentioned countries, the
net growth in the number of enterprises mainly applied in the group of micro
enterprises.
In Italy the number of SMEs, during 2002-2008, has grown six percent, which is
very low compared to the average EU growth of 13 percent (EC, 2009g, p. 2). The
net growth in the number of enterprises occurred particularly in the group of small
and medium-sized enterprises.
3.2.2 Number of persons employed
One of the most striking phenomenons of SMEs is their contribution to
employment in the European economy. Out of 21 million enterprises that were
active within the EU-27’s non-financial business economy with roughly 133.5
million persons employed, 20.7 million enterprises were SMEs with 90 million
persons employed (Eurostat, 2011a). In other words, SMEs accounted for two out
of every three jobs (67.4%). Large enterprises contributed only for 32.6 percent of
the jobs.
Of the 90 million persons employed in SMEs, micro enterprises employed almost
40 million people. Despite the fact that micro enterprises have only an average of
two persons employed per enterprise, they provide 30 percent of total private
employment and therefore are a ‘little’ economic miracle. Small and medium-
sized enterprises created 20.7 percent and 17 percent of the jobs.
3. Contribution to the economy 41
Micro Small Medium-
Sized SMEs LSEs Total
EU-27
% 39,653,450
29.7
27,671,127
20.7
22,689,920
17.0
90,006,497
67.4
43,448,150
32.6
133,454,647
100
Germany
% 4,288,700
19.3
4,843,235
21.8
4,288,582
19.3
13,420,517
60.5
8,762,628
39.5
22,183,145
100
France
% 3,714,919
24.7
3,130,988
20.8
2,435,146
16.2
9,281,053
61.7
5,757,419
38.3
15,038,472
100
UK
% 3,817,765
21.5
3,183,757
17.9
2,723,685
15.4
9,725,207
54.8
8,012,260
45.2
17,737,467
100
Italy
% 7,292,281
46.9
3,351,855
21.6
1,935,295
12.5
12,579,431
80.9
2,961,028
19.1
15,540,459
100
Spain
% 5,377,223
37.7
3,636,271
25.5
2,109,383
14.8
11,122,877
78.0
3,130,652
22.0
14,253,529
100
Czech
Republic
%
1,077,519
29.1
693,604
18,7
733,587
19.8
2,504,710
67.6
1,199,348
32.4
3,704,058
100
Table 14: Number of persons employed, 2008
(Source: Eurostat, 2011a)
When analyzing the number of persons employed in SMEs among the selected
European countries, it is noteworthy to mention that in the year 2008, Italy and
Spain were above the European average (like it was with the number of
enterprises in SMEs). The SME sector in these two countries accounted for
approximately 80 percent of the total employment. In contrast to that, in
Germany, France and the United Kingdom the share of number of persons
employed in SMEs are less than the average of the EU-27 (respectively 60.5, 61.7
and 54.8).
Within the SME sector, the Italian and Spanish micro enterprises played an
essential role regarding the contribution to employment. In Italy the micro
enterprises accounted for 46.9 percent and in Spain for 37.7 percent of the total
employment. On the contrary, in Germany and the United Kingdom the
contribution to employment by micro enterprises was below the European average
of 30 percent, with respectively 19.3 and 21.5 percent.
3. Contribution to the economy 42
Development of employment
The number of employed in the EU non-financial business economy increased by
11.3 million in the period 2002-2008, whereby 9.4 million jobs were created by
SMEs and 1.9 million jobs by LSEs (EC, 2010c, p. 30). This represents an annual
increase of 1.9 percent in SMEs, which is more than double of that of large scale
enterprises (0.8%). The reason for this lies partly in the more rapid growth in the
number of SMEs because during this period the number of SME increased by 2.4
million (13%), while the number of large scale enterprises rose by 2,000 (4.1%).
Considering the employment growth rate of SMEs in the period 2003-2008 for the
selected countries, Germany (10%) (EC, 2009d, p. 2), France (9%) (EC, 2009e, p.
2), UK (7%) (EC, 2009f, p. 2), Italy (9%) (EC, 2009g, p. 2) and the Czech
Republic (1%) (EC, 2009b, p. 2) increased at a rate below the EU average of 12
percent. Only Spain, with 18 percent, increased by a rate above the EU average
(EC, 2009c, p. 2). In France (EC, 2009e, p. 2) and the UK (EC, 2009f, p. 2),
employment increased in particular in micro enterprises. In Italy the low growth
rate of employment in SMEs was mainly driven by relatively low employment
growth in micro enterprises (EC, 2009g, p. 2) and in the Czech Republic
employment was in fact decreasing in particular in micro enterprises (-8%), even
though the number in micro enterprises slightly increased (EC, 2009b, p. 2).
Employment by sector
Within the SME group, most of the jobs can be found in the distributive trade
sector (23.3 million), in the manufacturing (19.5 million) and in the construction
sector (13.2 million) (Eurostat, 2011b, p. 14). These three activities account to
61.9 percent. SMEs also play an important role, in respect to employment, within
many service sectors.
The following figure analyzes the number of persons employed by enterprise size
in terms of activities. Here it is noteworthy that the micro enterprises employed
more people than any other size class in a number of service sectors.
3. Contribution to the economy 43
This applies especially to repairs of computers, personal and household goods,
real estate services and accommodation & food services (hotels and restaurants).
Small enterprises are strong employers in construction, accommodation and food
services, manufacturing and distributive trade. Medium-sized enterprises strongly
contribute to the workforce in the manufacturing sector, particularly in the
production of rubber and plastics, textiles, pulp, paper and paper products and
clothing. In contrast to that, large companies are represented by a high number of
employed people in activities like network energy supply, mining and quarrying,
administrative and support services, transportation and storage, as well as water
supply, sewerage, waste and recycling.
0% 25% 50% 75% 100%
Repair: computers, personal
& h'hold goods
Construction
Real estate activities
Accommodation & food services
Professional, scientific
& technical activities
Distributive trades
Non-financial business economy
Manufacturing
Information & communication
Water supply, sewerage,
waste & recycling
Transportation & storage
Administrative & support services
Mining & quarrying
Network energy supply
Micro Small Medium-sized Large
Figure 14: Number of persons employed by enterprise size class, 2008, EU-27 (Source: Eurostat, 2011b, p. 15)
3. Contribution to the economy 44
The enterprise size class structure of a sector is largely determined by its fixed
costs, meaning capital intensity and costs to set up a business. For example, to set
up an enterprise for computer repair or any other service tends to be at lower cost
than to set up an enterprise in mining and quarrying, which require high
investments in form of tangible assets and licenses.
3.2.3 GDP / Value added at factor costs
According to the European Commission, in the year 2008, European SMEs
accounted for more than half (58%) of the European Gross Domestic Product
(GDP) (Eurostat, 2011a).
Value added approach
To measure the direct contribution of SMEs to economic wealth, its contribution
to value added can be used (value added approach). “Value added at factor cost is
the gross income from operating activities after adjusting for operating
subsidiaries and indirect taxes.”(EC Eurostat, 2010).
Micro Small
Medium-
Sized SMEs LSEs Total
EU-27
%
1,316,318
21.0
1,182,663
18.8
1,127,422
17.9
3,626,403
57.7
2,656,257
42.3
6,282,660
100
Germany
%
191,950
15.5
222,179
18.0
238,833
19.3
652,962
52.8
584,225
47.2
1,237,187
100
France
%
180,538
21.0
160,849
18.7
134,289
15.6
475,676
55.2
385,655
44.8
861,331
100
UK
%
215,745
18.5
180,872
15.5
194,189
16.6
590,806
50.7
575,597
49.3
1,166,404
100
Italy
%
219,235
32.6
154,609
23.0
108,443
16.1
482,287
71.7
189,928
28.3
672,216
100
Spain
%
158,726
26.5
144,034
24.1
103,660
17.3
406,419
67.9
192,065
32.1
598,485
100
Czech
Republic
%
16,702
18.8
14,129
15.9
17,760
20.0
48,591
54.8
40,112
45.2
88,702
100
Table 15: Value added in million Euro (non-financial business economy),
2008, EU-27 (Source: Eurostat, 2011a)
3. Contribution to the economy 45
In the year 2008, across the whole EU-27’s non-financial business economy,
6,282 billion Euro value added has been generated (Eurostat, 2011a). SMEs
accounted for 58 percent (3,626 billion Euro). Large scale enterprises generated
42 percent (2,656 billion Euro) of the value added. Within the SME group micro,
small and medium-sized enterprises accounted for respectively 21, 19 and 18
percent.
Comparing the selected European countries with the EU-27, there are two
important aspects to point on. Firstly, in Italy and in Spain the contribution of
SMEs to value added was higher than the average of Europe (respectively 71.7%
and 67.9% compared to 58%). Secondly, the contribution of SMEs and LSEs to
value added by Germany and the United Kingdom was more or less equal
(respectively 52.8% and 47.2%; 50.7% and 49.3%).
Moreover, there is not only a difference between SMEs and large scaled
enterprises but also among micro, small and medium-sized enterprises. In Italy
and in Spain the micro enterprises play again a very significant role because they
created respectively 32.6% and 26.5% of the total value added compared to the
average of the EU (21%). Conversely in Germany, in the United Kingdom and in
the Czech Republic micro enterprises are of minor importance (respectively
15.5%, 18.5% and 18.8%). In these three countries the share in the micro
enterprise category compared to Italy, Spain and above all to the European
average is lower and is replaced by value added produced by larger enterprises.
During the period 2002-2008 the value added in the European Union increased by
an average of 28 percent in the SME sector. Spain and the Czech Republic were
the two countries where value added produced by SMEs increased above the
European average level. In Spain it grew by 52 percent, which is well above the
EU average level (growth of 28%) (EC, 2009c, p. 2). It seems that this vast
growth has been fuelled by the overall positive macroeconomic climate, which
Spain enjoyed during this period. Even more striking is the growth of the value
added of Czech SMEs, which recorded 87 percent (EC, 2009b, p. 2). Germany
with 21 percent (EC, 2009d, p. 2), the United Kingdom with 22 percent (EC,
2009f, p. 2) and Italy with 26 percent (EC, 2009g, p. 2) were below the EU
3. Contribution to the economy 46
average. France almost aligned with the European average (respectively 29%
compared to 28%) (EC, 2009e, p. 2). It is very important to always remember that
the national economic situation of the particular country is the driving force and
therefore explains the different growth rates of value added among the European
countries. For instance Spain and the Czech Republic recorded a high growth rate
of value added because during this time, they experienced an economic boom.
Value added by sector
Similar to the analysis of employment, the sectors distributive trades,
manufacturing and construction played an important role because there the highest
level of added value has been generated (Eurostat, 2011b, p. 20). This is the
outcome of, on the one hand, the great representation of the number of enterprises
active in these sectors, and on the other hand, the numerous number of persons
employed in this area.
0 200 400 600 800
Distributive trades
Manufacturing
Construction
Prof., scientific & technical activities
Administrative and support services
Transportation & storage
Real estate activities
Information & communication
Accommodation & food services
Network energy supply
Water, sewerage, waste & recycling
Mining & quarrying
Repair: comp., pers. & h'hold goods
Figure 15: Value added by SMEs (EUR 1,000 million), 2008, EU-27 (Source: Eurostat, 2011b, p. 20)
3. Contribution to the economy 47
3.2.4 Labor productivity
However the contribution of SMEs with respect to value added (58%) compared
to the contribution of SMEs with respect to employment (66.7%) is lower. This
indicates low labor productivity by SMEs, which will be proved in the following.
Labor productivity is expressed in 1,000 Euro/occupied person.
Micro Small Medium-Sized SMEs LSEs Total
EU-27 33.2 42.7 49.7 40.3 61.1 47.9
Germany 45 46 56 49 67 56
France 49 51 55 51 67 57
UK 57 57 71 61 72 66
Italy 30 46 56 38 64 43
Spain 30 40 49 37 61 42
Czech Republic 16 20 24 19 33 24
Table 16: Labor productivity (1,000 Euro/occupied person), 2008, EU-27 (Source: Eurostat, 2011a)
The average of EU-27 has a labor productivity of 40.3. In Germany, France and
UK the labor productivity is higher than the average with respective 49, 51 and
61. In contrast to that, in Italy, Spain and the Czech Republic labor productivity is
considerably low with respective 38, 37 and 19.
In general apparent labor productivity is not so high due to the fact that SMEs
usually do not benefit from economies of scale, they are less capital intensive
and/or have difficulties to develop innovations (Eurostat, 2011b, p. 20). Another
very remarkable reason is, that less qualified labor force is used in SMEs.
Therefore large enterprises have higher labor productivity ratios than SMEs,
meaning that there is a positive correlation between labor productivity and
enterprise size. In the year 2008, in each of the selected countries, the labor
productivity increased parallel with the increasing size of an enterprise.
3. Contribution to the economy 48
3.2.5 Export turnover
As already mentioned, the role of SMEs in exports is less than in large scale
enterprises. According to a survey of the Observatory of European SMEs, in
2005, there is a large number of European SMEs that does not export at all (EC,
2007b, p. 44). Only around eight percent of the European SMEs had export
turnover in 2005. (This number differs from the stated number in chapter 2.2 of 11
percent export because firstly it was from the period 2006-2008 and secondly it
was elaborated in a different study. Nevertheless, in order to calculate the export
turnover, the proportion of income of exports has to be used, which is only given
in this study.) Across the EU, the differences are high. While Germany and the
UK reported a higher involvement in exports than the EU-27 (respectively 9%
each compared to 8 percent), Italy, the Czech Republic, France and Spain were
below the EU 27 average.
Figure 16: Proportion of enterprises with revenue from exports,
2005, EU-27 (Source: EC, 2007b, p. 44)
On average, the exporting SMEs in the EU had an export turnover of 83,700 € in
2005, which made up 4.6 percent of the turnover of those SMEs in the EU that
reported export activities. In contrast to that, 19.4 percent of the turnover from
exporting large scaled enterprises was attributed to exports. It is notable that the
bigger the enterprise, the bigger the export turnover (see table 17).
8% 9%
6%
9%
7%
3%
7%
0%
2%
4%
6%
8%
10%
EU 27 Germany France UK Italy Spain Czech
Republic
3. Contribution to the economy 49
Any export
turnover in %
Proportion of income from
exports in %
SMEs 8 4.6 S
ize
clas
s
Micro 7 5.0
Small 13 7.9
Medium-sized 24 14.9
LSEs 28 19.4
SM
E a
ctiv
ity
sec
tor
Manufacturing 14 7.8
Construction 5 2.0
Wholesale and retail 12 5.9
Hotels and Restaurants 1 0.8
Transport, storage and
communication 9 9.0
Financial intermediation 2 1.7
Real estate, renting and
business activities 6 4.2
Health and social work 2 0.4
Other community, social and
personal service 3 2.0
Table 17: Exporters by industry sector, 2005, EU-27 (Source: EC, 2007b, p. 45)
Note: the averages used for the SME subcategories by size class use a smaller sample (only the
SMEs that disclosed the export figures are part of this sample, as opposed to the sample used for
the total of SMEs)
Export incomes were mainly found in the transport, storage and communication
(9%), manufacturing (7.8%) and wholesale and retail (5.9%) sector. Health and
social work (0.4%) and hotels and restaurants (0.8%) make only a negligible part
of the sales income that come from exports.
When combining the data presented above with the statistical supplement
compiled by Eurostat (2011a), it is possible to see how much the export turnover
of SME represents of the total export turnover:
Total
turnover
(in €)
Proportion of
income from
exports (%)
Export
turnover
(in € / %)
SMEs 11,877,533.5 4.6 546,367 / 24
LSEs 8,783,746.3 19.4 1,704,047 / 76
Table 18: Calculation of the export turnover, 2005, EU-27 (Source: EC, 2007b, p. 45 and statistical supplement (Eurostat, 2011a))
In conclusion, SMEs account for 24 percent of the total income from exports in
Europe according to this study and the statistical supplement.
X =
3. Contribution to the economy 50
3.3 Brazil
3.3.1 Number of enterprises
According to Sebrae, in the year 2008 there were around 5,838,070 enterprises
(2010, p. 35) and over 9.5 million unregistered enterprises (personal
communication with Kátia Rausch, July 27, 2011) in Brazil. Considering the
registered enterprises, most of them are located in the southeast (2,975,715) and
the south (1,381,294) (Sebrae, 2010, p. 35). The southeast, with its three
important states - São Paulo, Rio de Janeiro and Minas Gerais - is the richest
region of the country in terms of GDP and leads the country in urban population,
industries, universities and many other areas (IBGE, 2010, p. 19). The south
consists of Paraná, Santa Catarina and Rio Grande do Sul, and is the second
largest economic pole of Brazil.
In Brazil approximately 0.3 percent (17,777) counted as large enterprises, while
99.7 percent (5,820,293) accounted for SMEs (Sebrae, 2010, p. 35). Thus the vast
majority of enterprises are again represented by the SMEs. Within the SME
group, the micro enterprises accounted for the greater part of the SMEs with 94
percent (5,486,649). The small enterprises make up 5.1 percent (300,047) and the
medium-sized 0.6 percent (33,597).
Micro Small Medium-Sized SMEs LSEs Total
Brazil
%
5,486,649
94
300,047
5.1
33,597
0.6
5,820,293
99.7
17,777
0.3
5,838,070
100
North
%
182,634
92.2
12,983
6.6
1,542
0.8
197,159
99.6
836
0.4
197,995
100
Northeast
%
810,720
94.1
43,316
5.0
4,674
0.5
858,710
99.7
2,609
0.3
861,319
100
Southeast
%
2,783,357
93.5
162,694
5.5
19,164
0.6
2,965,215
99.6
10,500
0.4
2,975,715
100
South
%
1,314,549
95.2
58,078
4.2
6,011
0.4
1,378,638
99.8
2,656
0.2
1,381,294
100
Mid-West
%
395,389
93.8
22,976
5.4
2,206
0.5
420,571
99.7
1,176
0.3
421,747
100
Table 19: Number of enterprises, 2008, Brazil (Source: Sebrae, 2010, p. 34)
3. Contribution to the economy 51
Table 19 gives an overview of the number of enterprises of Brazil as a whole and
of its five main regions. In all of the five regions, the SMEs are represented by at
least 99.6 percent. Consequently large scale enterprises count only for the minor
part, which ranges from 0.2 to 0.4 percent in the five big areas.
Within the SME sector (micro, small and medium-sized), it is interesting to see
that each region reflects more or less the same proportions for each enterprise
size. The importance of the micro enterprises is seen in each of the five regions.
Density of SMEs
The density of SMEs is the number of SMEs per 1,000 inhabitants. In the year
2008 the density of SMEs was about 30.4 in the Brazilian economy. According to
the World Bank (2011b) the population was 191,543,237 in that year.
Average size of an enterprise
Having a look at the average size of an enterprise in Brazil, it clearly underpins
the importance of micro enterprises. Brazil reached an average of 4.2 persons
employed per enterprise, while the five regions show a similar picture.
Development of the number of Brazilian SMEs
During the last years, the number of Brazilian SMEs has steadily been growing:
According to Sebrae (2010, p. 35), the total number of enterprises in Brazil grew,
in absolute numbers, from 5,640,870 in 2007 to 5,838,070 in 2008. Considering
the SME sector, the number of SMEs in Brazil increased from 5,624,222 in 2007
to 5,820,293 in 2008 which gives an average growth rate of 3.5 percent.
In September 2008, Sebrae published a presentation with a forecast for the period
2009 – 2015 of micro and small enterprises in Brazil. Since the medium-sized
enterprises play a minor role in Brazil (0.6%), Sebrae focuses only on micro and
small enterprises, which represent about 99.1 percent of all enterprises.
3. Contribution to the economy 52
According to this study the
following number of micro
and small enterprises has
been observed: 4.1 million
(2000), 5.0 million (2004),
6.8 million (2010) and 8.8
million (2015), whereupon
the number of the years
2010 and 2015 are
estimates.
3.3.2 Number of persons employed
In 2008, those 5,838,070 registered enterprises created in total 24,923,699 jobs
(Sebrae, 2010, p. 179). Whereby, 5,820,293 of the registered enterprises were
SMEs, which provided 17,015,375 jobs. In relative terms, SMEs provided 68.3
percent and large scaled enterprises about 31.7 percent of all jobs.
In the SME group, the micro, small and medium-sized enterprises accounted for
respective 24.5 percent, 27.5 percent and 16.0 percent. The following table
resumes the above-mentioned, but the number of employment was not available
for each of the five regions.
Micro Small Medium-
Sized SMEs LSEs Total
Brazil
%
6,112,602
24.5
6,914,631
27.7
3,988,142
16.0
17,015,375
68.3
7,908,324
31.7
24,923,699
100
Table 20: Number of persons employed, 2008, Brazil (Source: Sebrae, 2010, p. 179)
Development of employment
The following figure shows the development of number of employment in SMEs
and large scale enterprises (Sebrae, 2010, p. 179). The number of jobs created by
Figure 17: Development of the number of micro
and small enterprises, 2000-2015, Brazil (Source: Sebrae/SP, 2008)
0
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
2000 2004 2010 2015
3. Contribution to the economy 53
SMEs and large scale enterprises increased since the year 2000. SMEs provide
significantly more jobs than large scale enterprises.
But on the other hand, since
2004 the number of
employment in large scale
enterprises increased by a
higher growth rate compared
to that of SMEs (in 2008:
20.2% compared to 13.0%),
which can be seen in the
following table. Brazil is
facing the problem that a
growing number of SMEs do not register all of their employees in order to enjoy
fiscal advantages and to stay competitive (personal communication with Kátia
Rausch, July 27, 2011). Thus, the growth of number of persons employed in
SMEs is relatively low compared to that of LSE. This informality is usually not
realizable in large scale enterprises because they are subject to many special
regulations and restrictions, and are under special control, which cannot be
bypassed easily.
Within the SME group, in 2008, the small and medium-sized enterprises show the
highest growth rate (respective 14.9% and 15.0%), while micro enterprises had a
growth rate of 9.6 percent.
2002 2004 2006 2008
SMEs 9.4% 10.1% 11.2% 13.0%
Micro 10.0% 8.3% 9.4% 9.6%
Small 11.4% 11.6% 12.1% 14.9%
Medium-sized 5.0% 10.5% 12.8% 15.0%
LSEs 4.2% 15.3% 18.3% 20.2%
Table 21: Growth rate of persons employed, 2002-2008, Brazil (Source: Sebrae, 2010, p. 179)
Figure 18: Development of employment in
SMEs and LSEs, 2008, Brazil (Source: Sebrae, 2010, p. 179)
0
4
8
12
16
20
2000 2002 2004 2006 2008 M
illi
on
s
LSEs
SMEs
3. Contribution to the economy 54
Employment by sector
The figure below shows the proportion of the employment generated by each size
class, divided by sector.
In the commerce sector, SMEs are responsible for 83.6 percent of the total of
employment generated. Especially micro and small enterprises are active in this
sector, respectively 37.8 percent and 35.9 percent. In the construction and industry
sector SMEs generated respectively 77 percent and 68.58 percent of all
employment, whereby a great part is generated by medium-sized enterprises.
Large scale enterprises are represented in the service sector by 48.1 percent.
Figure 19: Distribution of employment by sector, 2008, Brazil (Source: Sebrae, 2010, p. 182)
3.3.3 GDP
In September 2010, the president of Sebrae, Carlos Alberto dos Santos,
announced that micro and small enterprises in Brazil are responsible for only 20
percent of the Brazilian GDP (Agência Sebrae de Notícias, 2010). According to
Sebrae medium-sized enterprises do not play a significant role in the Brazilian
economy and therefore they put their focus on micro and small enterprises and
simply neglect medium-sized enterprises. This is a fatal error because the number
of medium-sized enterprises might seem low but their contribution to the
economy can be considered high. For instance, medium-sized enterprises account
for only 0.6 percent of all enterprises but they create around 16 percent of all jobs
(while for example micro enterprises account for 94 percent but only creates a few
37.8
19.8
17.8
20.3
35.9
23.0
24.7
28.4
9.9
9.0
26.0
28.3
16.4
48.1
31.4
23.0
Commerce
Service
Industry
Construction
Micro Small Medium-sized Large
3. Contribution to the economy 55
more jobs than medium-sized enterprises, respectively 24.5 percent). This shows
that the significance of medium-sized enterprises for the Brazilian economy
should not be undervalued.
Although micro and small enterprises represent more than 99 percent of all
Brazilian companies, they attribute this low volume (20% of GDP). Whereby it is
not said how this 20 percent was calculated or which calculation approach has
been used. This issue definitely has to be looked into in the future.
Furthermore, Carlos Alberto dos Santos stated the following:
"We have entered a cycle of sustainable development, with decreased concentration of
income and reducing disparities. The outlook for the coming years is very good. We must
work now on the quality of development and growth and not the quantity” (translated by
the author from Portuguese into English: “Entramos em um ciclo de desenvolvimento
sustentado, com diminuição da concentração de renda e redução das disparidades. As
perspectivas para os próximos anos são muito boas. Precisamos trabalhar agora na
qualidade do desenvolvimento e do crescimento e não no quantitativo”) (Agência Sebrae
de Notícias, 2010).
He noted that about 52.2 percent of the labor force are employed by micro and
small enterprises (68.3 percent by SMEs) and noted the challenge of doubling the
importance of these enterprises in GDP over the next ten years. This can only be
reached by increased productivity, efficiency and competitiveness of SMEs.
3.3.4 Productivity
There are no exact numbers of the productivity of Brazilian SMEs available, but
when comparing the number of employed persons in SMEs with their contribution
to the Brazilian GDP, it implies that the productivity in SMEs is very low.
Moreover the current president of Sebrae, brought up in an interview in
September 2010, that the productivity is too low and has to increase in SMEs
(Agência Sebrae de Notícias, 2010).
To be more concrete, in 2008 around 99.7 percent of all Brazilian enterprises
accounted for SMEs, which created 68.3 percent of all persons employed. But
Brazilian SMEs (micro and small enterprises) contributed only to 20 percent of
the GDP. This leads to the presumption, that productivity and the efficiency of
3. Contribution to the economy 56
Brazilian SMEs are considerably low. But it has to be considered that the amount
of contribution by SMEs (micro and small enterprises) to GDP (20%) is not a
good basis and seems tremendously small.
Another indicator, like the education of the workers, indicates that the
productivity is low. More than 43 percent of the workers employed in SMEs did
not finish high school (in Brazil the high school is from the 10th
grade until 12th
grade) (Sebrae, 2010, pp. 155-160). Another 45 percent finished high school but
did not finish the university.
Furthermore, which is a general problem of SMEs, they cannot profit from the
economies of scale-advantage, have less resources to train their workers and have
difficulties to develop innovations.
Due to the aforementioned reasons, productivity tends to be low but since the data
are insufficient and some of the data are even put into question, this issue has to
be looked at in more detail.
3.3.5 Export turnover
According to Sebrae (2009, p. 57) the total export turnover in the year 2008 was
US$ 197,597.8 million (exports realized by individuals is excluded). SMEs play
an important role in the contribution to the export value because around one fifth
of the export value has been attributed by SMEs. This proportion is highly
dependent to the medium sized company, which accounted, in 2008, for 11.7
percent of the total value exported. The micro enterprises accounted for 0.1
percent, small enterprises represented one percent of the total turnover exported
and the micro and small special size 6.8 percent.
Micro Small
“Micro
and Small
Special”
Medium-
Sized SMEs LSEs Total
Brazil
%
184.6
0.1
2,072.3
1.0
13,482.8
6.8
23,092.5
11.7
25,349,4
19.7
158,765.5
80.3
197,597.8
100
Table 22: Export turnover (in million US$), 2008, Brazil (Source: Sebrae, 2009, p. 57)
3. Contribution to the economy 57
However, it is possible to see from the figure below that the relative participation
of SMEs in the total export turnover has been decreasing since 2004.
0%
25%
50%
75%
100%
2004 2005 2006 2007 2008
LSEs
SMEs
Figure 20: Relative share of export turnover, 2004-2008, Brazil (Source: Sebrae, 2009, p. 57)
The absolute number of export turnover for SMEs, however, shows a steady
growth during this period until the first semester of 2009, when the export
turnover decreased by 22.9 percent, due to the crisis (Sebrae, 2009, p. 8).
The increase in the absolute numbers can be clearly seen in the following figure.
27
29
35
37
41
25
28
31
34
37
40
2004 2005 2006 2007 2008
Mil
lio
n (U
S$
)
Figure 21: Development of the export turnover for SMEs in absolute
numbers, 2004-2008, Brazil (Source: Sebrae, 2009, p. 57)
3. Contribution to the economy 58
From this seemingly paradox information, some conclusions can be drawn.
Firstly, that the growth of large companies in the export turnover is much higher
than that of SMEs. This is due to the fact that large scale enterprises had many
benefits from the booming in the world trade during this period (Sebrae, 2009, p.
9). Their exports had a greater share of commodities, which had a great rise of
demand as well as the price. Secondly, SMEs had problems with the exchange
rate evaluation and the rise of the real wage in Brazil, since their exports are more
concentrated in goods that require intensive labor force. These products are
traditionally very sensitive to changes in the exchange rate. Furthermore they also
suffered from a strong international competition, especially from the Asian
market.
3.4 Argentina
3.4.1 Number of enterprises
According to the Ministry of Labor, Employment and Social Security (in
Argentina the so-called Ministerio de Trabajo, Empleo y Seguridad Social), in the
4th
semester of 2009, there were around 485,000 private enterprises in Argentina
(MTEySS, 2011). The majority of them, 98.2 percent (475,714) are SMEs and
approximately 1.8 percent (8,830) account for large enterprises.
SMEs are made up of 71.2 percent micro, of 21.7 percent small and of 5.3 percent
medium-sized enterprises. More than seven out of ten enterprises are a micro
enterprise. Thus, the micro enterprises are very important.
Micro Small Medium-Sized SMEs LSEs Total
Argentina
%
344,890
71.2
105,259
21.7
25,565
5.3
475,714
98.2
8,830
1.8
484,544
100
Table 23: Number of enterprises, 2009, Argentina (Source: MTEySS, 2011)
3. Contribution to the economy 59
Density of SMEs
The density of SMEs is the number of SMEs per 1,000 inhabitants. In the year
2009 the density of SMEs was about 11.9 (with a population of 40,062,470 (The
World Bank, 2011c)).
Average size of an enterprise
The average size of an enterprise is the total number of persons employed per
enterprise. In the year 2009, the average size of an enterprise in Argentina was
10.3.
Development of the number of enterprises
During the last years, the number of enterprises has been steadily growing. During
the period 2002 to 2009 there was an increase of 38 percent in the number of
enterprises (MTEySS, 2011). As can be seen in the figure, the number of large
enterprises has been growing more compared to SMEs. It had an increase of 64
percent during this period, while the number of medium-sized enterprises
increased by 55 percent, the number of small and micro enterprises by
respectively 49 percent and 34 percent.
Comparing the year 2009 to 2008, the number of micro enterprises went down by
two percent, the
growth rate from
small and medium-
sized enterprises is
also slowing down,
respectively a
growth rate of two
percent and one
percent (compared
to 2008, respect-
ively 5% and 5%).
This is due to the crisis, which especially hit SMEs.
0%
10%
20%
30%
40%
50%
60%
70%
2003 2004 2005 2006 2007 2008 2009
LSEs
Medium-sized
Small
Micro
Figure 22: Development of the number of enterprises,
2003-2009, Argentina (Source: MTEySS, 2011)
3. Contribution to the economy 60
3.4.2 Number of persons employed
According to the Ministry of Labor, Employment and Social Security, in the 4th
semester of the year 2009, there were a total of 4,971,000 official registered
people working in private enterprises of Argentina (MTEySS, 2011).
Approximately 2,394,523 workers were employed in large scale enterprises, in
relative terms 48.2 percent. SMEs accounted for 2,576,040, which represent 51.8
percent of the total workforce. Although the total number of SMEs (98.2%) is
much higher than the total number of large enterprises (1.8%), the proportions for
people employed is almost even (each more or less 50 percent).
Within the SME group micro account for 12.7 percent, small for 19.2 percent and
medium-sized enterprises for 19.9 percent.
Micro Small Medium-
Sized SMEs LSEs Total
Argentina
%
630,346
12.7
955,181
19.2
990,513
19.9
2,576,040
51.8
2,394,523
48.2
4,970,563
100
Table 24: Number of persons employed, 2009, Argentina (Source: MTEySS, 2011)
Development of the number of employment
Between the period from 2002 to 2010 there was an overall growth rate of 63.8
percent (in 2002: 3,024,006 and in 2010: 5,163,419 workers employed). The
number of employment in large and micro enterprises rose more than the overall
growth rate with respective 68.7 percent and 67 percent. Small (60.2%) and
medium-sized enterprises (54.6%) were below the overall growth rate.
In the year 2009, the number of employment decreased in each size class. But the
recovery was fast because in the year 2010 it exceeded already the number before
the crisis.
3. Contribution to the economy 61
Figure 23: Development of the number of persons employed
by size class, 2002-2009, Argentina (Source: MTEySS, 2011)
Employment by sector
In the fourth semester of the year 2009, the 2,576,040 jobs that were created by
SMEs, half of them took place in the service sector (1,301,000), around 26.8
percent in commerce (690,000) and 22.7 percent in the industry (584,000)
(MTEySS, 2011).
The figure shows the
proportion of the
employment generated
by each size class,
divided by sector.
In the commerce sector, SMEs are responsible for 65.7% of the total of
employment generated, while LSE account for 34.3 percent. Especially Micro and
small enterprises are active in this sector, respective 23.0 percent and 27.6
percent. In both, the service and the industry sector, SMEs and LSE evenly share
their participation of the total employment.
-0.1
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
LSEs
Medium-sized
Small
Micro
6.9
11.3
23.0
19.1
16.0
27.6
23.0
20.4
15.2
51.1
52.3
34.3
Industry
Service
Commerce
Micro Small Medium-sized LSEs
Figure 24: Number of persons employed by sector
and by size class, 2009, Argentina (Source: MTEySS, 2011)
3. Contribution to the economy 62
3.4.3 GDP
According to SePyME and the Ministry of Industry, Argentinean SMEs generate
around 40 percent of the GDP (SePyME, 2009). Detailed information about the
contribution of SMEs to GDP, such as the calculation method or how this number
has been established is not available. Therefore this number is doubtful.
3.4.4 Labor Productivity
There is no data available of the labor productivity of Argentinean SMEs. But
when comparing the number of persons employed in SMEs with their contribution
to the Argentinean SMEs, it implies that the productivity in SMEs is not very
high. To be more concrete, in the year 2009 more than half of the workers (52%)
were employed in Argentinean SMEs but they only contributed to 40 percent of
the GDP. Whereby the number of contribution to GDP is put into question and
therefore does not build a good basis to evaluate labor productivity.
The Fundación Observatorio PyME (2010b, pp. 5-6) published a study about
labor productivity of industrial SMEs in Argentina.
Figure 25: Development of labor productivity of industrial SMEs
and the industry average, 1997-2009, basis 1997=100 (Source: Fundación Observatorio PyME, 2010b, p. 6)
Industrial SMEs Industry average
3. Contribution to the economy 63
It shows that during the period of 2003 – 2007, the labor productivity of industrial
SMEs was stable, whereupon the industry average index was skyrocketing
(Fundación Observatorio PyME, 2010b, pp. 5-6). The average labor productivity
increase was mainly led by large enterprises, which had a higher productivity
during this time.
The productivity of industrial SMEs declined in the years 2008 and 2009. In
contrast to that, the average productivity of the national industry shows growth
every year. Comparing their indexes of productivity (1997=100) in 2009, the
average productivity of the national industry was calculated at 140, while the
industrial SMEs had an index close to 90. It is worth mentioning, that the
maintenance of the high labor productivity index in 2009 was more due to the
decrease in the number of workers (3.5%) than the rise in the production (only
0.4%), compared to 2008.
Summarized, it shows that the labor productivity of industrial SMEs is very low
compared to that of the industry average.
3.4.5 Export turnover
During the period 2002 and 2005, export turnover of SMEs grew by more than 50
percent – a growth comparable to the growth of total exported turnover of
Argentina during this period (CEPAL, 2006, p. 14). All this growth, however,
represent only 10.7 percent of the
total of exports (LSEs represent the
majority of the export turnover,
89.3 percent) (CEPAL, 2006, p.12).
This fact shows that the external
sector of Argentina is extremely
concentrated, where a small group
of large exporters are responsible
for the major part of the income of
the sales abroad.
89.3%
10.7%
LSEs
SMEs
Figure 26: Export turnover, 2005,
Argentina (Source: CEPAL, 2006, p. 12)
3. Contribution to the economy 64
Another noteworthy fact is that the average of price/ton of exported good is higher
the smaller the firm is (CEPAL, 2009, p. 47). This shows that the products
exported by SMEs in Argentina in general have a higher aggregated value than
that of LSEs. The average price per ton exported by micro and small enterprises
amounts to US$ 1,064, while the medium-sized enterprises account to US$ 871.
Moreover, the LSEs export the proportion of US$ 382 per ton, what is almost
three times less than the value for SMEs.
3. Contribution to the economy 65
3.5 Comparison
In Europe, Brazil and Argentina the majority of enterprises are SMEs. Europe and
Brazil have roughly the same share (respectively 99.8% and 99.7%). In Argentina
the share is lower (98.2%) but still remarkable high.
Within the SME group, it is noteworthy that the micro enterprises play a
significant role. Whereupon Brazil has the highest share of micro enterprises
(94%) and Argentina the lowest (71.2%). Another interesting fact is that in
Argentina the small (21.7%) and medium-sized (5.3%) enterprises have a very
high share compared to Brazil (5.1% small and 0.6% medium-sized) and Europe
(6.9% small and 1.1% medium-sized). To sum it up, in Brazil and in Europe there
are more enterprises that are classified micro and in Argentina are more
enterprises that are classified as small or medium-sized. Due to this fact, in Brazil,
for instance, there is more specific support for micro and small enterprises, while
medium-sized enterprises are disregarded.
The density of SMEs shows that in Europe there are more SMEs per inhabitant
(41.7) when compared to Brazil (30.4) and Argentina (11.9). This shows the
importance of SMEs in Europe and Brazil, which is significantly lower for
Argentina.
When regarding the average size of an enterprise, the importance of SMEs,
especially of micro enterprises, for Europe and Brazil, becomes clear. In Europe
the average size of an enterprise consists of 6.4 employees and in Brazil of 4.2
employees. Argentina has around 11.9 employees, which again shows that in
Argentina the enterprises tend to be larger.
In both, Europe and in Brazil, SMEs create more than two thirds of the jobs and
therefore are an important source of jobs. Argentinean SMEs contribute to only
about half of all jobs. It is important to mention that in Europe and in Brazil the
micro enterprises create surprisingly many jobs (respectively 29.7% and 24.5%),
although they are so small. In Argentina it is the opposite situation, the bigger
SME size classes (small and medium-sized) contribute to more jobs.
The smaller the SME, the more likely it is active in the service or commerce
sector, due to the fact that a service business in general does not require a high
3. Contribution to the economy 66
amount of capital to start and to keep the business running. The bigger the SMEs,
the more likely it becomes active in the manufacturing or industry sectors. Since
they have more resources and therefore can invest in machines, equipment, etc.,
which is needed. This applies for Europe, Brazil and Argentina.
The contribution to GDP is hard to compare because in Brazil and Argentina the
data is insufficient (since there is just one number given but not explained how it
was calculated or how it was composed). Nevertheless, it gives a rough estimate.
European SMEs contributed greatly to the GDP (58%), while Argentinean SMEs
contributed at a medium level (40%) and Brazilian SMEs (micro and small
enterprises) had a tremendous small contribution of 20 percent of the GDP.
Furthermore, the data for labor productivity in Brazil and Argentina is also not
very exact, due to the before-mentioned weak data base. Labor productivity of
SMEs in the EU-27 was 40.3 (1,000 Euros per occupied person) and therefore
close to the average of all enterprises (47.9). LSEs have a higher labor
productivity (61.1). In Brazil there was no data available for the labor productivity
of SMEs. However, when considering that Brazilian SMEs represent 68 percent
of employment and contribute to 20 percent of the GDP, labor productivity can be
considered very low. In Argentina the labor productivity in industrial SMEs is low
compared to the average of the national industry.
Export turnover is high in European SMEs. Out of the total export turnover one
fourth can be attributed to SMEs. Despite the low export share (0.31%) that
Brazilian SMEs have, export turnover is surprisingly high (19.7%). In Argentina
the export turnover is 10.7 percent and therefore low compared to Europe and
Brazil. The Argentinean result reinforces the fact that Argentinean SMEs are
withdrawing from the international market and focusing more in the internal
market.
In conclusion, the contribution to the economy by European SMEs is enormous,
thus they can be considered the true backbone for the European Economy. The
Brazilian SMEs are also essential for the Brazilian Economy but they have to
improve in certain aspects, such as labor productivity. Argentinean SMEs have a
3. Contribution to the economy 67
considerable contribution to the Argentinean economy but several issues, such as
labor productivity, export turnover and the job creation, could still be improved.
This table gives an overview of the most important indicators used to compare
European, Brazilian and Argentinean SMEs.
EU-27 Rating Brazil Rating Argentina Rating
Total 99.8% 99.7% 98.2%
Micro 91.8% 94.0% 71.2%
Small 6.9% 5.1% 21.7%
Medium-sized 1.1% 0.6% 5.3%
41.7 30.4 11.9
6.4 4.2 10.3
Total 67.4% 68.3% 51.8%
Micro 29.7% 24.5% 12.7%
Small 20.7% 27.7% 19.2%
Medium-sized 17.0% 16.0% 19.9%
Micro Service Commerce Commerce
SmallConstruction,
Service
Commerce,
ConstructionCommerce
Medium-sized ManufacturingConstruction,
IndustryIndustry
58% 20% 40%
40.3 n.a. (low)* low**
24% 19.7% 10.7%
Contribution to GDP
Labor productivity (1,000
Euro/occupied person)
Export turnover
Number of
SMEs
Density of SMEs
(per 1,000 inhabitants)
Average size of an
enterprise
(employee/enterprise)
Number of
persons
employed by
SMEs
Sector with
most
persons
employed
Table 25: Comparison of SMEs’ contribution to the economy (Source: see chapter 3.2, 3.3 and 3.4)
Note: * no exact data available but assumption
** data refer to industrial SMEs
The confidence level of the data rated by the author
high
medium
low
4. Challenges SMEs face 68
4 Challenges SMEs face
4.1 Brief introduction
At the beginning of the 21st century companies are facing increasing global
dynamics and complexity. Innovation cycles are getting shorter, products become
obsolete, and markets are changing faster and faster. Many of the challenges in
today's ‘turbulent times’ hit SMEs much harder than large companies. The latter
has the edge over SMEs, due to greater financial strength and resources, product
and geographic diversification and better marketing opportunities. SMEs, on the
other hand, do not have granted a ‘second chance’ in case of a wrong decision,
due to their low equity ratio.
Moreover SMEs are strongly influenced by changes in their business environ-
ment, which originate from different forces like political, economic, socio-
cultural, technological, legal and environmental forces.
This chapter describes in which environment European, Brazilian and Argen-
tinean SMEs reside and gives an overview of factors that makes the environment
turbulent. Apart from the same influencing factors, such as the globalization and
the crisis, each of them confronts their own challenges.
4.2 Europe
4.2.1 The impact of EU enlargement
The enlargement of the European Union is a process, in which the European
Union is expanded by new member states. It is often referred to as ‘European
integration’. This process of enlargement is changing the business environment
under which SMEs in current and prospective new member states are operating.
The removal of barriers to the flow of goods, services, capital and labor result in a
higher competition on the domestic market. But at the same time it also provides
new market opportunities and facilitates access to new resources.
The report ‘The impact of EU enlargement on European SMEs’ published by the
European Commission from the year 2004 gives concrete numbers of the impact
on, at that time, the EU-19 and their new member states.
4. Challenges SMEs face 69
In particular SMEs that are active in manufacturing and wholesale trade were
affected due to the liberalization and growth in foreign trade (EC, 2004a, p. 27).
While approximately 11 percent of manufacturing SMEs in EU-19 experienced an
increase in turnover due to the enlargement process, nine percent experienced a
decrease. The reduction in transaction costs will offer new trading opportunities,
especially for SMEs that are located in border regions between current and new
member states (EC, 2004a, pp. 40-41). The growing exchange of goods between
old and new member states has a positive effect on transport firms because of
additional business opportunities.
After full entry, wages in candidate countries usually grow, which leads to a
reduction of labor cost advantages. This could have a negative effect on the
position of labor intensive industries.
The adoption of the ‘Acquis Communautaire’(“The body of Community
legislation by which all EU Member States are bound. Countries joining the EU
must have implemented the existing acquis communautaire by the time of
accession.” (OECD, 2005)) has on the one hand a positive effect because it
ensures an improvement of the business environment but on the other hand it
implies significant investment requirements by SMEs in areas like working
condition, emissions, waste management, product safety, etc. (EC, 2004a, p. 52).
This cost burden is a critical threat in terms of business survival.
The above-mentioned impacts are just some out of many impacts that the EU
enlargement process has on SMEs.
4.2.2 Globalization
The impact of the EU enlargement is similar to that of the globalization. The
difference is that globalization describes the process of growing connectivity and
interdependence of the world’s businesses and markets.
In the context of increasing globalization, large corporations are expanding into
new markets and forcing medium-sized suppliers to do the same (Knop, 2009, p.
18). The trend towards globalization goes far beyond the previously known
4. Challenges SMEs face 70
internationalization. Not only goods but increasingly also services, capital, people
and jobs, information, know-how and expertise are exchanged or mobilized. But
on the other hand, there is a direct link between internationalization and the
increase of SME performance. The European Commission (2010b, pp. 69-70)
published a study about internationalization of European SMEs that shows very
clearly that international activities reinforce growth, enhance competitiveness and
support the long term sustainability of companies. Despite the opportunities
globalization is giving, European SMEs still depend to a great extent on their
domestic markets (EC, 2010b, p. 45).
In a globalized world, with progressive deregulation of national and European
markets, SMEs in Europe confront an increasing competition from developed and
emerging economies that enter in their core domestic markets (Knop, 2009, p. 18).
Especially China and other Asian countries, with its low cost products are
threatening European SMEs (EC, 2011b).
Globalization is both an opportunity and a threat for Europe’s SMEs.
4.2.3 Trend toward a knowledge-based economy
Enterprises are at the heart of the so-called Lisbon Strategy, which has been
launched by the European Council in Lisbon in March 2000 (EC, 2010d, p. 2). Its
objective was, that the EU becomes “(…) the most competitive and dynamic
knowledge-based economy in the world, capable of sustainable economic growth,
creating more and better jobs, and developing greater social cohesion (…)” by
2010 (Lisbon European Council, 2000). It ultimately depends on the success of
enterprises, in particular of SMEs. This shift towards a 'knowledge-based
economy’ has resulted especially in a growing complexity and technological
progress.
Growing Complexity
The growing complexity that companies are facing can be divided into business
and knowledge complexity (Knop, 2009, pp. 19-20). The increase in the business
complexity is a result of growing needs of the clients, for instance energy-saving
4. Challenges SMEs face 71
production and environmentally sound use and disposal. The knowledge
complexity results of specialization, which leads to a distribution of knowledge, it
also results of technological advances, which continuously shortens the half life of
knowledge.
Both complexity-effects contribute significantly to the trend of concentration on
core competencies. Companies focus on skills, which are of high strategic
importance and which provide a superior performance in competition. Other
activities that do not count on core competencies will be given to partners. In
particular large scaled enterprises will break down their business in different units
and outsource inefficient ones. These units often become legally independent but
economic dependent SMEs. An example of this development is the increasing
outsourcing of IT departments.
Nowadays the complexity in many aspects of the business environment is steadily
growing. One of the main drivers of the financial crisis was the complexity in
financial instruments and their interdependence, that at the end nobody under-
stood anymore. The increasing complexity and interconnectedness of the
businesses and/or markets mean that developments in one business and/or market
could have an immediate influence to other businesses and/or markets. Especially
for SMEs it is hard to keep a clear head and to escape from the highly
interconnectedness with other companies.
Technological Progress
Business-process optimization, continuous cost decrease, ongoing monitoring and
controlling of the financial situation and improvement of customer acquisition and
retention is not achievable without the support of modern information and
communication systems in competition intensive industries (Knop, 2009, p. 20).
Furthermore, in order to be integrated in the IT-world of the parent company,
partners or suppliers, SMEs need to implement modern IT systems.
Indeed integrated standard software become less expensive, easier to implement
and can better be tailored to industry-specific business processes but the effort is
nonetheless significant. Technological progress often requires the replacement of
4. Challenges SMEs face 72
old island solutions through an integrated system, for that a new IT know-how
must be built.
Over the last decades, there are also new challenges for SMEs in the production,
because modern production systems in terms of mass customization allow LSEs
to customize their products and services better to individual customer needs than
SMEs, while at the same time maintaining the cost advantage of large-scale
production (EC, 2004b, p. 9). The variety of new systems is limited but the
previous ‘safe’ market niches of SMEs have been under constant attack and as a
result the niche advantage of SMEs is decreasing.
Because of technological progress the product lifecycle gets shorter. This means
that products become obsolete very fast. This leads also to shorter innovation
cycles. In other words, in order to be successful, SMEs have to be innovative and
able to adopt new innovations.
European SMEs are innovative, as seen in chapter 2.2.1.1, but still they have to
cope with many difficulties, such as the extremely high costs to obtain a patent,
which is in Europe 21.7 times higher than in the USA (EC, 2008a, p. 77).
A survey carried out by the Observatory of European SMEs (EC, 2007b, p. 77)
lists the main constraints of innovation that affect the European SMEs. Among the
enterprises that planned an innovation, the problem with access to finance is the
higher constant to ten percent of them. The high cost of human resources is a
problem to nine percent of the enterprises. For eight percent of these companies,
the lack of skilled human resources and lack of market demand for innovation are
the main problems. The high interest rates follow, with six percent of the
enterprises electing this as the main constraint. And lastly, three percent of the
enterprises believe that the lack of ability to use new technologies and the
difficulties to obtain intellectual property is the main constraint for innovation.
As seen above, the main problem they face is related to human resources, with 17
percent of the surveyed enterprises complaining either about the cost or scarcity of
human resources. Easiness of financial access seems to be a problem to a slightly
less percentage of companies (16%).
4. Challenges SMEs face 73
4.2.4 Economic crisis 2008/2009
It all started out with a financial crisis in 2007 when the bubble in the U.S.
mortgage market burst, which in late 2008 culminated in a sudden loss of business
confidence and a rapid decline of world trade (EC, 2010c, p. 10). The effects of
the crisis were huge and widespread. Although it hurt companies of all sizes, its
effects on smaller companies have taken slightly longer to materialize. In
addition, it has had certain specific impacts on SMEs. SMEs usually are more
vulnerable to economic downturns than large scale enterprises, as they lack deep
pockets to endure this turbulent environment or are too specialized to hearken
back on alternative business streams. Furthermore, in consequence of this crisis,
SMEs have had more difficulties to get credits or to access other financial
instruments compared to LSEs.
According to a report of the European Commission (2010c, p. 11) the growth
momentum of SMEs began to stall in 2008 and was followed by a halt in the
following year. In the year 2009, the number of SMEs stagnated, while their
economic output declined by 5.5 percent compared with the previous year. The
following part will give a more detailed overview of the effects on SMEs’
production.
In the year 2009, there was a large decline in production (unprecedented since the
1930s), which was experienced by all size classes. The following table shows the
forecast of real production growth by size class for the EU-27. It was prepared in
the framework of the report: ‘European SMEs under pressure’ for the years 2009-
2011:
Micro Small Medium-sized SMEs LSEs
2009 - 4.6 - 5.7 - 6.4 - 5.5 - 6.5
2010 0.9 0.8 1.0 0.9 1.1
2011 1.7 1.9 2.2 1.9 2.4
Table 26: Forecasts of real production growth of gross value added at factor
costs (annual growth rates in %), by size class, 2009-2011, EU-27 (Source: EC, 2010c, p. 11)
4. Challenges SMEs face 74
The impact of the crisis on production was especially in the short-run on medium-
sized and large companies higher than on micro and small enterprises, due to a
sales and export decrease. In the year 2009, the real growth of gross value added
at factor costs was estimated with a loss of 6.4 percent for medium-sized and 6.5
percent for large enterprises (micro and small respectively -4.6 and -5.7). In the
long-run micro and small enterprises suffer more because the growth is lower
compared to medium-sized and large scaled enterprises (respective 0.9 and 0.8
percent compared to 1.0 and 1.1 percent in 2010 or 1.7 and 1.9 percent compared
to 2.2 and 2.4 percent in 2011). Medium-sized and especially large scaled
enterprises are prominent in manufacturing and have a relatively big share of
export in total sales. Exports lead the economic recovery and therefore they
recover faster, while micro and small enterprises are heavily oriented towards the
market for domestic consumption.
Another impact that SMEs experienced in the crisis is that the average labor
productivity falls in times of recessions. This is so, because firms retain their
workers, which is the so-called labor hoarding. Conversely, in booms the
productivity grows. Reasons for labor hoarding are: “(…) adjustment costs,
irreversibility if dismissal, limited divisibility of labor, and cooperative team
effort” (EC, 2010c, p. 12). These reasons apply especially to micro and small
enterprises. In large enterprises a worker is easily dismissed (in recessions) and
replaced by others (in booms). The latter argument can be confirmed, when
looking at the employment growth (table 27).
Micro Small Medium-sized SMEs LSEs
2009 -1.0 -2.1 -3.5 -1.9 -3.9
2010 -1.8 -1.8 -1.3 -1.7 -1.0
2011 -0.8 -0.4 0.1 -0.5 0.6
Table 27: Forecast of employment growth (annual growth rates in %), by
size class, 2009-2011, EU-27 (Source: EC, 2010c, p. 12)
In 2009, the estimate of employment dropped most strongly in medium-sized and
large enterprises. On the other hand, micro and small enterprises had a not so
4. Challenges SMEs face 75
strong drop in employment and therefore they lost relatively fewer jobs during
this time. The data from 2009 of the table 26 and 27 combined, show that the
change in labor productivity in micro and small enterprises is lower compared to
that of medium-sized and large enterprises.
Since mid 2007 the SME Business Climate Index for the European Union (the EU
Craft and SME Barometer builds on the results of surveys that are conducted by
UEAPME member organizations twice or four times a year on about 50.000 crafts
and SMEs in different regions all over Europe.) had been falling until the first half
of 2009 (UEAPME, 2011, p. 1). By mid 2009 business confidence slightly
increased.
For SMEs there are two additional stress factors (OECD, 2009, pp. 18-19):
a) Increased payment delays on accounts receivables, together with an increase in
inventories, results in a shortage of working capital and a decline in liquidity. For
example, 43 percent of surveyed SMEs in Belgium experienced delayed payments
on their accounts receivables, 50 percent of Dutch SMEs had to deal with delayed
payments by their clients.
b) An increase in reported defaults, insolvencies and bankruptcies. For instance in
Denmark, Italy, Ireland, Norway and Spain corporate insolvencies were higher
than 25 percent. The bankruptcies in Sweden increased by 50 percent (in the first
two months of 2009 compared to the same period in 2008).
In conclusion, the business profitability in SMEs, in particular micro and small
enterprises, was influenced by the crisis quite negatively in various ways. A
similar situation has occurred across the Atlantic and in other countries, although
European SMEs have proven more resilient, the study reveals.
4.2.5 Others
Additionally to the aforementioned factors that affect European SMEs, there are
further challenges that European SMEs face. According to the European
Commission, the biggest challenge is the bureaucracy and administrative burden
4. Challenges SMEs face 76
(EC, 2008b). It is followed by difficulties to find financing and skilled workers.
More challenges are taxes, labor regulations and so on. These problems arise from
the day-to-day business in Europe but are not the currently crucial problems that
bring a turbulent environment to European SMEs. Therefore these problems were
only touched on but will not be examined further.
4.3 Brazil
4.3.1 Globalization
The previous discussed impacts of globalization in Europe are similar to the ones
in Brazil. Noteworthy is the strong increase of competition from Asian countries,
that has been noticed by Brazilian SMEs (Sebrae, 2009, p. 9). As a result, the
demand for their products decreases (the export share is lower than it could be)
and is substituted especially by Asian products.
Another impact that the globalization has, is the rise in competition of imported
products (Sebrae, 2009, p. 4). Due to this, the competition and the pressure in
general from outside increased in the internal market. According to a study by
Sebrae, in 2009, around 15 percent of the enterprises were confronted by this.
4.3.2 High bureaucracy
In Brazil the bureaucracy is very high and Brazil ranks only 127 out of 183 in the
‘doing business 2011’ published by the World Bank and the international finance
corporation (2010, p. 4). Especially the high bureaucracy affects the Brazilian
SMEs to a great extent because it takes around 120 days to open a business and
approximately four years to close a business (The World Bank, 2010, p. 152). In
addition many taxes have to be paid and are not differentiated from the taxes that
larger companies have to pay. The following table gives an overview of different
indicators that are used in the ease of doing business:
4. Challenges SMEs face 77
Starting a Business (rank) 128 Paying taxes (rank) 152
Procedures (number) 15
Payments (number per year) 10
Time (days) 120
Time (hours per year) 2600
Cost (% of income per capita) 7.3
Total tax rate (% of profit) 69
Dealing with construction permits (rank) 112
Closing a business (rank) 132
Procedures (number) 18
Time (years) 4.0
Time (days) 411
Cost (% of estate) 12
Cost (% income per capita) 46.6 Recovery rate (cents on the dollar) 17.1
Table 28: Indicators from the report ‘ease of doing business 2011’ for Brazil (Source: The World Bank, 2010, p. 152)
4.3.3 Business management
Sebrae analyzed in 2007 (2007b, p. 4) the factors which determine the survival or
mortality of SMEs. One of the main reasons, that bring SMEs in a turbulent
environment and in many cases even makes them fail in the market, is the
management of the business (personal communication with Mariana Grapeggia,
September 5, 2011). Management failures originate from different issues. First of
all, the educational level of the workers as well as of the owner, which has been
presented before, is very low. This leads to a low productivity and this in turn
makes SMEs less competitive. Secondly, the owners of SMEs usually do not
know how to manage cash flow, thus, they mingle private finance with that of the
company.
The overall management of the business is not very structured or formal but rather
informal (Sebrae/SC, 2011). The findings of a survey by Sebrae, which took place
in the state Santa Catarina in 2011, underline this. In the following some of their
findings are presented:
The interviewees were asked whether the company's mission is defined
and is known by employees. Most (57.8%) said that the mission is defined
informally, with knowledge of the leaders.
Only around 13.4 percent said that customers are known and grouped
systematically and the information obtained is used for improvement of
customer service and search of new clients.
4. Challenges SMEs face 78
The necessities and expectations of the clients are known through formal
methods (3.6%).
For only 12 percent, information needed for planning, execution and
analysis of activities for decision-making are defined and organized.
When asked about the definition of roles and responsibilities of individuals
(managers and employees) in the company, the majority (59.4%) said that
they are defined informally.
There are financial controls, but no cash flow concept is used in 23.2
percent of the questioned enterprises. In another seven percent a financial
control does not exists at all.
To summarize, the majority of Brazilian SMEs are rather intuitive and informal
than structured and formal.
4.3.4 Tax changes
To facilitate the payment of taxes of SMEs in Brazil, the government supports
their adhesion to the ‘Simples Nacional Program’ (Comitê Gestor do Simples
Nacional, 2008, pp. 7-15). This program in theory facilitates the payment of the
numerous different taxes that an enterprise has to pay in Brazil (six federal taxes,
plus one state tax and one municipal tax). When the enterprise chooses to take
part in this program, all of these taxes can be paid through a unique form,
facilitating the process.
The problem about the ‘Simples Nacional Program’ is that the underlying taxes
are constantly changing, or are complex already only by themselves. As an
example, it is possible to use the so-called state tax ‘ICMS’ (Imposto sobre
Operações relativas à Circulação de Mercadoria e sobre Prestação de Serviços de
Transporte Interestadual e Intermunicipal e de Comunicação), that is included in
the ‘Simples Nacional Program’. This tax has a different quota for every state of
Brazil (Fórum Fiscal dos Estados Brasileiros, 2009, pp. 1-20). Aside from that,
each state can decide which sectors will incur a higher quota. For example, if the
state produces a high volume of cosmetic products, it can decide for a higher
quota in these products, earning more income from the producers. As a result of
4. Challenges SMEs face 79
this flexibility, the ICMS is always changing depending on the product and on the
state. In case a SME decides to sell its production to a different state, they will
incur the ICMS quota of that specific state, and specific product.
This example has brought only the complexities of the ICMS tax, one of the eight
taxes which are part of the ‘Simples Nacional Program’. This makes it difficult
and expensive for SMEs to deal with all of these taxes by themselves.
In conclusion, the profusion of different taxes and rules bring difficulties to the
SMEs, thus contributing to a turbulent environment.
4.3.5 Informal business
The existence of a large informal sector is a common feature of most Latin
American labor markets and this is in Brazil, especially the case (personal
communication with Kátia Rausch, July 27, 2011; Ulyssea, 2006, p. 2). For
instance, completely homogeneous workers, in terms of productivity and
preferences, could get different wages depending on the sector they are active.
The reason for this is that the gap of gross wages, which remains high,
differentiates between formal and informal workers.
The informal sector does not only consider unregistered workers but also
unregistered enterprises as a whole. According to Sebrae, in 2008, around 9.5
million enterprises were not registered and therefore belonged to the informal
sector. This is almost double the number of registered SMEs at this time (around
5.9 million were registered in 2008). Enterprises that are not registered obviously
do not pay taxes. Due to this reason, those enterprises survive. Many of them lose
their competitiveness in the moment they become registered and subject to taxes
(personal communication with Mariana Grapeggia, September 5, 2011).
Since there are numerous micro enterprises that consist of only one person (e.g. a
hot dog seller or popcorn seller on the street, which is very common for Brazil),
and are not registered, Sebrae introduced the so-called ‘empreendedor individual’
(individual entrepreneur) (personal communication with Kátia Rausch, July 27,
4. Challenges SMEs face 80
2011). This was introduced in 2009 and aims to reduce the number of enterprises
in the informal sector.
4.3.6 Economic crisis 2008/2009
Since Brazilian SMEs are not very involved in international activities (only 0.3%
export), it could imply that they were hardly hit by it, but as the following survey
shows, it also had impacts on Brazilian SMEs. Sebrae published in June 2009 a
study about the impact the crisis had on Brazilian SMEs. Out of the 4,200 polled
micro and small enterprises, about 63 percent affirmed that they were affected in
their negotiations (Sebrae/SP, 2009a, p. 3). Most of the affected ones (60%) stated
that they had a drop in demand, 45 percent said that credit became more expensive
and 40 percent also experienced a worsened access to credit. Other impacts were
the rise in price of imported products (33%) and reduced terms of payment (24%).
According to another study of Sebrae, in 2009, approximately 57 percent of the
interviewed Brazilian SMEs faced the problem of increased costs in raw material
and rent (Sebrae/SP, 2009b, p. 4). In the same survey around 52 percent stated
that, due to the crisis, they faced difficulties with default of their customers.
It is important to mention that 30 percent of all polled SMEs declared the crisis as
their main problem out of all problems they faced.
4.3.7 Others
There are many more factors that have a strong influence on Brazilian SMEs, such
as the decrease in consumption (affirmed by 66% of the polled SMEs), the
increase of competition among other enterprises (affirmed by 53% of the polled
SMEs), lack of skilled workforce, access to finance in general (not just in times of
the crisis), increase of the employees’ salary and so on (Sebrae/SP, 2009b, p. 4)
4. Challenges SMEs face 81
4.4 Argentina
4.4.1 Globalization
Due to the globalization, competition increases and enterprises constantly have to
offer improved, but at the same time less expensive products, in order to stay in
the market. In Argentina, SMEs are basically affected in two ways by the strong
international competition. Firstly, the Argentinean SMEs are not able to transfer
increased prices perceived in the direct costs of production (Fundación
Observatorio PyME, 2011, p. 10). As a result, their products are too expensive to
compete with low cost products from e.g. China. While during the period of 2005-
2007 they were still very active in the international markets, in 2010 the tendency
went towards the internal market. This has many reasons, but mainly the exchange
rate volatility and obviously the growth of strong international competitors that
they cannot compete with.
Secondly, this international competition has reflected even in the internal market
for the SMEs (Fundación Observatorio PyME, 2011, pp. 10-12). The products
originated in Brazil and China were entering in the markets that once were
dominated by the Argentinean SMEs. In 2010, one out of three Argentinean
SMEs had problems to compete in the internal market with the cheap imported
products. They lost around 17 percent of the internal market share.
This competition does not happen in all the sectors. Sectors such as foods and
beverages, paper, edition and print have not felt any import pressure. Others, such
as textiles, clothing, leather products and shoes or electrical machinery, electronic
equipments and precision instruments suffer more from the imports from Brazil
and China.
The strongest competition in the internal Argentinean market is China (57 percent
of the interviewed SMEs confirmed this in 2010). From year to year China
becomes stronger, while the Brazilian competition slightly decreases but still is
seen as a strong competitor. Thus the bilateral trade policy with these two
countries is of great importance.
The following figure will give an overview of the countries that are responsible
for the strong competitive pressure in Argentina.
4. Challenges SMEs face 82
Figure 27: Countries responsible for strong competitive
pressure in Argentina (Source: Fundación Observatorio PyME, 2011, p. 12)
4.4.2 Inflation
The high inflation in Argentina has a really strong effect on SMEs (Fundación
Observatorio PyME, 2011, pp. 2-4). Due to the unpredictability of the evolution
of prices in the country, SMEs have to constantly renegotiate the terms of their
debts, with clients or suppliers alike (see figure below). For instance, in 2010, 60
percent of the Argentinean SMEs had to renegotiate with their suppliers every 30
days about the purchase price of raw material, and another 30 percent every 90
days. This led to an impossibility of a long run planning for the SMEs. More than
80 percent operate nowadays with a planning period of not more than three
months in the future, due to the high number of renegotiations that need to be
done.
4% 2% 3% 5% 5% 3%
5% 6% 4%
8% 9%
4%
34% 30%
29%
44% 48% 57%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2008 2009 2010
Other countries EU
Rest of Latin America Rest of Asia
Brasil China
4. Challenges SMEs face 83
Figure 28: Frequency of renegotiations of industrial SMEs, 2010, Argentina (Source: Fundación Observatorio PyME, 2011, p. 3)
SMEs suffer much more than LSEs with this high inflation because their
production system is usually very vertical, which means that the SMEs
traditionally deal with raw materials, parts and external components to produce
their goods. Thus they suffer from the effects of inflation in each of the vertical
channels.
Inflation always has a negative effect on the purchasing power of the population,
which in term is felt by the SMEs because the demand for their products or
services decreases.
Another current topic that brings instability to this already turbulent environment
is the political uncertainties of the country. The elections, which are soon to be
carried out (October 2011), prevent the governors to take solid measures in the
attempt to tackle down the inflation or at least to stabilize it. Most of the action
will be delayed for after the election and the SMEs have to cope with this
turbulent environment at least until then.
45%
45%
46%
48%
60%
48%
31%
34%
28%
29%
30%
31%
14%
17%
14%
13%
8%
12%
10%
4%
11%
9%
3%
9%
With clients regarding the payment terms
With clients regarding the selling prices of
the enterprise's products
With the clientes regarding delivery
conditions of the enterprise's products
With suppliers regarding the payment terms
With suppliers regarding the buying price of
inputs and raw materials
With suppliers regarding the delivery
conditions of inputs and raw materials
Monthly Quarterly Semiannually Annualy
4. Challenges SMEs face 84
4.4.3 Infrastructural problems
There are also some infrastructural problems in Argentina that affect the SMEs
(CEPyMECE (Centro PyME), 2006). The increasing difficulties for energy supply
are serious constraints to industrial growth and in particular industrial SMEs. On
the one hand, as the international petrol prices have risen to new historical prices
in the last few years, the electricity in Argentina has gotten more expensive. The
consequence of this is a rise in the production costs for the SMEs. On the other
hand, the insufficiency of the electricity supply or its instability is another huge
concern for the SMEs and to their growth of production. This concern has been
stated in the study by the Fundación Observatorio PyME (2010a, p. 4) as one of
the top concerns among high competitive industrial SMEs.
The figure shows that the supply of electricity is not enough to increase the
installed capacity for 50 percent of the SMEs, and still insufficient to use 100
percent of the installed
capacity for 7 percent of
the SMEs. In the case of
gas supply, the situation
is not so bad, since 61
percent of industrial
SMEs argued that the in-
stalled capacity is suffi-
cient to expand. However,
this input is not as prev-
alent for production as
electricity.
4.4.4 Economic crisis 2008/2009
The crisis hit Argentinean SMEs in a similar way, as it occurred with European
and Brazilian SMEs. First of all, the number of enterprises decreased in the year
2009. Micro enterprises experienced a decrease by two percent (MTEySS, 2011).
The growth of the number of enterprises of small and medium-sized enterprises
7% 8%
50%
31%
43%
61%
Eletric Power Gas
Sufficient to
increase capacity
Insufficient to
increase capacity
Insufficient to
100% of capacity
Figure 29: Electric power/gas and industrial SME
capacity, 2006, Argentina (Source: CEPyMECE (Centro PyME), 2006)
4. Challenges SMEs face 85
also slowed down. Secondly, which resulted out of the before-mentioned, the
number of employees in SMEs decreased in 2009 as well. The sales also
decreased by a big amount, 7.6 percent in 2008 and 10.6 percent in 2009
(Fundación Observatorio PyME, 2011, p. 6).
But the recovery in these issues was astonishingly fast because in 2010 the
numbers were already raising (MTEySS, 2011; Fundación Observatorio PyME,
2011, p. 6).
The crisis also had an important impact in the reorientation of the Argentinean
SMEs towards the internal markets (Fundación Observatorio PyME, 2011, p. 10).
In 2008, the exports grew only 2.2 percent (as opposed to a growth of 8.6 percent
in 2007), and decreased by 0.5 percent in 2009. In 2010, the exports decreased by
10.4 percent, while at the same time the sales grew by 12.1 percent. This shows
that in this year, SMEs were exporting less, but focused their sales on the internal
market.
Because of liquidity problems that arose from the crisis, there were increased
payment delays on accounts receivables (Fundación Observatorio PyME, 2010a,
p. 22). Since 2007 SMEs faced the problem that they received payments from
their clients an average ten days later than the payment they had to pay to their
supplier. Thus SMEs suffered from a shortage of cash flow throughout this crisis.
4.4.5 Others
A study from the Fundación Observatorio PyME (2010a, p. 4) has shown what is
considered by industrial SMEs the most important problems during the year 2009.
The industrial SMEs were split up accordingly to a ‘Competitiveness Index’,
which has been developed in this study. The companies with a higher
competitiveness index stated that the following are their problems: high logistic
costs, insufficient capacity, high financial costs, difficulties to obtain credit,
reduction of profitability, high share of taxes in the final cost of the product and so
on.
4. Challenges SMEs face 86
4.5 Comparison
There are many different factors that make the environment of SMEs turbulent.
European, Brazilian and Argentinean SMEs share in common, that the
globalization has an enormous impact on them. Increased competition, low cost
products imported from the Asian countries that threatens their internal market,
are only some examples. It is noteworthy to mention that Brazilian SMEs are
losing export participation in the Argentinean market to China. Another similarity
is the economic crisis 2008/2009 that had affects on SMEs in many aspects, such
as a stall in the growth of the number and employment of SMEs, a decrease in
exportations, difficulties to obtain credit and shortages of working capital.
In Europe additional factors that influence SMEs, thus creating a turbulent
environment, are the EU enlargement process and the trend towards a knowledge-
based economy.
Brazilian SMEs suffer of a high bureaucracy, continuous tax changes, poor
business management, etc., meaning that the business environment and the
surrounding conditions are meager and unsecure.
Inflation and the political situation, a lack of sufficient infrastructure are issues
that Argentinean SMEs have to deal with. This shows that in Argentina there is a
need of improvement in many essential areas.
5. Coping in a turbulent environment 87
5 Coping in a turbulent environment
5.1 Europe
5.1.1 Brief introduction
The current economic environment in European SMEs is characterized by
continuous technological developments, shorter product life cycles, complexity in
customer demands and changing enterprise structures through mergers, take-
overs, outsourcing and alliances, and finally global competition, which is
enhanced by the EU enlargement process and globalization. Especially, in this
complex and highly competitive environment,
competence development,
building co-operations and
increasing innovation
play a key role in sustaining economic growth, enterprises’ competitiveness and
productivity. In the following, it will be analyzed with respect to the three
abovementioned factors, how European SMEs are coping with this turbulent
environment.
5.1.2 Competence development
According to the European Commission Observatory Report (2003b, p. 9),
Competence is defined “(…) as the mix of human knowledge, skills and aptitudes
serving the enterprises’ productive purposes and therefore its competitiveness”.
Consequently ‘competence development’ is defined as the measures taken by
enterprises to develop its competence base.
According to the ENSR Enterprise Survey 2002 (EC, 2003b, p. 14), half of
European SMEs see that competence development activities are a key part of the
general business strategy. The importance of competence development and the
enterprise size show a positive relationship. This importance seems to be higher in
medium-sized enterprises (67%) compared to small (52%) and micro enterprises
(51%).
5. Coping in a turbulent environment 88
Various reasons for the increased attention for competence development exist, but
mainly it resulted from the turbulent environment, described in chapter four.
There are many ways for SMEs to improve their competence base (EC, 2003b, p.
13). On the one hand, SMEs can develop the competence base of its human
resource in-house and on the other hand, it can obtain the desired competence
externally.
Development of in-house competencies
Considering the in-house concept, it can be differentiated between formal and
non-formal (EC, 2003b, p. 19). The latter is especially relevant in SMEs.
The ENSR Enterprise Survey 2002 gives an overview of methods, which are used
by the different enterprise sizes, to develop the competence base of their human
resource in the last three years. The method used the most by all size classes, was
the attending to expos and trade fairs (average of 58%). There, enterprises can
learn about the latest technological and/or market developments in their specific
branch or industry because new technologies, machines and production processes
are exposed and demonstrated at these expos and trade fairs. Thus, it is in
particular popular amongst SMEs. The second most used method are courses
provided by external trainers (average of 41%), which is followed by the reading
of professional literature (average of 37%) and meetings amongst personnel for
knowledge exchange (average of 33%). Co-operation with consultants and
advisers for developing internal competence, courses that are provided by own
personnel and study visits are methods, which are used by approximately 20
percent of the SMEs. Methods used less extensively, are job rotation and
tutor/mentoring activities for staff.
The table below gives an overview of the abovementioned:
5. Coping in a turbulent environment 89
Micro Small
Medium-
sized Total
Visits to expos/trade fairs 57 70 78 58
Courses/seminars/conferences provided by own personnel 19 38 54 21
Courses/seminars/conferences provided by external trainers 39 56 70 41
Study visits 17 22 41 18
Job rotation (in-house or in other firms) 8 17 29 9
Tutor/mentoring activities for staff 10 20 27 11
Promote reading of professional literature 36 39 58 37
Co-operation with consultants and advisers for developing
internal competence 21 32 39 22
Meetings amongst personnel for knowledge exchange 32 46 56 33
Other activities 4 5 5 4
Do not know/no answer 0 0 0 0
% of SMEs not involved in any of the suggested methods 20 9 4 19
% of SMEs not having formal training activities 61 44 30 59
Average number of methods applied by enterprises 3.1 3.8 4.8 3.1
Table 29: Methods of developing in-house competencies, 2003, EU-19 (Source: EC, 2003b, p. 20)
The table also shows that micro enterprises have a strong preference for non-
formal training practices (61%), while small and medium-sized enterprises
account for respectively 44 percent and 30 percent. The smaller the enterprise the
higher the non-formal training activities. This can be explained by the lower costs,
the ease of integrating this non-formal training into everyday activities and also
the ease to focus on the specific worker with its specific work role needs.
To summarize, besides the 19 percent which confesses that they do not use any of
the suggested methods in the last three years, European SMEs are very active in
developing their in-house competencies.
The average number of methods applied by enterprises grows with the size of the
enterprise (micro: 3.1, small: 3.8 and medium-sized: 4.8). Also, the percentage of
SMEs that were not involved in any of the suggested methods is in a negative
relation to the size class (20% in micro, 9% in small and 4% in medium-sized
enterprises). While smaller firms focus their training activities on issues that are in
a close relation to their business, large scale enterprises focus on a broad scope.
This can, for the most part, be explained by the low resources available for SMEs.
5. Coping in a turbulent environment 90
Considering the sector, it is interesting to see that by all sectors the main method
used was the attending to expos/trade fairs, especially by the manufacturing and
the wholesale SME sector (EC, 2003b, p. 22). By almost all sectors, the second
most applied method is the courses provided by external trainers. This was
especially used by business service SMEs. As for this sector, it is important to
gain knowledge, about e.g. the competition, the market, etc., from an outside
perspective. Manufacturing SMEs see meetings amongst personnel as the second
most important method, while personal service SMEs see the reading of
professional literature as the second most method. Between these sectors, there is
also a big difference concerning the number of SMEs that do not use any of the
suggested methods. On the one hand 28 percent and 23 percent are the
transport/communication and construction sectors, while on the other hand, 14
percent and 13 percent are the wholesale and business service sector. Due to the
fact that each sector has different competition and the sectors have different
enterprise structures, differences in involvement to improve in-house competence
base are given. The high involvement by business service SMEs is explained by
the strong competition. In order to stay in the market, they continuously have to
be up to date with the latest knowledge.
On a country basis, it is possible to identify three main groups according to their
involvement in improving the in-house competence base (EC, 2003b, p. 23-24).
The first group, which is most active, is represented by some Nordic countries
(Norway, Finland, Sweden and Iceland), central European countries
(Liechtenstein and Austria) and Ireland. They show, apart from a broad selection
of methods, a high involvement in both formal and non-formal competence
development activities. The second group, which show the lowest involvement is
represented by the southern European countries (Italy, Greece, Spain and
Portugal), France and Luxembourg. The third group consists of the Netherlands,
Denmark, Belgium, the United Kingdom, Switzerland and Germany, and their
involvement is intermediate. This so-called ‘North-South divide’ is also
confirmed by results of other studies, such as the ‘sixth report of the observatory
of European SMEs’ (EC, 2000a, pp. 289-317). According to the survey by the
5. Coping in a turbulent environment 91
European Commission (2003b, p. 24), reasons for that are: the different national
structure of the business sector (in the north there is a higher presence of larger
enterprises compared to the south, where the average size is lower), the different
existing institutional frameworks (e.g. public policy involvement), differences in
labor markets (e.g. the south is marked by high unemployment rates and less
formalization) and national differences in historical and cultural attitudes (e.g.
decision making concerning investment in competence development).
Obtaining external competence
When an enterprise, or in particular a SME, needs knowledge or competencies in
order to perform better, but it is not available in-house, SMEs obtain the desired
competence externally (EC, 2003b, pp. 24-26). Sources of external competence
can be in the form of recruitment of new employees, the purchase of consultant
services, co-operation with other external stakeholders etc.
Table 30 resumes the main sources of external competences used by European
SMEs.
Micro Small
Medium-
sized Average
Recruitment of personnel with required new
competence 13 27 48 14
Auditors & Banks 14 20 26 14
Consultants 18 24 35 18
Clients and/or suppliers 33 34 40 33
Other entepreneurs (no business relations) 13 12 16 13
Training centres/ Universities (public or
private) 15 27 35 16
Business and Trade Associations 20 26 36 21
Public authorities 8 9 17 8
Other actors 5 3 4 5
Don't know/ no answer 1 2 2 1
Table 30: Sources of external competencies, 2003, EU-19 (Source: EC, 2003b, p. 25)
It clearly shows that the main source used by SMEs are clients and/or suppliers
(33% of the interviewed SMEs stated this answer). The reason for this is that
clients and/or suppliers are of high significance because they directly work
5. Coping in a turbulent environment 92
together and often times foster a close, trusting and long-term relationship. The
second most used source is business and trade associations (21%), which are
followed by consultants (18%) and training centres/universities (public or private)
(16%). Auditors & Banks, recruitment of new personnel with required new
competence (14%), other entrepreneurs (13%) and public authorities (8%) are not
frequently used sources.
Within the enterprise size, clients and/or suppliers are the main source of external
competence for micro and small enterprises, while for medium-sized enterprises
the recruitment of personnel.
In general one can say that there is a positive relation between the enterprise size
and their involvement in the suggested external competence methods.
From a sector perspective, for all sectors, clients and/or supplier and business/
trade associations are the most important sources.
The same applies when considering countries, with the exceptions of Portugal
(business/trade association), Germany and Liechtenstein (training centres/
universities) and Finland and Iceland (auditors/banks). However, clients/suppliers
are the second most significant source for these country exceptions.
In conclusion, external competence development is essential for SME because
external sources help to better understand this turbulent environment and with this
knowledge it becomes easier to find a way to cope with it. But SMEs face a
problem, which is described in the following: External competence, e.g. a
consultant, acts like a bridge between two ‘nodes’ (the SME and another
institute), which brings them together but does not connect them directly. Hence
smaller enterprises face more difficulties of obtaining external competences than
large enterprises because the capacity to absorb of small enterprises is limited. For
instance, small enterprises are broadly managed by just one owner/manager (one
node). He has a limited capacity to absorb external knowledge. On the other hand,
large enterprises with a management team have a much greater capacity to absorb.
5. Coping in a turbulent environment 93
Who benefits from competence development activities?
Enterprises, as well as SMEs consist of different occupational groups, such as
managers, technicians, low-skilled workers etc. (EC, 2003b, pp. 27-29). Not each
group benefits the same from competence development. The following table gives
an overview of occupational groups that benefit the most from competence
development activities.
Micro Small Medium-sized Average
Manual, low-skilled workers 15 28 37 16
Semi-skilled (e.g.drivers, machine
operators) 24 43 51 26
Technicians, engineers 35 56 68 36
Clerks, administrative personnel 37 55 64 39
Middle management foremen 26 47 68 28
Directors and managers 60 56 67 60
Don't know/no answer 1 1 1 1
Table 31: Main occupational groups benefiting from competence
development activities (Source: EC, 2003b, p. 27)
The group that benefits the most is directors and managers (60%). It is followed
by clerks/administrative personnel and technicians/engineers. The middle
management foremen, semi-skilled and low-skilled workers do not benefit a lot.
Because of this, it can be assumed that there is a positive relationship between the
skill content of the different occupational groups and their involvement in
competence development activities.
When considering the size class, it is interesting to see that in micro enterprises
mainly the directors and the managers benefit, while in small enterprises next to
directors and managers, other groups, like technicians and engineers, benefit to
the same extent. In medium-sized enterprises many different occupational groups
benefit to the same amount. This is so, because they invest in more categories.
The smaller the enterprise, the more likely the concentration of benefits from
competence development activities on the owner (director/manager), which is a
consequence of the fact that there is only limited workforce available.
5. Coping in a turbulent environment 94
Further characteristics
Around half of the European SMEs stated that their competence development
activities are conducted on a regular basis (micro: 44%, small: 57% and medium-
sized: 58%) (EC, 2003b, pp. 29-31). There is no significant difference when
analyzing from a sector or country perspective.
Around 40 percent of the European SMEs stated that their competence
development activities aimed at obtaining economic return in the short term. In
general one could say that smaller enterprises focus more on short-term goals than
larger enterprises. From a sector perspective, there are no large differences but
there is a difference among the countries: the Southern European countries
(Greece, Spain and Italy), France and Ireland rather follow a short-term approach.
Around 45 percent of European SMEs have a certain person or group responsible
for identifying competence needs. The larger the enterprise, the higher the
percentage (respectively 44%, 58% and 61% for micro, small and medium-sized
enterprises). In most SMEs, the owner is responsible to identify competence
needs, as in large companies it is more likely to be shared among a management
team. From a sector and country perspective, there are no significant differences
identified.
In European SMEs, it is not very common to have a written plan for developing
their in-house competence. On average only around 18 percent have a plan,
whereby there is a difference among the enterprise size. Although micro
enterprises do not formalize a plan (only 16%) it might exist in the head of the
owner or manager. Small (35%) and medium-sized (47%) enterprises rather tend
to formalize compared to micro enterprises. This is so, because smaller enterprises
have limited strength and resource constraints. From a country perspective, there
are differences from country to country but no clear pattern can be identified.
It is interesting to see, that SMEs that are involved in export activities, use on the
one hand more methods to develop their competence in-house, and on the other
hand have more access to sources of external competence, compared to non-
exporting SMEs (EC, 2003b, pp. 32-33). Exporting SMEs encounter much higher
5. Coping in a turbulent environment 95
competition and therefore they are forced to continuously develop their
competence base.
Barriers
There are many reasons why some enterprises, usually smaller ones, are not active
in competence development (EC, 2003b, pp. 35-37). Whereby it is important to
know, that some enterprises are satisfied with their current state of knowledge and
existing skills and therefore they decide not to invest in competence development.
In Danish empirical evidence the following barriers have been identified: The
main barrier is the lack of time. Insufficient budget, lack of planning, lack of
motivation with management and no relevant courses on the market are other
important obstacles. Due to the fact that in micro and small enterprises the owner
is responsible for more or less everything, he is overburdened by so many other
things, that he is not able to diagnose the competence needs effectively. In this
case the owner is its own barrier.
The most striking reason for smaller enterprises is that they are usually short-term
driven, thus they want fast and easy results. But competence development aims
long-term goals.
The cost factor is another important reason; there are not only the costs for the
development base considered but also the costs, which are related to the absence.
Due to the before-mentioned barriers, SMEs encounter challenges, which many of
them cannot overcome alone. Therefore there are numerous activities of European
Institutions that set up different policy measures in order to improve the national
SMEs’ competence base. Measures take into account “(…) support to formal
training, access to external consultancy services or empowering methods to
management and organizational innovation” (EC, 2003b, p. 46).
Besides this, quite a few countries are developing initiatives in order to upgrade
the qualifications and competencies of the workers (EC, 2003b, p. 40). The ‘Small
Firm Development Account’ program, the ‘FRAM’ program (FRAM is a
5. Coping in a turbulent environment 96
Norwegian program and stands for understand (forstått), realistic, accept and
measure), the ‘Framework of Actions for the Lifelong Development of
Competencies and Qualifications’ and so on, are all examples of these kind of
initiatives.
5.1.3 Co-operations
According to the report ‘SMEs and co-operations’ by the European Commission
(2004b, p. 16), co-operation can be defined as “(…) the interaction between
independent SMEs for a specific purpose that extends beyond a single task”.
The ENSR Enterprise Survey 2003 identified that approximately 50 percent of the
European SMEs were involved in formal and non formal co-operations with other
enterprises (EC, 2004b, p. 23). Around 25 percent reported only non-formal co-
operation and 12 percent report only formal co-operation. Approximately 13
percent had both formal and non-formal co-operations. In total 38 percent
reported non-formal co-operations, while in total 25 percent reported formal co-
operations. This means that European SMEs tend to have non-formal co-
operations.
Table 32: Extent and formalization of co-operation between European SMEs,
2003 (Source: EC, 2004b, p. 23)
Securing of resources is one of the major reasons for co-operations (EC, 2004b, p.
25). Since small firms always suffer from a lack of resources compared to large
enterprises, this could lead to the assumption that the frequency of co-operations
among SMEs diminish with the size class. But the following figure shows that this
is not the case. It shows basically two biases, firstly, the formal co-operation
strongly increases with the size of the enterprise due to the fact that in larger
Model of co-operation Percent of SMEs Comment
No co-operation 49%
Non-formal co-operation only 25%
Formal and non-formal co-operation 13%
Formal co-operation only 12%
Missing/non-respondents 1%
Total 100%
In total 38% non-formal co-operation
In total 25% formal co-operation
5. Coping in a turbulent environment 97
companies, formalization processes are part of the daily business. Secondly the
non-formal co-operation slightly decreases with the size of the enterprise, because
smaller enterprises suffer of a lack of administrative capacity. Many other studies
confirmed that larger enterprises are more involved in co-operations compared to
small enterprises.
In all countries, except Portugal, the non-formal co-operations are more common
than formal co-operations (EC, 2004b, pp. 23-25). Enterprises from Italy and four
Nordic countries (Finland, Norway, Iceland and Denmark) participate to a great
part in non-formal co-operations, with 50 percent or more. The UK, Switzerland,
Luxembourg, Liechtenstein and Austria are represented by around 40 percent to
50 percent in non-formal co-operations. The rest participate with 40 percent or
less. Formal co-operations that reach more than 40 percent take only place in
Finland, Norway and Iceland. Italy, Luxembourg, Greece and the Netherlands
participate in formal co-operations with a percentage between 30 and 40. The
remaining countries participate with around 10 to 30 percent in formal co-
operations.
Many of the Nordic countries SMEs, as seen before, are to a large extent involved
in formal and non-formal co-operations. There are a number of explanations for
this: Firstly, those countries have a similar culture and background. For them an
oral agreement on something is considered as legally valid as a written agreement.
0
10
20
30
40
50
Micro Small Medium-sized
Formal co-operation Non-formal co-operation
Figure 30: Formal and non-formal cooperation
by enterprise size (Source: EC, 2004b, p. 23)
5. Coping in a turbulent environment 98
Secondly, the Nordic countries have small domestic markets and have a long
distance to their central European market. To win market access, co-operations are
built up. As a result of these arguments, Germany and France do not have many
co-operations. Another explanation is the strong policy initiatives that took place
in the early 90’s in the Nordic countries and in Italy and were aimed to stimulate
and/or support SME co-operations.
Co-operations in general across industry sectors vary (EC, 2004b, pp. 26-27). In
all stated sectors, the non-formal co-operation is always higher than the formal co-
operation. Non-formal co-operation is especially common in the business service,
transport and communication, and manufacturing. The construction and again the
business service sector are strong in formal co-operations. Noteworthy is that the
retail sector shows the lowest level of frequency of SME co-operations because
franchising and large chains, which make up a great part of retail co-operations,
are not considered in this survey. Another reason is, that this sector is dominated
by micro or small enterprises and therefore the average size of an enterprise is
smaller (co-operations among SMEs grow with the enterprise size).
Figure 31: Formal and non-formal cooperation by sector, percentage of
European SMEs (Source: EC, 2004b, p. 26)
The majority of European SMEs have only a small number of partners to co-
operate (EC, 2004b, pp. 27-29). Around 66 percent of them have less than seven
0 10 20 30 40 50
Retail
Construction
Personal service
Wholesale
Manufacturing
Transport/ communication
Business service
Non-formal Formal
5. Coping in a turbulent environment 99
partners. The figure below illustrates that around 30 percent of all European
SMEs have one or two partners and less than ten percent have more than ten
partners. Literature about this topic says that the most successful co-operations are
based on a small number of partners. Having too many partners, could lead to an
‘overdose of partnership relations’. Each relationship needs to be cultivated in
order to be effective and that takes time. Due to time constraints it is simply not
possible to keep up many partners. Time constraint is especially in micro
enterprises a big topic, thus micro enterprises often have only one partner that
they then depend on. On the other hand, large enterprises have more
(administrative) capacity and time to co-operate with more partners.
Figure 32: Number of partners in formal and non-formal co-operations (in
% of European SMEs) (Source: EC, 2004b, p. 28)
To co-operate with partners in other countries is often done because of the
facilitation of access to input, the access to new and larger markets and the
element of ‘local know how’ (EC, 2004b, pp. 29-30). Local know how is
especially important in internationalization of SMEs in order to receive
information about consumer preferences and tastes, relevant rules and regulations,
sources for support and information, market opportunity, etc. Moreover, there are
no big differences between the size and their domestic or foreign partners. In each
size class, the number of national SMEs excels the number of foreign partners.
0
5
10
15
20
25
30
35
Non-formal
Formal
5. Coping in a turbulent environment 100
There is a slight trend, that the smaller the enterprise the higher the number of
domestic and the lower the number of foreign partners.
When considering the countries, it is noteworthy, that Ireland, Liechtenstein,
Luxembourg, Greece and Switzerland have more foreign partners than the
average. This is because of their small market size and the geographical distance
to national borders.
Especially in this topic, international co-operations, the relationship suffers and
becomes weak in cases of language or cultural understanding problems.
Relationships are usually stronger between partners that share the same language,
similar norms and values, and institutions.
The frequency of contact is very important, especially in terms of two aspects
(EC, 2004b, pp. 31-35). First, infrequent contacts are not very helpful to build up
trust. It is not said that frequent contact automatically builds trust because for
example the quality of contacts is equally important. Thus, trust is one of the key
factors in well working co-operations and is the basis for everything. Secondly, a
low frequency of contact indicates weaker relationships.
In the formerly EU-19 around 56 percent of the SMEs had at least once a week
contact with their partner, whereby Spain had the lowest contact frequency with
41 percent and Iceland had the highest with 86 percent.
0
10
20
30
40
50
Once or less
per year
Once per half
year
Once every
month
Once every
week
Several times
per week
Don't know/
no answer
Micro Small Medium-sized Total
Figure 33: Contact frequency in SME co-operation (in percentage of
European SMEs) (Source: EC, 2004b, p. 32)
5. Coping in a turbulent environment 101
But the frequency of contact with the partner depends more likely on operational
factors than factors that are associated by country, such as the market structure,
culture for co-operation and other framework conditions.
European SMEs have relatively stable relationships with partners. Most of them
have been involved in their co-operation for more than five years. This indicates a
strong relationship because trust also builds on years of co-operation. Around 62
percent of the enterprises that co-operate for more than five years did not change
their partner of the past year.
Approximately 22 percent of
the European SMEs that co-
operate for three to five years,
maintained the same partners
and that of one to two years was
12 percent. In other words, the
changes between partners that
co-operate usually occur in the
early stages.
There are some country differences: SMEs in Belgium, Finland, Germany,
Greece, Liechtenstein, the Netherlands, Norway, Spain, Sweden and Switzerland
showed stable relationships with their partners because more than 60 percent of
SMEs maintained the same partners. In countries like France, Iceland, Ireland,
Italy and Portugal the partners changed a lot during the last 12 months but the
number of partners stayed the same.
Overall, the co-operations in European SMEs, in terms of frequency and duration,
are relatively stable. The majority has co-operated for more than five years and
has maintained their partners in the last 12 months.
Barriers to co-operate
The most important barrier that was stated by each enterprise size is the wish to
maintain independence (39%). It is followed by the lack of information with
Figure 34: Duration of SME co-operation
(in percentage of European SMEs) (Source: EC, 2004b, p. 33)
0
20
40
60
80
Less than
one year
1-2 years 3-5 years More than
5 years
Micro Small Medium-sized Total
5. Coping in a turbulent environment 102
whom to co-operate (16%) and the wish to not disclose sensitive information to
other SMEs (15%). An interesting point is that 25 percent of the European SMEs
do not perceive barriers to co-operate.
To overcome these barriers, the European Commission launched in the early
nineties several initiatives that aim to encourage co-operations between SMEs
(EC, 2004b, p. 50). Since one of the SME’s biggest barriers is the lack of
information of potential partners, these initiatives focus on creating meeting
places or providing information channels. For example an initiative is the
‘Innovation Relay Centres’ (IRC). They use European co-operations as a tool for
enterprise development. Another, relatively new initiative is the ‘Thinking Big for
Small Businesses’ program, which promotes co-operations between SMEs (EC,
2011c, p. 11).
5.1.4 Innovation
European SMEs reside in an environment, which experiences a shift to a
knowledge-based economy, meaning that the technological progress is immense.
In order to survive this highly competitive environment innovation is
indispensable.
European SMEs are innovative. Nevertheless they have to cope with many
difficulties to innovate, as described in the previous chapter. European SME’s
environment to innovate is characterized by high costs to obtain patents, problems
with access to finance innovation, too high costs of human resource and a lack of
skilled workers.
The solutions used by European SMEs, such as the development and training of
the employees, related to human resources are mentioned in the past topic –
competence development.
Additionally, the Innobarometer 2009 (EC, 2009h, p. 3) brings rich information
about what SMES are doing to promote innovation. It is important to note that this
study refers to a sample, where a number of companies were chosen randomly,
among sectors which are likely to be innovative. This survey shows in which
5. Coping in a turbulent environment 103
areas the companies are more likely to pay attention when hiring new employees
and when offering training:
Team
working
capacity
Negotiation
skills
Cross-
cultural
abilities
General
communication
skills
Creativity
Small 53% 43% 40% 54% 46%
Medium-sized 59% 49% 35% 64% 50%
Table 33: Supportive skills for innovation (Source: EC, 2009h, p. 34)
It shows for both, small and medium-sized enterprises, general communication
skills are very important. It is followed by team working capacity, which is in an
innovation process very significant because the best ideas arise from a group of
mixed competences. That is the reason why general communication skills are
required because e.g. a computer expert has to be able to express himself in order
that another person from a different field understands him. Creativity is another
key aspect.
The same study also shows what methods are used by companies to support open
innovative activities, as seen below:
Internet-based
discussion
forums
Testing
products by
potential users
Involve
potential users
in innovation
activities
Share or
exchange
intellectual
property
Small 12% 25% 22% 20%
Medium-sized 15% 28% 26% 26%
Table 34: Indicators of open innovation (Source: EC, 2009h, p. 42)
The most common used methods have been the testing of products by potential
users, which is followed by the involvement of potential users in innovation
activities. The sharing of exchanging of intellectual property is also a popular
method.
5. Coping in a turbulent environment 104
Regarding the activities used to promote innovation, the high innovative SMEs
claimed that since 2006 they have done the following activities (see table 35):
Small Medium-sized
Research and development within the company 30.8% 42.2%
Research and development performed for the
company by other enterprises or by research
organizations
17.3% 28.2%
Acquisition of new or significantly improved
machinery, equipment and software 73.2% 78.5%
Purchase or licensing of patents, inventions,
know-how, and other types of knowledge 13.5% 16.8%
Training to support innovative activities 44.3% 56.5%
Design (graphic, packaging, process, product,
service or industrial design) 26.7% 32.1%
Application for a patent or registration of a design 8.3% 11.4%
Table 35: Activities to support innovation (Source: EC, 2009h, p. 92)
It is possible to see that they are more active in the acquisition of new or
significantly improved machinery, equipment and software, followed by training
to support the innovative activities.
Regarding the before stated problem of the financial access, the Europeans SMEs
can take part in programs sponsored by the EU (EC, 2000b, p. 8). A paper from
the European Commission stated that from all participants of the ‘Fourth
Framework Programme’ (a European program that gives incentive and sponsors
innovation), 29 percent of them were SMEs, and they received 21 percent of the
funding available in the program. The currently ‘Seventh Framework Programme’
(FP7) aims “(…) to strengthen the ‘innovation capacity’ of small and medium-
sized enterprises (SMEs) in Europe and their contribution to the development of
new technology based products and markets” (EC, 2007c).
The ‘Innobarometer Report 2004’ (EC, 2004c, p. 82) presents a quantitative
measure about the government support and their use by the enterprises. According
to this survey, 29 percent of the SMEs affirmed that the government support was
crucial for them to develop their innovation activities. In other words, they could
not have developed any innovation without this support. Especially for these
companies, the before-mentioned initiatives and programs are essential.
5. Coping in a turbulent environment 105
5.2 Brazil
5.2.1 Brief introduction
In Brazil the environment of SMEs is especially marked by increased competition
and low cost imported products due to globalization. Constantly tax changes, a
high bureaucracy, which results in difficulties to compete in the formal. In other
words, Brazilian SMEs face a lot of challenges, which they have to cope. In order
to understand or to get an idea of how the Brazilian SMEs survive and stay
competitive in this highly turbulent environment, the following areas will be
analyzed:
Competence development
Co-operations
Innovation
Management of the enterprise (in terms of leadership, strategy and plans,
customer relations, information and knowledge, processes and results)
5.2.2 Competence development
Sebrae/SC (2010a, p. 4) did a study about the competitiveness of Brazilian SMEs.
One of the main factors that help enterprises to stay competitive is the competence
development. In this study they found out that in the year 2008, around 26 percent
of the questioned enterprises sent their employees to courses to train them
(formal). In this study, there is no further data available about how this
competence development has been executed.
In another study that has been conducted by Sebrae in 2011 in the state Santa
Catarina, other important criteria about competence development and people
management, has been analyzed.
In this study, micro and small enterprises had been asked, if their employees were
trained (development of in-house competencies) (Sebrae/SC, 2011, pp. 170-172).
Approximately 70.8 percent of the interviewed enterprises claimed that their
employees were trained on a regular or occasional basis (another 10.6 percent
train their employees using a training plan). Around 18.6 percent of the
5. Coping in a turbulent environment 106
interviewed enterprises reported, that they did not train their employees at all.
Compared to the study from 2008, the number of enterprises that were active in
training their employees or sending them to trainings and courses seemed much
higher but the 70.8 percent is not differentiated between formal and non-formal
and therefore a great share could contain non-formal development.
Another question from the questionnaire is very interesting, because it has been
asked if the selection of employees is carried out according to defined standards
and if they consider the requirements of the job (Sebrae/SC, 2011, pp. 166-169).
If so, one could assume that hiring certain people serves as external competence
development because necessary knowledge or specific competence is not
available in-house. But a higher percentage (36.8%) of the interviewed enterprises
reported that the selection of employees is done intuitively and around 29.2
percent select only with few standards.
Micro and small enterprises have been asked, if the roles and responsibilities of
the employees and managers in the enterprise are defined (Sebrae/SC, 2011, pp.
162-165). The majority (59.4%) said that it is defined but informally. Around 16
percent defined it and documented it and around 18.2 percent defined,
documented it and it was known by all employees.
To summarize, the information about competence development of Brazilian SMEs
is limited but from the information, that has been available it becomes clear, that
they are active, but to a great extent just informally.
5.2.3 Co-operations
In Brazil there remains a high number of micro and small enterprises that claim
not to participate in co-operations (Sebrae, 2007c, p. 21). Sebrae analyzed factors
that have an influence on the survival and mortality of micro and small
enterprises. It is a comprehensive study, done in 27 states. In the first half of 2007,
14,181 companies, which were created between 2003 and 2005, of which 13,428
were active and 753 were extinct, were screened. Interesting results were found
5. Coping in a turbulent environment 107
when comparing the active with the extinct micro and small enterprises. Amongst
other things, Sebrae analyzed the participation in co-operations.
Figure 35: Level of involvement in co-operations by extinct and active SMEs,
2000-2005, Brazil (Source: Sebrae, 2007c, p. 24)
As the figure shows, co-operations among both active and extinct enterprises are
not very common (in 2005 respectively 88 percent and 93 percent did not
participate in co-operations). But a striking difference is that active enterprises
participated in more co-operations than extinct enterprises in all analyzed years (in
2005 respectively 10 percent and 7 percent).
As an assumption, one could say that co-operations help micro and small
enterprises to survive in this highly turbulent environment but Brazilian SMEs do
not participate in many.
5.2.4 Innovation
In this turbulent environment, which is characterized by strong (international)
competition, innovation is one of the key factors to survive in the market. This has
also been confirmed by a study, which has been published by Sebrae/SC in
88%
93%
90%
99%
88%
96%
85%
90%
10%
7%
8%
1%
10%
3%
8%
4%
2%
7%
1%
2%
1%
7%
6%
0% 20% 40% 60% 80% 100%
Active
Extinct
Active
Extinct
Active
Extinct
Active
Extinct
20
05
2
00
4
20
03
2
00
0/2
00
2
Do not co-operate Co-operate No answer
5. Coping in a turbulent environment 108
September 2010a (p. 2). Because it showed that the main reasons that stimulate
micro and small enterprises to be innovative is the owners’ own initiative (34%),
it is followed by the demand/suggestion of the customers (33%) and the pressure
of the competition (30%). In other words, customers and the strong competition
forces SMEs to be innovative in order to stay competitive and survive.
According to this study, in 2008, the main types of introduced innovation was a
new process or method (25%), a new product or service (24%) and a new market
that has been conquered (17%).
The principle sources that the enterprises used to stay informed about innovations
in product, processes or the market are the internet (36%), suppliers (24%),
customers (13%), publications (11%), events (7%) and competitors (5%).
In many cases, micro and small enterprises are not fully able to realize
innovations by themselves, but need support. The main type of support that the
company needs, to achieve product innovations, processes or markets are lower
taxes (39%), bank loans (22%), courses/lectures and consulting (20%) and support
for the dissemination of products (13%) (Sebrae/SP, 2009a, p.16).
The following figure provides an overview of micro and small enterprises that are
either highly innovative, innovative or not innovative. They were asked after their
‘perceived increase’ in 2008 compared to 2007, with regard to different indicators.
Figure 36: Comparison among highly innovative, innovative and
non-innovative SMEs (Source: Sebrae/SC, 2010a, p. 3)
92% 86%
77% 72%
43%
67% 64% 58%
65%
30%
48% 47% 42%
53%
17%
Production
volume
Total income of
the SME
Productivity per
employee
Average wage
per employee
Total number
of employed
persons
Highly Innovative Innovative Non-Innovative
5. Coping in a turbulent environment 109
It shows very clearly, that the ‘perceived increase’ is always higher in highly
innovative enterprises. Whereby the differences among the three (highly
innovators, innovators and non-innovators) is bigger in production volume and
total income. The differences of the perceived ‘increase’ became smaller in the
productivity per employee, average remuneration per employee and the total
number of persons employed. In conclusion, innovation has a strong influence on
production volume and total income.
5.2.5 Management of the enterprise
Sebrae/SC (2011) analyzed, in the state Santa Catarina, the management of micro
and small enterprises with the help of seven dimensions: the business leadership,
strategies and plans, customer relations, information and knowledge, people
management, processes, and results. In the following the main findings will be
shortly presented. It is important to remember, that the owners or the manager of
the enterprises answered the questionnaire, thus the results from the study show
only what the owners/managers perceived of their own enterprises.
Business Leadership
The first interesting aspect to point out is the mission (Sebrae/SC, 2011, p. 6).
It was asked if the mission is defined and known by all employees. Most
(57.8%) said that the mission is defined informally, with knowledge of the
leaders.
Regarding the analysis of the company performance by their leaders, a higher
percentage (45.6%) said that the analysis is done regularly, but by no means
restricted to some aspects such as financial, sales, service and production
(Sebrae/SC, 2011, p. 71).
When asked about the sharing of information by managers with employees,
the majority of respondents said that this sharing occurs (65.4% in the sum)
(Sebrae/SC, 2011, p. 75). Out of these 65.4 percent, around 34.6 percent stated
that information sharing occurs regularly and covers all employees.
5. Coping in a turbulent environment 110
A higher percentage (40.2%) of companies surveyed said that their leaders
occasionally invest in their management development and apply the
knowledge acquired in the company (Sebrae/SC, 2011, p. 79). Around 28.2
percent stated that the leaders do not invest in their management development.
When asked about the improvement of products, services, processes and
methods of management of the company, a higher percentage (42.4%) said
that improvements are promoted regularly from contributions of managers and
employees (Sebrae/SC, 2011, p. 87).
Strategies and Plans
Similar to the mission, the majority (65.2%) stated that the vision is defined
informally but is only aware of the leaders (Sebrae/SC, 2011, p. 91).
A higher percentage (43.20%) of the respondents said that strategies to
achieve company goals are defined as intentions and ideas, but are known
only to the leaders (Sebrae/SC, 2011, p. 94).
When asked about the development of indicators and targets related to the
strategies of the company, there was an even distribution (Sebrae/SC, 2011, p.
98). There are no indicators related to the strategies (28%), indicators are
established for some strategies, but no goals related to these indicators
(28.8%) and indicators and their targets are set for some strategies', whereas
the latter had the highest percentage cited (29.6%).
Customer Relations
Most companies surveyed (58.2%) said that their customers are known
intuitively (Sebrae/SC, 2011, p. 108).
For most of the companies surveyed (58.8%) the needs and expectations of
their customers are known intuitively (Sebrae/SC, 2011, p. 114).
Around 68.8 percent of companies surveyed, in summation, said that customer
complaints are received and processed, and 31.6% of them said that they give
5. Coping in a turbulent environment 111
feedback to customers, informing them of the solution of the claim
(Sebrae/SC, 2011, p. 118).
Regarding the evaluation of customer satisfaction, the majority (54.4%) said
that customer satisfaction is evaluated eventually intuitively (Sebrae/SC, 2011,
p. 126). Another 31.8 percent of respondents, in summation, claimed that
customer satisfaction is evaluated periodically and formally.
Information and Knowledge
A higher percentage (49%) of the respondents reported that the main
information required for planning, execution and analysis of activities for
decision-making are defined (Sebrae/SC, 2011, p. 146). Out of the 49 percent,
approximately 12 percent said that in addition to defined, information is
organized. Around 20.8 percent of respondents said they do not have this
information defined.
Regarding the availability of information necessary for adequate conduction
of the business there was considered an even distribution (Sebrae/SC, 2011, p.
152). Around 21.4 percent reported that the information is not available to the
employees, 22.8 percent reported that information is available for some
employees, 29.6 percent reported that information is available to most
employees and 26.2% said that information is available to most employees in
an organized and information systems (e.g. bulletin board, meetings, intranet,
etc.).
The majority of respondents (67.2%) stated that employees are encouraged to
share the acquired knowledge (Sebrae/SC, 2011, p. 158).
People Management
This topic has already been discussed in 5.2.1 competence development.
5. Coping in a turbulent environment 112
Processes
Around 45.6 percent said their company’s core processes are performed in a
standardized manner, but are not documented. Another 42.2 percent (in sum)
said that the main development processes are conducted in a standardized way
and documented (Sebrae/SC, 2011, p. 182).
Most respondents (59.6%) said that the main business processes are not
controlled, but are corrected when problems or customer complaints occurred
(Sebrae/SC, 2011, p. 188).
When considering the criteria for selecting and evaluating suppliers' business,
a higher percentage (42.2%) said that suppliers are selected on the criteria laid
out and are evaluated periodically, generating actions to improve the supply
(Sebrae/SC, 2011, p. 192).
Most enterprises participating in the survey (53.2%) said that they carry out
financial control with the use of cash flow (Sebrae/SC, 2011, p. 197).
Business results
Regarding the results for customer satisfaction, customer complaints, for
training given to employees and productivity at work, the vast majority of
respondents (respectively 62.8%, 72.4%, 72.4% and 58%) said they are not
controlled and there are insufficient data to evaluate (Sebrae/SC, 2011, p.
202).
To summarize, Brazilian SMEs manage and run their business in a rather informal
way. The ideas, strategies, mission and so forth are in the head of the owners or
leaders but to a great part not shared with their employees. Many micro and small
enterprises are not able to structure their enterprise by themselves and therefore
rely on support from outside (personal communication with Douglas Luís Três,
July 27, 2011). Because of this, different institutions but mainly Sebrae developed
programs that aim to help micro and small enterprises to organize and manage
their business in a better way.
5. Coping in a turbulent environment 113
5.3 Argentina
5.3.1 Brief introduction
Argentinean SMEs are facing some fundamental problems in their business
environment, such as high inflation and lack of infrastructure (e.g. in energy
supply). Together with challenges arising from the globalization and the past
economic crisis, the environment becomes highly turbulent. The Fundación
Observatorio PyME (2010a) examined factors that are crucial for being
competitive in these times. Those factors can be summarized under
Competence development
Co-operations
Innovation
Management of the enterprise (information search, strategy, clients)
In this study, industrial SMEs were examined and split up in competitive and non-
competitive enterprises (the classification of competitive and non-competitive has
been done with the help of two indexes – the performance level and
organizational development). Their findings are interesting, and it is possible to
see some fundamental differences in how these two kinds of enterprises cope with
the turbulent environment.
5.3.2 Competence development
In order to be competitive and successful on a long-term basis, enterprises need to
invest in their employees. The study, where competitive SMEs are compared with
non-competitive SMEs, shows that competence development is crucial for
competitive SMEs. In the year 2005 around 41 percent of industrial SMEs
invested in training and qualification of their workers (Fundación Observatorio
PyME, 2010a, pp. 12-13). In 2008/2009 the number rose to 45 percent. This
increase shows that Argentinean SMEs are getting more involved in competence
development in order to sustain this turbulent environment. This increase might
seem small, but this is in some respect because of the crisis.
5. Coping in a turbulent environment 114
The proportion of employers who stated that they had trained their workers
between 2008 and 2009 remained at around 50 percent for nearly all sectors of
manufacturing activity. However, for SMEs in textiles, garments, leather and
footwear, it was only 27 percent.
It is important to mention, that there is a positive relation between the enterprise
size and the involvement in competence development. In 2008/2009, around 39
percent of small enterprises trained their workers, while around 67 percent of
medium-sized enterprises were involved in competence development.
SePyME (2011) said that in a survey from the Industry Ministry (Ministerio de
Industria) 90 percent of the industrial SMEs in Argentina which had investment
plans for 2011, had planned to invest in the development of employee
qualification.
The lack of qualified labor force is the drive to the qualification offered by SMEs
(Fundación Observatorio PyME, 2010a, p. 13). About one fourth of the training
was offered to qualified workers, and 20 percent to unqualified workers. Only 12
percent was offered to graduates or directors of the enterprise.
Given this environment, SMEs also have to retain their personnel. The study
shows that 82 percent of the SMEs have some kind of labor accident control, but
on the other hand only 24 percent of them have specific personnel retention
policies.
In Argentina there are also different initiatives that help SMEs, for instance the
‘Fiscal Credit Program for the qualification of Human Resources’ (Programa de
Crédito Fiscal para la Capacitación de Recursos Humanos), which allows SMEs
to qualify their employees and get back from the government in the form of fiscal
benefits up to 100 percent of the expenses used for the qualification activities
(Fundación Observatorio PyME, 2010a, p.18). This study shows that out of all the
industrial SMEs surveyed, only three percent declared to have used the program,
while 61.1 percent do not know the program and 36.1 percent do know it, but
have not used it. This high number of enterprises that did not know about the
program indicates that the initiatives are not well promoted.
5. Coping in a turbulent environment 115
In a nutshell, Argentinean SMEs see a need to improve their competence and
become active. Whereupon it is important to mention that the bigger the
enterprise, the more they are involved in competence development activities. The
use of initiatives, which aim to support SMEs, are not very common or not even
known.
5.3.3 Co-operations
High competitive firms, which are better integrated in their value chain, in
consequence have better chances of developing projects with suppliers, clients or
partners (Fundación Observatorio PyME, 2010a, p. 7). The study proved that
SMEs, which usually participate in projects, present a major organizational
development index than those who do not. It also showed a better overall
performance compared to those SMEs that do not participate in any co-operation.
Moreover, co-operative projects with suppliers and/or strategic clients reflect in a
better commercial management for the enterprises (Fundación Observatorio
PyME, 2010a, p. 20). Joint planning volume, prices and delivery times are
beneficial for the clients and for suppliers as well.
The possibility to develop joint activities however depends on the activity sector
in which the company operates. Specific characteristics of the production process
and the product, as well as its relative level of development determine the
feasibility of co-operation. Thus it is possible to see that 35 percent of SMEs in
the sector ‘Chemical products and substances’ take part in any kind of co-
operation, while only 14 percent of enterprises in the sector ‘Paper, edition and
printing’ do so.
The following figure provides an overview about the different types of activities
and their involvement in co-operations.
5. Coping in a turbulent environment 116
Figure 37: Co-operations of SMEs among different activity sectors,
2009, Argentina (Source: Fundación Observatorio PyME, 2010a, p. 20)
5.3.4 Innovation
Industrial SMEs with a high level of competitiveness are more likely to achieve
innovation, whether in products, production processes and/or organizational
management (Fundación Observatorio PyME, 2010a, pp. 16-17). In turn, the
achievement of innovation results in improvements in terms of competitiveness.
The study alerts to the fact that the more successful the companies are, the more
resources they have to invest in innovation. But it also says that the biggest
difference between highly competitive firms and low competitive firms resides in
the innovation of new processes. This shows that a high investment is not
necessarily needed to generate innovation.
A study by INDEC (Instituto Nacional de Estadística y Censos) (2008, p. 8)
shows that among the industrial firms, SMEs have a higher ratio of innovation
35%
32%
28%
26%
25%
23%
23%
23%
20%
19%
17%
14%
Chemical products and substances
Plastic and rubber products
Common metals and metal products
Machines and equipments
Wood, cork and straw
Average industrial SME
Glass, ceramic and non-metallic
products
Automobiles and auto parts
Foods and beverages
Electrical equipments, electronics and
precision instruments
Textiles, clothes, leather products and
shoes
Paper, edition and printing
5. Coping in a turbulent environment 117
activities/sales (2.1% for small and 1.6% for medium-sized enterprises) than LSEs
(0.8%). Naturally, the sales of LSEs are much higher than that of SMEs, and the
absolute numbers for investment in innovation activities must be higher for LSEs.
But this statistic shows that the industrial SMEs are making an effort to promote
innovation. The same study also shows that SMEs spend more money in machines
and equipment (out of the total investment in innovation, small enterprises spend
74.5 percent in this category and medium-sized enterprises spend 54.2 percent)
than in R&D activities (12% for small companies and 26.1% for medium-sized
enterprises) (INDEC 2008, p.10).
This reveals a higher focus on the short-run, since acquisition of new equipment
and technology can be more easily copied by competitors, as opposed to
innovations based on the knowledge produced by R&D activities, which are more
long-run oriented.
5.3.5 Management of the enterprise
The level of competitiveness and success of an enterprise depends on a large
extent on how the enterprise is managed. The following three sections will
analyze the information search, strategy and clients relationship of competitive
firms.
Information sources
The diversity of information sources in industrial SMEs affects their
competitiveness (Fundación Observatorio PyME, 2010a, p. 5). Overall, almost all
employers (91%) stated that their most important source of information in 2009
were clients and suppliers. Through dialogue with their customers and their
suppliers, they were informed about the general situation of its industry, while
other types of information sources were less widely used.
The owners of successful and competitive SMEs in Argentina have their sources
of information not only based on clients or suppliers (93.1%), but also 79.8
percent of the SMEs had their information from events/expositions,
newspapers/professional journals (71.9%), conferences and seminars (46.7%).
5. Coping in a turbulent environment 118
They are also generally closer to business chambers and are more willing to
consult private statistical database companies.
Strategy
The level of competitiveness of enterprises is closely related to the strategic
capacity of industrial SMEs to define their market position (Fundación
Observatorio PyME, 2010a, p. 6). High competitive SMEs follow a strategy based
on the product quality, product differentiation or market expansion, while low
competitive firms follow a more defensive strategy, relying less on this strategies
and comparatively more on a price strategy.
Clients
This study shows that high competitive SMEs are better integrated in their value
chain (Fundación Observatorio PyME, 2010a, p. 6). This is reflected by the
structure of their clients – they have fewer sales directly to the client, and more to
other companies or firms. The less competitive firms deal more with the final
client, and represent less of the sale to other firms or companies.
5. Coping in a turbulent environment 119
5.4 Comparison
In the last chapter, European, Argentinean and Brazilian SMEs were analyzed in
terms of how they deal with the turbulent environment, described in chapter four.
First of all it is important to mention that this is not an easy question to answer
because when asking a company “How do you deal or cope with a turbulent
environment in order to survive and still stay competitive?” they likely will not
have a simple answer to this question. Some companies survive and are
successful, so they are doing things right, but often they are not conscious of how
they do the right things.
Therefore, three main areas were analyzed to draw some conclusions of how
European, Brazilian and Argentinean SMEs do the right things. However, the data
was poor due to the before-mentioned problem, particularly in Brazil and
Argentina. Therefore a comparison, with this little information, is hardly
realizable. The main facts will be presented in the following.
The first analyzed area was the competence development. While in Europe it is
very advanced, in Brazil and in Argentina it lags behind. All of them share in
common, that the involvement in competence development grows with the size of
the enterprise. This is very important because European SMEs tend to be larger
than in Brazil, and therefore it can explain to some extent why competence
development is more mature in Europe. Another important fact is that when
comparing Europe to Brazil and Argentina, the activities to build competence are
more likely formal and part of the regular business (attending expos, courses
offered by externals). A study about Brazilian SMEs showed that the entire
business management, including competence development, is rather intuitive and
exercised in a non-formal way. All ‘countries’ see the need to raise competence
and are aware of the fact that this is an important issue to become more
competitive.
The second analyzed area is ‘co-operations’. In Europe, co-operations are an
inherent part for 50 percent of the SMEs, while in Brazil only about 8 percent
participate in co-operations. In Argentina co-operations strongly depend on the
business field, in which the enterprise is active (range from 35% to 14% of
5. Coping in a turbulent environment 120
enterprises that are in some kind of innovations involved). Nevertheless, all
countries claim that co-operations are very important to survive and to be
competitive.
Another field that has been examined is innovation. European SMEs are highly
innovative and invest quite a lot energy to keep this up. Employees build the basis
of an innovative enterprise and therefore innovative European SMEs are more
likely to pay attention when hiring new employees. Skills such as team working
capacity, general communication skills and creativity are a ‘must’. On the other
hand, the Brazilian SMEs determine about new employees in an intuitive way and
the job requirements are just partly fulfilled. European SMEs use a number of
methods to support innovative activities, such as the testing of products by
potential users or they involve potential users in innovative activities. This shows
again, that European SMEs elaborate plans and rely on them. In Brazil, it seems
that innovation is just a reaction to the market because one of their main reasons
for innovation are the customers and the strong competition.
An impression one can get, is that in Europe exist a multitude of initiatives and
organized support with respect to many aspects. There are many organizations and
institutions that deal and support exclusively with SMEs. This also reflects the
existence of numerous studies and research papers in Europe. In Brazil, Sebrae,
also support micro and small enterprises to a high degree and many studies have
been conducted by them. In Argentina it seems that there are only few
organizations or institutions that focus exclusively on SMES and therefore the
data base is scarce.
Europe seems well prepared with plenty of formal courses offered to employees,
their stable long-lasting co-operations and high level of innovation. All of this, no
doubt, also contributes to their success and the fact that European SMEs are the
engine of the European economy. But at the same time, this contributes also to the
fact that they are helpless at first, when the environment starts to become unstable.
They count too much on their plans and consultants that do not have a quick
answer to challenges coming up in turbulent times.
5. Coping in a turbulent environment 121
One of Brazil’s secret recipes can be summarized with just one word – Jeitinho.
‘Jeitinho’ is Portuguese and is a term used to express the way of doing things. It is
hard to understand what ‘jeitinho’ means, when not raised in this culture. The
jeitinho is part of the Brazilian culture and is used in any circumstance. The
jeitinho is basically a way of working around things, a loophole and an alternative
way of doing something. No matter what problem or challenge Brazilians face,
they always have a way to figure it out, solve or bypass it. This flexibility,
detached of all narrow-minded thoughts, is in Brazil essential to survive in
turbulent times.
Overall, the question, ‘How do SMEs cope with a turbulent environment?’ is hard
to answer with just a conglomerate of different studies, from different years, and
studies that are each focused on a different topic.
6. Conclusion 122
6 Conclusion
As this thesis is part of a four year project, which is in its early stages, it provides
fundamental data and a comprehensive comparison of SMEs in Europe, Brazil
and Argentina in many aspects.
Throughout the thesis the following four central questions served as a guideline
and were answered one by one:
What is a SME? How are they defined? What is a typical European,
Brazilian and Argentinean SME?
What do SMEs contribute to the economy?
What are the factors affecting SMEs, especially in turbulent times?
How are SMEs coping with turbulent environments?
The first central question might sound simple, but in reality it is not easy to
answer. An overview of SMEs is given by investigating the different definitions.
The collected data shows that an apple to apple comparison is impossible. The
two common thresholds (staff headcount and turnover) used to classify an SME,
differentiate drastically when comparing Europe, Brazil and Argentina. Even
within Brazil there are several significant different definitions. The definition of
European SMEs considers an extraordinary higher turnover than that of Brazilian
and Argentinean SMEs. In conclusion, one can say that the definitions
predetermine to some extent the current state of SMEs: While on the one hand the
relatively ‘big’ European SMEs, with one asserted common definition, are very
innovative, well organized and for a great part international oriented. At first sight
no significant differences of large enterprises is perceived.
On the other hand the relatively ‘small’ Brazilian (with plenty of SME definitions)
and Argentinean SMEs have rather an imitative character, focus on their local
market and are rather unorganized. With this, they fulfill the stereotypes one
might have about SMEs in general.
But SMEs in general should not be underestimated. This has been proven by
finding an answer to the second main question. In fact, they contribute immensely
to the economy and are irreplaceable. While European SMEs were not questioned
6. Conclusion 123
regarding their contribution, Brazilian and Argentinean SMEs were observed with
a critical view. In some aspects (e.g. number of SMEs, creation of jobs and export
turnover) they converged with the European SME level, in other aspects the
available data was questioned by the author (especially contribution to GDP).
From the existing differences of SMEs in Europe, Brazil and Argentina, the
conclusion can be drawn, that each of them resides in a different environment
with diverse factors that have a tremendous influence on SMEs. SMEs are more
vulnerable to their direct environment than large enterprises and this shows that at
second sight European SMEs, in fact, differentiate dramatically from large scale
enterprises.
European SMEs are mainly confronted with challenges, such as the shift toward a
knowledge-based economy and technological progress that results in even more
competitiveness and innovative activities. In other words, these challenges act as a
catalyze for more success for European SMEs. Latin American SMEs have to
struggle with challenges, such as constantly changing taxes, bureaucracy,
infrastructural problems and so forth, that keep SMEs busy dealing with and
finding a way to bypass them. But much more important is the fact that these
challenges detain SMEs to further grow and develop vigorously.
Because of this, European, Brazilian and Argentinean SMEs have adopted
different strategies or ways to overcome these challenges. European SMEs
basically developed well organized competence development, steady co-
operations and their innovation plans, and highly rely on them. In turbulent times,
which has become more common in nature, European SMEs are at first clueless
and are stumped. They suffer of the lack of a certain flexibility and intuition.
Latin American countries, conversely, are used to turbulent times and therefore
the businesses are run or executed in a fundamental different way. They trust on
their gut instinct, are flexible and intuitive. Especially in the Brazilian culture, the
so-called ‘jeitinho’ is an inherent part of the daily business survival.
The data used to come to this conclusion is based on several reliable reports and
statistics in Europe. The Brazilian data mainly comes from Sebrae. This data is
also reliable but is not as complete and detailed as in Europe because their focus is
6. Conclusion 124
on micro and small enterprises. Medium-sized enterprises are disregarded in many
of their studies.
Information about Argentinean SMEs is hard to find. Many studies focus only on
specific sectors, but hardly ever give a complete picture of Argentinean SMEs.
Therefore the author recommends further data digging, mainly in Argentina, but
also to a certain extent in Brazil. Relying on a single source (Sebrae) could give a
distorted view. As a conclusion from the state of the data, the quality and
availability is in a direct correlation to the maturity of the economy.
7. Appendices 125
7 Appendices
Calculations
Appendix 1: High-tech enterprises in EU-27 – No. of Enterprises (2008)
(Source: Eurostat, 2011a)
Appendix 2: High-tech enterprises in EU-27 – Employment (2008)
(Source: Eurostat, 2011a)
7. Appendices 126
Appendix 3: High-tech enterprises in Argentina – No. of enterprises (2009)
(Source: MTEySS, 2011)
Appendix 4: High-tech enterprises in Argentina – Employment (2009)
(Source: MTEySS, 2011)
7. Appendices 127
Appendix 5: SME density in the EU-27 (2008)
(Source: Eurostat, 2011a; Eurostat 2009)
Appendix 6: SME density in Brazil (2008)
(Source: Sebrae, 2010; The World Bank, 2011b)
Appendix 7: SME density in Argentina (2009)
(Source: MTEySS, 2011; The World Bank, 2011c)
7. Appendices 128
Appendix 8: Average size of an enterprise in the EU-27 (2008)
(Source: Eurostat, 2011a)
Appendix 9: Average size of an enterprise in Brazil (2008)
(Source: Sebrae, 2010, pp. 34, 179)
Appendix 10: Average size of an enterprise in Argentina (2009)
(Source: MTEySS, 2011)
7. Appendices 129
Appendix 12: Evolution and growth rate of employment in Brazil (2000-
2008)
(Source: Sebrae, 2010, p. 179)
Appendix 13: Employment by sector in Brazil (2008)
(Source: Sebrae, 2010, p. 182)
7. Appendices 130
Appendix 14: Export turnover in Brazil (1998 – 1st semester of 2009)
(So
urc
e: S
ebra
e, 2
009
, p
. 57
)
8. Bibliography 131
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9. Declaration of authenticity 142
9 Declaration of authenticity
I herewith confirm that I have written this thesis by myself without any assistance
other than that indicated. All parts of the thesis which have been taken from
published or unpublished sources have been clearly marked as such. This thesis
has not previously been presented in this or similar form at any examination board
in Germany or abroad.
Wiesbaden, October 15, 2011
__________________________
Carolin Häner