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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

SMEs in turbulent times – A comparative analysis between Argentina, Brazil and European countries. Carolin Häner

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Page 1: SMEs in turbulent times – A comparative analysis between Argentina, Brazil and European countries. Carolin Häner

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

Page 2: SMEs in turbulent times – A comparative analysis between Argentina, Brazil and European countries. Carolin Häner

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:

Page 3: SMEs in turbulent times – A comparative analysis between Argentina, Brazil and European countries. Carolin Häner

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

Page 4: SMEs in turbulent times – A comparative analysis between Argentina, Brazil and European countries. Carolin Häner

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.

Page 5: SMEs in turbulent times – A comparative analysis between Argentina, Brazil and European countries. Carolin Häner

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

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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

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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

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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

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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

Page 10: SMEs in turbulent times – A comparative analysis between Argentina, Brazil and European countries. Carolin Häner

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

Page 11: SMEs in turbulent times – A comparative analysis between Argentina, Brazil and European countries. Carolin Häner

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

Page 12: SMEs in turbulent times – A comparative analysis between Argentina, Brazil and European countries. Carolin Häner

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

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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

Page 14: SMEs in turbulent times – A comparative analysis between Argentina, Brazil and European countries. Carolin Häner

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

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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

Page 16: SMEs in turbulent times – A comparative analysis between Argentina, Brazil and European countries. Carolin Häner

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.

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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?

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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.

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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,

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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.

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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

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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)

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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)

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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

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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).

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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:

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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

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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.

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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).

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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)

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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?

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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.

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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

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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

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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,

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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

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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%).

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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)

Page 39: SMEs in turbulent times – A comparative analysis between Argentina, Brazil and European countries. Carolin Häner

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

Page 40: SMEs in turbulent times – A comparative analysis between Argentina, Brazil and European countries. Carolin Häner

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

Page 41: SMEs in turbulent times – A comparative analysis between Argentina, Brazil and European countries. Carolin Häner

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.

Page 42: SMEs in turbulent times – A comparative analysis between Argentina, Brazil and European countries. Carolin Häner

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)

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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.

Page 44: SMEs in turbulent times – A comparative analysis between Argentina, Brazil and European countries. Carolin Häner

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

Page 45: SMEs in turbulent times – A comparative analysis between Argentina, Brazil and European countries. Carolin Häner

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).

Page 46: SMEs in turbulent times – A comparative analysis between Argentina, Brazil and European countries. Carolin Häner

2. Overview of SMEs 31

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Page 47: SMEs in turbulent times – A comparative analysis between Argentina, Brazil and European countries. Carolin Häner

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.

Page 48: SMEs in turbulent times – A comparative analysis between Argentina, Brazil and European countries. Carolin Häner

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

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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.

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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.

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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:

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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

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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

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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

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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.

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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.

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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.

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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)

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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)

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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

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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)

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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.

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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

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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 =

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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)

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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.

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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

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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

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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

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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

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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)

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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)

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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)

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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)

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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.

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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)

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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

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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)

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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.

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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

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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

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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

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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.

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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

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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

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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

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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%).

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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)

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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

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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

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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:

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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.

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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

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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,

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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)

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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.

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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

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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

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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)

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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.

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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.

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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%).

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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:

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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.

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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

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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

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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.

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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.

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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

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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

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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

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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)

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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

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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

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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)

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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

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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

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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.

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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.

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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

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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

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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

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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

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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.

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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

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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.

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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.

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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.

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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.

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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.

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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

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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%).

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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.

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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

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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.

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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.

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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

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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

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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.

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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)

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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)

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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)

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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)

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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)

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7. Appendices 130

Appendix 14: Export turnover in Brazil (1998 – 1st semester of 2009)

(So

urc

e: S

ebra

e, 2

009

, p

. 57

)

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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