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O p p o r t u n i t i e s f o r t h e
I n t e r n a t i o n a l i s a t i o n o f S M Es
Background document 6:
Country Studies of theSeven Key Target Markets
Zoetermeer, 20 July, 2011
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This report was prepared with financial assistance from the Commission of the EuropeanCommunities. The views expressed herein are those of the Consultant, and do not represent
any official view of the Commission.
EIM Business & Policy Research, www.eim.nl
PO Box 7001, 2701 AA Zoetermeer, The Netherlands
Phone: + 31 79 3430200
Fax: + 31 79 3430204
Rue Archimde 5, Box 4, 1000 Brussels, Belgium
Phone: + 32 2 5100884
In cooperation with:
Centre for Strategy & Evaluation Services CSES
Westering House, 17 Coombe RoadOtford, Kent, TN14 5RJ, United Kingdom
http://www.cses.co.uk
Phone: +44 1892 544025
and:
European Network for Social and Economic Research ENSR
Contact: [email protected]
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4
5.7 Policy support used by EU SMEs 111
5.8 What support is missing? 113
5.9 Which role could the EU play in stimulating EU SMEs to do more
business in Japan? 115
5.10 Workshop agenda 118
6 Russia 123
6.1 Profile of Russia 123
6.2 EU-Russia relations in trade and commerce 127
6.3 Opportunities for EU SMEs in Russia 132
6.4 Bottlenecks of doing business in Russia, especially for EU SMEs 134
6.5 Overcoming bottlenecks 137
6.6 Policy support offered to EU SMEs 139
6.7 Policy support used by EU SMEs 146
6.8 What support is missing? 147
6.9 Which role could the EU play in stimulating EU SMEs to do more
business in Russia? 148
6.10 Workshop agenda 152
6.11 Major conclusions 153
7 South Korea 159
7.1 Profile of South Korea 159
7.2 Trade with and investment from the European Union 163
7.3 Opportunities for EU SMEs 167
7.4 Bottlenecks and key issues and challenges for European SMEs in South
Korea 168
7.5 Overcoming bottlenecks 170
7.6 Policy support offered to EU SMEs 170
7.7 Policy support used by EU SMEs 172
7.8 What support is missing? 173
7.9 Which role could the EC play in stimulating EU SMEs to do more
business in South Korea? 173
7.10 Workshop agenda 173
7.11 Major results from the workshop discussions 174
8 Ukraine 181
8.1 Profile of Ukraine 181
8.2 Orientation of trade with and FDI in Ukraine 185
8.3 Opportunities for EU SMEs 187
8.4 Bottlenecks of doing business, especially for SMEs 1888.5 How did EU SMEs overcome the bottlenecks? 190
8.6 Policy support offered to EU SMEs 191
8.7 Policy support used by EU SMEs 195
8.8 What support is missing? 195
8.9 Which role could the EU play in stimulating EU SMEs to do (more)
business in Ukraine? 196
8.10 Workshop agenda 198
8.11 Major results from the workshop discussions 198
9 Overview of support provided by interviewedorganisations in the seven countries 207
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ANNEX I Support provided by interviewed organisations in Brazil 211
ANNEX II Support provided by interviewed organisations in China 221
ANNEX III Support provided by interviewed organisations in India 231
ANNEX IV Support provided by interviewed organisations in Japan 241
ANNEX V Support provided by interviewed organisations in Russia 248
ANNEX VI Support provided by interviewed organisations in South Korea 259
ANNEX VII Support provided by interviewed organisations in Ukraine 266
ANNEX VIII National researchers 275
ANNEX IX Country coordinators 277
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8
EIM provided the local researchers with an overview of existing EU support
programmes and support programmes implemented by EU Member States for
their country.
Next the local researchers were asked to prepare an interview programme and
make appointments with people and organisations to be interviewed.
The first series of 5-7 face-to-face interviews in each country were undertaken
by the local researcher together with the national coordinator from the Core
Team.
The additional interviews were held by the local researcher.
Most interviews were held in the capitals of the countries. In India interviews
were also held in Pune and Mumbai, in China also in Shanghai, and in Russia
also (by phone) with people in St.-Petersburg, Yekaterinburg, Zelenograd, and
Krasnodar. Most interviewees were very much willing to share their experi-
ences with the team. A few interviewees in Russia requested anonymity,
which was of course respected.
Based on a.o. the interview results, the national researchers prepared provi-
sional national reports.
Next, the national researchers organised in each country a half-day workshop
to discuss all findings. All people and organisations who had been interviewed
were invited to the workshop. The national coordinator attended (and often
chaired) the workshop. In most countries simultaneous interpretation was
available during the workshop.
The local researchers together with the national coordinators prepared the
country reports incorporating the conclusions of the workshops. These country
reports are presented in this report as Chapters 2 to 8.
Finally the local researchers prepared overviews of support provided by or-
ganisations interviewed in the seven target countries. These overviews can be
found in Chapter 9.
1.3 How to read this Background Document?
Each country chapter in this Background Documents starts with a brief pro file of
the target market concerned. First a general profile is provided based on public
sources1:
some key figures on the country (size in te rms of population and in square
kilometres) and the economy (GDP and GDP/capita);
some key figures on imports (total volume, main goods and main trading
partners);
some key figures on imports (total volume, main goods and main trading
partners); a brief narrative on the economy.
Secondly three graphs present some main findings of the present study based on
the trade analysis and the survey among internationalised SMEs in the European
Union:
development of exports 2000-2010 from EU27 to the country concerned for
SME and non SME sectors compared to similar data for the total export of
EU27;
1 World fact book CIA (//www.cia.gov/library/publications/the-world-factbook/geos/ks.html; 28-5-
11)
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2.2 Trends in trade with and investment from the European Un-ion
Figure 2.5 External trade of Brazil with the European Union (27), EUR millions.1
Table 2.1 External trade of Brazil with the European Union (27) in million , 2000-2009
Impor ts Expor ts
2000 16,826 16,308
2001 18,462 17,312
2002 15,201 15,984
2003 12,338 16,035
2004 14,082 19,459
2005 16,044 21,342
2006 17,582 24,181
2007 21,469 29,435
2008 26,795 31,588
2009 22,655 24,132
Brazil ranks 9th & 12th in the world as a trade partner of the EU (respectively for
imports from and exports to Brazil) and 4 th & 8th of the countries outside the
European continent. The EU is Brazil's biggest trading partner, accounting for
22.5% of its total trade (2009). As can be seen in Table 2.1 and Figure 2.5,
since 2003, the external trade between Brazil and the EU increased steadily, ex-
cept for 2009 when the effects of the international financial and economic crisis
1 Source: Eurostat, External and intra-EU trade - statistical yearbook: 1958/2009 Data, Luxem-
bourg, 2010, pp. 20-23.
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were felt. After the first years of the millennium, Brazilian trade balance has kept
a surplus ranging from 15 to 30% of the EU exports.
The EU is the largest foreign direct investor in Brazil with an annual average of
about EUR 12.4 billion in the last 5 years. The annual FDI from EU Member
States underwent a fast growth trend in this period. As to individual countries, 6
out of the 10 largest direct investors in Brazil are from the European Union and
account for about 61% of the aggregate investment of this group.
Figure 2.6 Foreign Direct Investments in Brazil. EUR millions, EU 271
1
Source: Banco Central do Brasil, http://www.bcb.gov.br/ , accessed February 2011.
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O r i e n t a t i o n o f E U e x p o r t s
Viewed across products (using the sections of the SITC - Standard International
Trade Classification, Rev. 4), Brazilian external trade with Europe is still showing
a specialisation typical of a relationship between developing and developed
economies.
Figure 2.7 External Trade of Brazil with the EU (27) by product groups. EUR millions.1
1 Source: Eurostat, "External and intra-EU trade - statistical yearbook: 1958/2009 Data, Luxem-
bourg, 2010, pp. 45-52.
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Brazilian surpluses occur in commodities (food and raw materials), while EU sur-
pluses arise in semi-processed (chemicals) and manufactured goods (machinery
and transport equipment).
The Brazilian market is quite protected with an applied customs averaging tariff
of 12%. EU tries to encourage Brazil to reduce tariff and non-tariff barriers, and
to maintain a stable regulatory environment for European investors and traders.
The basis of the EU's b ilateral trade relations with Brazil will be a wide-ranging
EU-Mercosul1 Association Agreement which will also result in the creat ion of a
vast free trade area. This agreement has been in negotiations since long. Until
summer 2004 there was gradual but substantial progress in the negotiation
which, however, stalled in September 2004. Since then, regular contacts have
taken place both at ministerial and technical level in order to explore ways on
how to re-engage the process. Recently (Madrid Summit, May 2010) it was de-
cided to resume negotiations.
2.3 Opportunities for SMEsAccording to interviewees there is a wide range of opportunities in Brazil for
European SMEs to invest. Some of such opportunities arise in connection with
known Brazilian shortcomings (e.g.: poor or insufficient infrastructure, mainly in
the transportation sector)2, abundance of natural resources (e.g.: oil and gas in-
dustries), the needs of the burgeoning middle class of the country and the sheer
size of the internal market. With the award to Rio de Janeiro of two of the high-
est profile sports events in the world, the 2014 World Cup and the 2016 Summer
Olympics, additional opportunities were generated.
The Table 2.2 shows areas where investment opportunities in Brazil a re available
as indicated by the interviewees3.
1 Mercosul (Portuguese) or Mercosur (Spanish) is an economic and political agreement betweenArgentina, Brazil, Paraguay and Uruguay, founded in 1991 by the Treaty of Asuncin. Its purposeis to promote free trade and the fluid movement of goods, people, and currency. The official lan-guages are Portuguese and Spanish. It has been updated, amended, and changed many timessince. It is now a full customs union. In 2004, Mercosul concluded free trade agreements withColombia, Ecuador, Venezuela, and Peru, adding to its existing agreements with Chile and Boliviato establish a commercial base for the newly-launched South American Community of Nations. In2008 Mercosul concluded a free trade arrangement with Israel, and another arrangement withEgypt was signed in 2010. Mercosul is pursuing free trade negotiations with Mexico and Canada.The trade bloc also plans to launch trilateral free trade negotiations with India and South Africa,building on partial trade liberalization agreements concluded with these countries in 2004. InJuly 2006, Venezuela officially joined the Mercosul trade bloc; its full membership is pendingratification by the Paraguayan congress.
2 Former Brazilian President Lula da Silva announced in March 2010 a USD550 billion long-terminfrastructure investment plan called the PAC II (the second instalment of the government's 'ac-celerated growth program', PAC or PAC I, a major investment plan of the government announcedin 2007. When combined with the USD504 billion in budget allocations outlined by PAC I in 2007,Brazil's targeted infrastructural investments should eventually total more than USD1 trillion overa 10-year period. "BRAZIL Fantastic OpportunitiesSpectacular Potential", The Address Maga-zine, issue 7, November 2010, http://www.theaddressmagazine.com/2010/10/brazil/ , accessedFebruary 2011.
3 While Brazil is known to possess rich mineral deposits (48 billion tonnes of iron ore, 208 milliontonnes of manganese, 2 billion tonnes of bauxite, and 53 million tonnes of nickel, reserves ofpotassium, phosphate, uranium, cassiterite, lead, graphite, chrome, gold, zirconium, thorium andother, as well as gems, such as diamonds, aquamarines, topazes, amethysts, tourmalines, andemeralds), none of the interviewees mentioned the mining industry as a field offering opportuni-
ties to European SMEs.
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Between 2003 and 2009 only, 29 million Brazilians got out of poverty. This
trend, which is expected to go on in the future1, is creating many opportunities
for investing in local businesses to manufacture consumer products or to provide
consumer services.
2.4 Bottlenecks of doing business in Brazil
Brazil ranks 58th in the ordered list of 139 countries (median rank: 70) partici-
pating in the last Global Competitiveness Index 2010/2011 (GCI)2. According to
this benchmarking study, "Brazil is fairly stable at 58 th, with a slight improve-
ment in score (4.3 vs. 4.2 in 2009), after following an impressive upward trend
for the last couple of years (up 16 positions between 2007 and 2009)."
From the 3 sub-indexes that contribute to the global index, it is in first one ("Ba-
sic Requirements") that Brazil performs worst, particularly in what concerns the
pillars "health & primary education" (87), "institutions" (93) and "macroeconomic
environment" (111). Other pillars contributing to other sub-indices that are
clearly above the median rank (i.e.: worst than the median) are "Goods market
efficiency" (114) and "Labour market e fficiency" (99), both contributing to the
sub-index "Efficiency Enhancers). In the last sub-index ("Innovation and sophis-
tication factors"), Brazil has a reasonable ranking: 38 th.
The results from the interviewing programme of public and private executives
and entrepreneurs in Brazil, between November 2010 and February 2011, gener-
ally corroborate the assessment of the factors made in the 2010/2011 version of
the GCI benchmarking study.
In the following sections these results are discussed.
2 . 4 . 1 M a j o r o b s t r u c t i o n sMore than 50% of interviewees concurred in mentioning 4 major obstructions
that are impairing the starting up and development of businesses in Brazil, par-
ticularly of direct investment projects in productive facilities by foreign SMEs,
notably from the EU.
Bureaucracy
Excessive bureaucracy is quite pervasive in Brazil, harming significantly the
business dealings of private companies with the public administration, absorbing
effort and time of their specialized staff. Bureaucracy is present in all govern-
1 By 2050, Brazil will rank as the fourth-largest economy in the world. Its economy, Latin Amer-ica's largest, is set to pass the economies of France this year and the United Kingdom in 2013. Itwill also overtake Germany in 2025 and Japan in 2039, according to projections in purchasingpower parity terms. The projections foresee an average annual GDP real growth of 4.4 percentfor Brazil in the 2009-2050 period. By comparison, the traditional Big Three economies will likelygrow by 2.4 percent (US), 1.3 percent (Germany) and 1.0 percent (Japan). Alejandro J. delCorro, "Brazil General Report 02/2011", GTSA Gateway South America, 30 January 2011,http://www.gatewaytosouthamerica-newsblog.com/2011/01/30/brazil-general-report-022011/ ,accessed February 2011
2 Klaus Schwab, "The Global Competitiveness Report 20102011", World Economic Forum, Geneva,Switzerland 2010. In this benchmarking study, competitiveness is defined as the set of institu-
tions, policies, and factors that determine the level of productivity of a country.
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mental layers (federal, state and municipal) and in the public agencies. Some
quotes: More than 50 certificates are needed to establish a company, costing in time
and money more than 200% of what was previously and reasonably planned. To change the registered office address of a company it is required to make
more than a dozen official registries and spend an amount of money in excess
of R$ 2,000 (or about EUR 900). Bureaucracy is a major drawback especially in areas where regulatory agen-
cies, such as ANVISA (the Brazilian Agency for Health Protection) or IBAMA(the Brazilian Environmental Protection Agency), must be consulted. EU com-panies are mentally unprepared to deal with this amount of bureaucracy andmany give up trying.
Huge bureaucracy in Brazil is due to overregulation and an excessive numberof organizations overlapping each other.
The GCI ranks "inefficient government bureaucracy" as the 5th of the most prob-
lematic factors for doing business in Brazil1.
Complexity of regulations
As a major contributor to the bureaucratic hurdles of Braz il, the complexity ofexisting regulations is quite exuberant and affects all important transactions (in-
formational, financial, and otherwise) companies must have with their stake-
holders. Complexity exists, inter alia in tax codes and regulations, in labour laws,
external trade rules, company law, industrial licensing, and foreign worker per-
mits. Quotes: To start importing goods, a firm needs to obtain a document named "Radar";
a pre-requisite for issuing such document is the submission of balance sheetsand income statements from previous fiscal years of the applying firm; start-ing-up firms cannot comply with this requirement because they don't have afinancial past; then, a bottleneck arises.
Work permits to foreign individuals can only be issued for specialised jobs that
no Brazilian citizen possess; as it is always possible to find Brazilians holdingpractically all specialisations, this creates barriers to contracting expatriatestaff, making it a lengthy and cumbersome process.
Labour law is complicated, outdated (approved in 1943) and paternalistic. Forinstance: once a benefit has been implemented by a f irm, it will be impossibleto change or eliminate it.
Trade unions are too strong and authoritarian: initiatives on the part of theemployers are often turned away, such as compensation programmes basedon performance and competence. Trade unions prefer not engaging in collec-tive negotiations at industry level favouring direct negotiations on a companyby company basis, thus undermining the power of the employers.
There is a multiplicity of taxes, contributions and other mandatory dues
(which are, actually taxes in disguise). They are sometimes cumulative anddifficult to comply with. The tax system comprises many different authorities levying taxes and entail-
ing many and complex procedures which are burdening enterprises2. Severalstates don't want to collaborate to resolve differences in tax regulations fear-ing to lose tax receipts.
1 Klaus Schwab, ibid., p. 106.
2 Reportedly, the existing i nefficient tax system is preferred to a "streamli ned and more efficientsystem" because it is capabl e of generating high levels of revenue". Carlos Pereira and MarcusAndre Melo, Tax Policy in Brazil: The Reform That Never Was, The Brookings Institution, 2011,http://www.brookings.edu/opinions/2010/0908_tax_policy_pereira.aspx , accessed February,
2011.
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tions, most of them sectoral employer's organisations, such as agriculture
(SENAR), industry (SENAI and SESI), wholesale and retail trade (SENAC and
SESC), transport (SEST and SENAT), co-operatives (SESCOOP), or autonomous
private organisation, such as SEBRAE (the Brazilian small business institute), as
well as federal agencies such as INCRA (Institute for the Agrarian Reform), DCP
(Federal Directorate of Coast and Ports of the Ministry of Maritime Affairs) and
FA - Fundo Aerovirio (a fund managed by the M inistry of Aeronautics).
High interest rates and difficult access to debt financing
Bank financing is very expensive and difficult to obtain, notably for a foreign firm
entering into the Brazilian market, as compared to bank financing in the EU. The
Brazil banks are more conservative, charging interest rates of 3% or more per
month dependent upon the type of collateral. Special financing programmes at
lower interest rates (e.g.: investment financing for acquiring machinery and
equipment of Brazilian origin) are not available for foreign SMEs in the starting-
up phase, because typically the financial institutions require that the applying
firm shows a financial track record of at least 3 years so they can perform an as-sessment of the credit risk1. Quotes:
The interest rates are very high. Short term loans cost around 18/20% per
year.
Bank financing is difficult and very expensive. Banks require substantial col-
laterals and interest rates for short term loans are of 20% or more. The refer-
ence interest rate (SELIC) is currently 10.75%.
Investment financing by bank credit for SMEs is virtually non-existent.
Bank credit is not available to foreign firms.
Bank financing for SMEs is very difficult to obtain and very expensive.
Also the GCI report acknowledges the "access to financing" factor as one of the
most problematic for doing business in Brazil, ranking it 7th in the listing2.
BNDES, the Brazilian Development Bank is the main development financing agent
in Brazil established on 1952 as a government agency. Subsequently it was con-
verted into a federal public company associated with the Ministry of Develop-
ment, Industry and Foreign Trade. BNDES is the second largest development
bank in the world. In July 2009 BNDES launched PIS, or the Investment Sustain-
ing Programme (Programa de Sustentao do Invest imento), to fight the finan-
cial crisis. This programme, which started w ith a budget of R$ 134 billion (Euro
66.5 billion) and is now being expanded, is dedicated to provide medium/long
term loans to Brazilian companies, at reduced interest rates (5.5% to 8.5% per
year), to finance the acquisition of machinery and transport equipment, as well
1 These constraints are reportedly made mandatory by the regulator, the Central Bank of Brazil(Banco Central do Brasil). To circumvent them, some suggest that an entrant foreign SME, will-ing to benefit from some special credit line from a Brazilian development institution, may buyoutan existing Brazilian company and conduct the financing negotiations through that local com-pany. The credit risk analysis wi ll take into account the past financial performance of the localcompany, as well as the expected performance of the new project (the former may be entirelyirrelevant as the new project may concern an industry that is completely different from the in-dustry of the local company). No success stories of such awkward approach were reported duringthe interviewing programme or the workshop.
2
Klaus Schwab, ibid., p. 106.
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to cut this type of investment than current expenditures with public salaries and
pensions, and acknowledging that the idea that the private sector could step in
and fill the financing gap d id not fully materialise, the report points out that the
"infrastructure development in the region has lagged behind that of the East
Asian tigers or even China over the last two decades, with severe implications in
terms of economic growth and poverty reduction". This is "particularly relevant
for large emerging markets such as Brazil, wh ich are increasingly playing a key
role in the global economy and for which poor infrastructure quality results in
higher logistics costs and inefficient patterns of interregional and international
trade."
Insufficient protection of IP
In Brazil the protection of intellectual and industrial property is weak due to a
legislation that does not conform to OECD standards. Some quotes:
Protection of intellectual or industrial property is more difficult than in Europe.
Legislation is not adequate and the intervention of INPI (the IP protection of-
fice) is not effective.
The poor protection of IP is a manifestation of the fact that Brazil practically
does not have international treaties, and, from a European perspective, the
possibility of making new treaties for IP protection is hindered by the obliga-
tion Brazil has to extend all facilities and privileges conceded to EU to the
other members of Mercosul.
The GCI report does not list this weakness of Brazil as a major problematic factor
for doing business in the country.
Lack of skilled labour
Some references were made to the lack of skilled labour, particularly in high
technology areas such as engineering, and to the fact that Brazilian workforce
has a low qualification. This is corroborated by the assessment made by the GCIreport, which ranks the "inadequately educated workforce" as the 8 th most prob-
lematic factor for doing business in Brazil1.
This deficiency is directly linked to the quality of the Brazilian educational system
at all levels (ranked in the GCI report 106th for primary education and 97th for
the higher education) and to disparities in educational access and attainment.
Brazil ranked 52nd out of 57 countries in the 2006 OECD PISA test, which is an
indicator of the relative performance of the educational systems2. In the 2009
test Brazil did not improve significantly (53rd out of 67)3. Some respondents also
pointed out that many government officials are not well prepared to deal with
their responsibilities, which may be a consequence of their insufficient skills.
Cultural differences
This encompasses a set of beliefs, attitudes and behaviours supposed to be
shared by the Brazilian population that are usually mentioned in national and in-
1 Klaus Schwab, ibid., p. 106.
2 Irene Mia et al., "The Brazil Competitiveness Report 2009", World Economic Forum and FundaoDom Cabral, 2009, pp. 59-60.
3 OECD, "PISA 2009 Results", http://www.pisa.oecd.org/dataoecd/54/12/46643496.pdf, accessed
February 2011.
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administration, aiming at making the functioning of public services and agencies
more friendly to companies and entrepreneurs. Besides calling for advancements
in the qualification of public officials, these reforms should reduce the routine
administrative burdens, minimise start-up requirements, improve the quality of
regulations, simplify the tax system, and increase the efficiency of the legal sys-
tem in general. Furthermore, the other 2 major bottlenecks, h igh taxes (includ-
ing import duties) and high int erest rat es and access to f inance (particularly by
foreign SMEs), entail also complex economic governance problems, notably re-
ducing domestic protectionism, fighting the decline of the manufacturing indus-
try's contribution to GDP threaten by cheap China imports, managing the budget
deficit, and keeping inflation at bay.
Resolving deficiencies ofpubl ic inf ras t ructure calls for complex projects and sub-
stantial financial resources; the international sports events planned to 2014 and
2016 (World Cup and Summer Olympics) offer good opportunities to open the
economy internationally, by selecting the most effective suppliers, increasing the
efficiency of public spending at the same pace. Insufficient protection ofindus-
t r ia l and inte l lec tual proper ty , which, together with the underdevelopment ofstandardisat ion and cer t i f icat ion policies in the country, are main hurdles to eco-
nomic progress, are also in need of public reforms. Still plagued by many defi-
ciencies and social and regional disparities, the Brazilian educat ional system has
a long way to go before it arrives where it needs to be, to improve the competi-
tive qualification of future generations.
Depending on many demanding reforms to improve the currently existing hur-
dles, it is not likely that the situation will get better significantly in the short and
medium term. Thus, meanwhile, what can be done is to help EU SMEs to antici-
pate and be prepared to deal with the bottlenecks and to influence and help Bra-
zilian authorities to take the necessary steps to introduce the reforms needed to
change the status quo.
Some of the interviewees emphasised the obvious recognition of the binding re-
sponsibility of the Brazilian authorities in solving most of the existing hurdles
that are obstructing foreign investment in Brazil, particularly by SMEs, and spe-
cifically by the European ones. Some quotes:
The federal government is making some efforts to better some of the bottle-
necks. There are some legislation in the Congress geared towards making ad-
ministrative procedures more flexible and swift, notably through the use of in-
formation technologies and internet. So far, its results are insufficient.
It will never be resolved without the attention and cooperation of the Brazilian
Government. Only possible with firm determination of the Government to implement admin-
istrative reforms.
Government should undertake programmes to overcome the bottlenecks. Fur-
thermore, employer's trade associations should be strengthened.
When questioned about what should be done to this respect, respondents offered
some solutions or ways to better deal w ith the obstructions and hurdles. These
recommendations can be categorised into 2 broader classes, according to the
addressees: SMEs and EU institutions.
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2 . 5 . 1 R ec o m m e n d a t i o n s t o S M EsThe recommendations to SMEs were basically of 3 types.
Get local help from trustworthy professionals
This type of advice was put forward by more than a third of the interviewees.
Some quotes:
Any SME aiming at developing its business dealings in Brazil should get the
appropriate local expertise by engaging lawyers, auditors and other Brazilian
professionals.
To resort to trustworthy professional support in the country (lawyers, ac-
countants, auditors, etc.).
Companies should select and engage good lawyers, accountants, and other
local professionals.
Contact free local supporting bodies
The respondents mentioned also the support of existing chambers of commerce,
consulates, trade offices and other home country representations in Brazil. Such
sources of help were cited with the same frequency as the first one ( local profes-sionals), sometimes with the proviso that these bodies are not as well prepared
as the private professionals to provide the required support. In some interviews,
local public agencies and/or industry associations were also recommended, as
sources of vital information for EU SMEs prepare thei r business plans.
In some circles (notably, federal and state agencies) it was expressed the belief
that Brazilian government became recently more aware of difficulties that foreign
SMEs face in entering in the market, which, combined with the perceived need of
attracting foreign investment in specific sectors where domestic technology and
experience are more faulty, induced some efforts to ease the requirements or to
help in overcoming them, notably through the informative functions. One of such
examples is the federal agency APEX that, after starting focused solely in the
promotion of exports, recently developed capabilities in the FDI promotion area.
Some states (e.g.: So Paulo, Rio) are also developing investment promotion
agencies and trying to extend more favourable development loans to SMEs,
through state economic development financial institutions.
Some excerpts of the recommendations from interviewees:
With the help of the Chambers of Commerce and Industry1.
Consulates and Chambers of Commerce may provide valuable support to EU
SMEs by promoting direct contacts and investment missions to Brazil.
A platform such as the incubator currently run by the Danish consulate in So
Paulo should be considered as an ideal measure, offering space, facilities andcustomised advice to SMEs willing to enter the Brazilian market.
Brazilian organizations are all fragmented2. For this reason the large industry
federations (e.g.: FIESP, at So Paulo, and FIRJAN, at Rio) work together with
SEBRAE and some CCIs combining efforts to offer more consistent and fo-
cused sources of information and networking. CIN, the federal confederation
1 European CCIs active in Brazil banded in the local branch of Eurochambres, the Association ofEuropean CCIs, are from the following 9 member states: Belgium, France, Italy, Germany, Lux-embourg, the Netherlands, Portugal, Spain, and Sweden.
2
This is one of the expressions of Brazilian excessive "federalism".
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The EU should provide direct support to existing Brazilian companies (which
includes local operations and joint ventures of EU SMEs) helping them to deal
with the above bottlenecks.
It was mentioned an institutional co-operation between the Ministry of P lan-
ning (Ministr io do Planejament o) aiming at helping Brazil dealing with public
administration red tape. It is the "Euro Brazil 2000"1 project that seems to be
already closed. It aimed at developing the capabilities and skills of public ser-
vants via video courses and distance learning. This approach could be re-
enacted.
To expand the existing co-operation platform between the European Commis-
sion and the Brazilian government dedicated to improve administrative proce-
dures and to reduce governmental red tape and the regulation burden over
private businesses.
The European Commission might also help in developing the national system
for protecting intellectual and industrial property, as well as the standardisa-
tion and certifications systems, capitalising in the vast experience Europe has
on these matters.
2.6 Policy support offered to EU SMEs
There is no programme sponsored by the EU offering support to SMEs specifically
targeted to the Brazilian market. Direct support to EU SMEs provided by the EU
Delegation is very limited. Most visible initiatives concern the promotion of inter-
national co-operation in technology areas through the Enterprise Europe Net-
work2 and in some promotional activities within the context of its general re-
sponsibilities of nurturing and enhancing bilateral relations.
There are a few support services funded by EU Member States3, focused in Brazil
and deployed in its territory. These services are offered exclusively to homecountry SMEs by consulates, export and investment promotion agencies of vari-
ous European countries. During the interviewing programme 3 institutions offer-
ing such types of programme were contacted (the incubator of the Consulate
General of Denmark, the United Kingdom Trade and Investment, and the Spanish
ICEX). Typically these organisations make available to individual SMEs general
market information, signpost to further sources of information, recommend on
local professional services, counselling & guidance, among other services. They
1 This project provided support to the modernization of the federal public service in Brazil in theareas of training, planning, human resource management, ethics and public participation. It was
implemented by an international consortium of European public administration organisations.
2 The Enterprise Europe Network is an information and consultancy network aiming at assistingSMEs in developing their innovative potential and to raise awareness for the policies of the Euro-pean Commission. It is a focal point network consisting of 600 organizations - chambers of com-merce, regional development agencies, university technology centres, where about 3 000 profes-sionals are working in over 40 countries worldwide.
3 Some of these programmes are co-funded by EU structural funds, such as the ERDF. This is thecase of ICEX that offers, besides in kind support or subsidised professional services, a widerange of financial support to Spanish SMEs willing to export or start direct investment projects inBrazil. The latter include concessionaire loans and grants, as well as equity fi nance by means ofventure capital operations. Some of this financial assistance is also available from other Spanishinstitutions, such as COFIDES (which also handles export credit insurance) and ICO (Centralstate owned institution) and other organisations, including financial institutions of the autonomic
regions of Spain.
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AD Diper - Pernambuco Economic Development Agency (Agncia de
Desenvolv iment o Econmi co de Pernambuco)
APEX Brazil (Exports and Investment Promotion Agency (Agncia de Promoo
de Export aes e Inv est imentos)
Banco do Nordeste
CODIN Industril Development Corporation of the State of Rio de Janeiro
(Comp anhia de Desenvolv iment o Ind ust r ia l do Estado do Rio de Janei ro)
INDI Industrial Development Institute of Minas Gerais (I ns t i t u to de
Desenvolv iment o I ndust r ia l de Minas Gerais)
SUFRAMA Manaus Free Trade Zone Authority (Super intendnc ia da Zona
Franca de Manau s)
Invest So Paulo.
This list includes quite different institutions as regards their statuary purposes
(one is a development bank, a few are state investment promotion agencies, one
is a federal promotion agency), territorial reach (federal, multi-state, state), dy-
namics (some have a proactive stance trying to recruit foreign investment and
offering special tracks to get financial and fiscal incentives at state and municipallevel, other are more conservative bureaucratic institutions).
One example of other type of public institutions that are seeking FDI is CIATEC,
a technology incubator. Majority owned by the Campinas Town Council (99%),
and specialising in NTBFs, this company operates 2 technology parks in the
Campinas1 municipality. CIATEC is actively seeking new technology foreign firms
(notably in Europe) that may be willing to locate their operations in one of their
science and technology parks.
2.7 Policy support used by EU SMEsDespite the fact that the number of interviews does not give a sufficient basis for
quantitative inferences, it seems that the support most used by European SMEs
when starting their business in Brazil are from trade & investment offices, consu-
lates, and CCIs of their home country. This is because such support services are
considered more trustworthy, more culturally familiar to the SMEs and are free of
charge in most cases. In th is context, incubators from home country organisa-
tions seem to be in h igh demand lately.
Professional services from local firms and specialised government agencies are
seemingly the next sources of support and specialised information.
Investment agencies, either federal (APEX), or state owned, tend to look for lar-
ger projects than SMEs can assure, thus directing their contacts to larger com-
panies. It is not clear whether these institutions can offer the type of integrated
1 Campinas is a city and municipality located in the interior of the state of So Paulo. I t has apopulation of about 1 million (the metropolitan area has some 19 cities and a population of 2.8million). Campinas is also the administrative centre of the meso-region of the same name, with3.8 million inhabitants. It is the third largest city in the state, after So Paulo and Guarulhos.The Viracopos International Airport connects Campinas with many Brazilian cities and also oper-ates some international flights. The city is home to the State University of Campinas or Unicamp,which is responsible for around 15% of all Brazilian research and, according to the Times HigherEducation 2007 World University Rankings, is the 177th best university in the world, and the 2nd
best in Latin America (after the University of So Paulo in 176th place).
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helping Brazilian authorities to reduce or remove the current hurdles that are af-
fecting European investment and trade in Brazil and (2) creating new or
strengthening existing mechanisms that encourage projects in these areas, re-
ducing the risks and costs of preparing and rolling out business development
projects in the country.
Some of the respondents offered ideas to operationalise the 2 above roles:
a) To help removing current hurdles under direct control of the Brazilian public
administration, besides general political influence, EU could consider the fol-
lowing:
To expand bilateral arrangements in the context of the recently resumed
trade negotiations between Brazil and the EU. Some respondents consider
that bilateral arrangements (EU Brazil) are the best way to provide impe-
tus to trade and investment operations between Brazil and Europe (thus fa-
vouring EU SMEs) in a way similar to what is happening with Mexico. In
general they are aware that the major obstacle to such possibility is Brazil
being a member of Mercosul, which implies that any special facilities wouldhave to be extended to the remaining members of this regional association.
The problem resides more with Brazil than with the EU.
To promote and part-finance the setting up of a higher education institute
or university organised in co-operation between Europeans institutions,
such as universities and business schools, and Brazilian organizations, such
as SEBRAE, specialising in re-training public officers and servants in mod-
ern administrative techniques, thus helping in reducing the national bu-
reaucracy.
To review and assess the results of the "Euro-Brazil 2000" programme and,
depending on the results of such assessment, re-enact or redefine a new
co-operation programme aiming at developing the capabilities and skills of
Brazilian public servants. Other respondents worded this recommendation
as follows: "To expand the existing co-operation platform between the
European Commission and the Brazilian government dedicated to improve
administrative procedures and to reduce governmental red tape and the
regulation burden over private businesses."
To enter into negotiations with Brazilian authorities to prepare and imple-
ment a full fledge programme (or programmes) to reform the ex isting
regulations and institutions in the country dealing with IP, standardisation
and certification matters. Such initiative should involve and have the sup-
port of the appropriate European institutions such as EPO, the European
Patent Office, the European Standards Organisations (CEN, CENELEC and
ETSI), ECQA, the European Certification and Qualification Association,among other to allow the transfer of their extensive experience of best
practices and policies.
To increase the co-operation with APEX and state investment promotion
agencies in order to enhance their capabilities to support EU SMEs business
in Brazil and, possibly, to part-finance their operations, provided that such
funds would be earmarked to support EU SMEs and subject to independent
evaluation. This could be materialised through setting up a special depart-
ment to handle, on a preferential fashion, the needs of European SMEs
when establishing in Brazil.
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A n n e x I L i st o f i n t e r v i e w e e s
O r g a n i sa t i o n I n t e r v i e w e e s
ApexBrazil Brazilian Trade and Invest-ment Promotion Agency
Paulo Morais, Investment Manager
Association of the European Chambers ofCommerce and Industry in Brazil
Yves Jadoul, Vice-president
BIOTEE Joo A. Mariano, Commercial and Administration
ManagerGerard van Lieshout, Owner (50%)
British Chamber of Commerce and Indus-try in Brazil
Rodrigo Alberto Correia da Silva, President SoPaulo
Chamber of Commerce and Industry Brazil
Germany
Eckart Michael Pohl, Director of Social Communica-
tion Mercosul
CIATEC Campinas Technopole Develop-
ment Corporation
Dcio Sirbone Jnior, Director
CNI - National Confederation of Industry Thiago Mendes Lima, Coordinator for AL-INVEST ofMercosul, Chile and Venezuela
European Union Delegation to Brazil Jos Mouta, Project Manager (economic co-operation)
FIESP Federation of the Industries of
the So Paulo State
Fabrizio Sardelli Panzini, Analyst, Foreign Trade
Jos Luiz Pimenta Jnior, Coordinator of Interna-tional Negotiations - DEREX
FIRJAN - Federation of the Industries ofthe State of Rio de Janeiro
Claudia Teixeira dos Santos, Foreign Trade AnalystCNI
Fernando Saboia de Castro, Consultant CNILaila Bozza Mendes, Project Manager SEBRAE
Bruno Solis, Consultant SEBRAE
G&E Strategy and BusinessConsultants
Carlos Matavelli, Partner, Strategy and Administra-tionArtur Heitzmann, Director, Quality and Lean Manu-
facturing, Environment
General Consulate of Denmark Nicolai Prytz, Consul General
ICEX - Economic and Foreign TradeOffice of Spain in So Paulo
Ins Menndez de Luarca Bellido, Economic andCommercial Consultant
'Nossa Caixa' So Paulo Deve lopmentBank
Julio Themes Neto, SuperintendentFlavio de Almeida Marques, Superintendent Busi-
ness and Operations
PP&C Paulo Jos de Carvalho, PartnerE. Camilo Pachikoski, Partner
Renz of Brazil Mario R. Hinrichsen, General Manager
So Paulo State Investment PromotionAgency
Jos Roberto de Arajo Cunha Jr., Director
SEBRAE-SP Service Center for supportto Micro and Small Enterprises in the
State of So Paulo
Ricardo Luiz Tortorella, SuperintendentRose Mary Estcio, Consultant International Affairs
Gilberto Alvaro Campio, Consultant InternationalAffairs
UK Trade and Investment Martin Whalley, Head of Trade for the State So
Paulo
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3 China
3.1 Profile of China
3 . 1 . 1 K e y d a t a
1. Number of inhabitants 1,336 ,718 ,015 (Ju ly 2011 est. ); rank 1 in the
world
2. Size (square kilometres) 9,596,961 sq km; rank 4 in the world
3. GDP (at official exchange
rate in 2010 USD) and
GDP/cap (PPP, in 2010
USD)
$5.745 trillion (no te : because China's exchange
rate is determine by fiat, rather than by market
forces, the official exchange rate measure of GDP
is not an accurate measure of China's output; GDPat the official exchange rate substantially under-
states the actual level of China's output vis--vis
the rest of the world; in China's s ituation, GDP at
purchasing power parity provides the best meas-
ure for comparing output across countries (2010
est.)).
$7,400 (2010 est.)
4. Total imports and share
of EU in total imports
$ 1,307,000,000,000 2010 est., rank 3 in the world
Goods: electrical and other machinery, oil and
mineral fuels, optical and medical equipment,
metal ores, plastics, organic chemicals
Partners: Japan 12.27%, Hong Kong 10.06%,
South Korea 9.04%, US 7.66%, Taiwan 6.84%,
Germany 5.54% (2009)
5. Major imports from EU
6. Total exports and share
of EU in total exports
$1.506 trillion (2010 est.); rank 2 in the world.
Goods: electrical and other machinery, including
data processing equipment, apparel, textiles, iron
and steel, optical and medical equipment
Partners: US 20.03%, Hong Kong 12.03%, Japan
8.32%, South Korea 4.55%, Germany 4.27%
(2009)Source: World fact book CIA (//www.c ia.gov/lib rary/publ icat ions/the-world -factbook/geos/ks.htm l; 28-5-11)
3 . 1 . 2 E c o n o m y 1For centuries China stood as a leading civilization, outpacing the rest of
the world in the arts and sciences, but in the 19th and early 20th centu-
ries, the country was beset by civil unrest, major famines, military de-
feats, and foreign occupation. After World War II, the Communists under
MAO Zedong established an autocratic socialist system that, while ensur-
1 World fact book CIA (//www.cia.gov/library/publications/the-world-factbook/geos/ks.html; 28-5-
11)
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Figure 3.2 The percentage of internationalised EU SMEs that have business activities in
the 7 target countries
0% 2% 4% 6% 8% 10% 12% 14%
China
Russia
Ukraine
Japan
Brazil
India
South Korea
Source: Survey 20 09- 2010, Opport unit ies In ternat ional isat ion SMEs, EIM/GDCC (EU27,
N=6649 ) .
The barriers reported for China (Figure 3.3) are rather similar to the average for
the 7 key target markets. Major differences:
- China is a very competitive market, price of products is more important
than elsewhere.
- Also different business culture is somewhat more important.
- Tariff, quota and lack of qualified personal are less important with regard
to the Chinese market.
Figure 3.3 Major barriers for China, percentage of SMEs
0% 5% 10% 15% 20% 25% 30% 35%
Knowledge o f foreign languages
Transport costs
Lack of adequate market information
Difficult paperwork, bureaucratic procedures
Different business cultures in foreign markets
Lack of financing
Other laws and regulations in foreign countries
Payment risks
Lack of sufficiently qualified personnel
Tariffs or quota for foreign markets
Lack of adequate public support
Price of our products and/or services
Political risks
Quality of our products and/or services
Conformity of prod./serv. to national standards
China Average 7 key markets
Source: Survey 20 09- 2010, Opport unit ies In ternat ional isat ion SMEs, EIM/GDCC (EU27,
N=6649 ) .
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Figure 3.4 shows that there are no support services that are in the perception
of European SMEs much more effective for China than in the other key target
markets. Information on market opportunities scores a bit higher and is the ser-
vice with the highest score. Support in dealing with national technical standards
in China scores lower than average
Figure 3.4 Anticipated effect of possible public support measures for China, percentage
of SMEs expecting the instrument to be effective or very effective, ranked by
average
0% 10% 20% 30% 40% 50% 60% 70%
Assis tance with identifying partners
Information on market opportunities
Information on rules and regulations
Business cooperation and networking
One-to-one meetings with partners
Exhibiting in international trade fairs
Business or professional advice
Auxiliary services in target market
Dealing with national technical s tandards
Trade missions
Staff training
Dealing with Intellectual Property Rights
Temporary office facilities in target market
Other non financial services
China Average 7 key target markets
Source: Survey 20 09- 2010, Opport unit ies In ternat ional isat ion SMEs, EIM/GDCC (EU27,
N=6649 ) .
3.2 China as a trading partner
3 . 2 . 1 I n t r o d u c t i o nChina is the fourth largest country in the wor ld with an administrative organisa-
tion based on three-levels, dividing the nation into provinces, counties, and
townships. At present, China has 23 provinces, 5 autonomous regions, 4 munici-
palities directly under the Central Government, and 2 special administrative re-
gions.
This is a relevant issue for the present study as shown in the chapters to follow:
European SMEs tend to under-estimate regional differences on the Chinese mar-
ket, both with regard to general market conditions as with regard to interpreta-
tion and enforcement of rules and regulations at local and provincial levels.
As already mentioned in Section 3.1, China's economy has changed since the
1970s from a closed, centrally planned system to a more market-oriented one
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that plays a major role in the global economy. In 2009, the global economic
downturn reduced foreign demand for Chinese exports for the first time in many
years, but China rebounded quickly, outperforming all other major economies in
2010 with GDP growth around 10% (in 2008 and 2009 still about 9%). But the
Inflation rate (consumer prices) is now 5% (2010 est.) surpassing the govern-
ment's target of 3%
The total imports and exports in 2010 increased by 35% compared with 2009
making China in 2010 the world's largest exporter ($1.506 trillion, 2010 esti-
mate).
In 2010 more than 27000 new foreign companies were established (a 17% in-
crease compared to 2009) in China with FDI of about $11 billion (both figures
about 17% in creased compared to 2009).
China has already concluded a lot of Free Trade Agreements (with a.o. Asean
countries, Pakistan, Chilli, New Zealand, Singapore, Peru, Costa Rica etc), but
there is not yet a FTA signed with the EU or EU Member States.(See: http://fta.mofcom.gov.cn/topic/enperu.shtml)
On the website of DG Trade (http://ec.europa.eu/trade/creating-
opportunities/bilateral-relations/countries/china/, as of 23-2-2011) it reads:
China is the single most important challenge for EU trade policy. China has re-
emerged as the world's third economy (recently overtaken Japan, and now the
second largest economy) and the biggest exporter in the global economy, but
also an increasingly important political power. EU-China trade has increased
dramatically in recent years. China is now the EU's 2nd trading partner behind
the USA and the b iggest source of imports. The EU is China's biggest trading
partner. The EU's open market has been a large contributor to China's export-led
growth. The EU has a lso benefited from the growth of the Chinese market and
the EU is committed to open trading relations with China. However the EU wants
to ensure that China trades fairly, respects intellectual property rights and meets
its WTO obligations.
3 . 2 . 2 T h e i m a g e o f C h i n a i n E u r o p eThe development of China in the last decade is impressive by any standards,
with the business press emphasising China's:
huge market;
very high growth rates;
and unlimited business opportunities
Moreover, large scale European car makers, such as Mercedes Benz and Volks-wagen report very large annual sale increases, even in 2010 compared with
20091, when trading conditions in many other markets were difficult. Whilst
these are very large corporations, such developments also provide opportunities
for SMEs as subcontractors.
1 News release on http://www.emercedesbenz.com dated 10-2-2010 reports: Deliveries for 2010in China totalled 148,400 passenger cars, more than double the number of units sold in 2009(70,100 units). And on http://www.volkswagenag.com , Volkswagen reports Record year 2010:
1,923,500 cars delivered with a solid growth of 37 percent.
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The coverage given to the experience of Europe's leading companies has a posi-
tive effect on making the wider business community in Europe, including the SME
sector, more aware of the changes in the world economy and the need to see
whether their business strategies need adaptation to reflect these developments.
At the same time, several people have drawn attention to negative side effects.
For example, some enterprises come to China with a rather vague and nave idea
(' huge marke t , I shou ld be there ') without studying whether or not their business
proposition is likely to be successful in China. The market is indeed very large,
but so is the competition on Chinese markets both from local and from intern a-
tional suppliers. One needs a serious unique selling point (USP) to have a rea-
sonable chance of a successful business development.
A second issue is that some SME are too optimistic about the extent to which
quick gains are possible. Nearly all the people that were interviewed stressed
that one needs several years to build up relations with business partners and
government agencies before business will really take off and can become profit-
able. As a consequence, it is necessary to take a long-term view and be willingto invest time and other resources for a few years.
It is important to invest in the initial years in obtaining an understanding of the
(business) culture in China and of the specific province in which one would like
to make a start. Th is does not only refer to issues, such as language, personal
attitudes and relations, how business relations are established and developed
and how to organise communication with local staff in China but also to more
structural issues.
Europeans tend to believe, for example, that knowing and understanding the
rules and regulations are the key to understanding the local business environ-
ment (investment laws, financial and fiscal arrangements, employment laws,
etc.), but many tend to overlook that in China power and re lationship are much
more important than most Europeans assume1. One needs not just to find good
local staff and build up re lations with local business partners but also to invest in
building good relations with local governments and government agencies, such
as customs, environmental inspection, and tax offices.
3 . 2 . 3 W T O m e m b e r s h i pIn 2001 China accessed to the WTO. The EU uses also the regular Trade Policy
Review of China in the WTO to raise a number of concerns regarding China's
trade policy. These include inadequate protection of intellectual property rights,the maintenance of industrial policies which may discriminate against foreign
companies especially in sectors like automobiles and barriers to market access in
a number of services sectors including construction, banking, telecommunica-
tions, and express postal services). Access to raw materials has also been identi-
fied as a major trade obstacle as well.
1 This may also be related to corruption practices that also in China have to be dealt with occa-
sionally.
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Table 3.1 Total EU-27 export of goods and exports to China, by type of product, 2009
(EUR million)
Type of product
Total EU27
expor ts
EU export s
to China
Dis t r ibu t ion
(% )
Share
China (% )
0: food and live animals 44746 2035 2% 5%
1: beverages and tobacco 17971 893 1% 5%
2: crude materials, inedible, except fuels 25168 6722 7% 27%
3: mineral fuels, lubricants and related mat. 57157 237 0% 0%
4: animal and vegetable oils, fats and waxes 2585 61 0% 2%
5: chemicals and related products, n.e.c. 195613 12660 13% 6%
6: manufactured goods classified chiefly by material 139512 12485 12% 9%
7: machinery and transport equipment 455799 54736 55% 12%
8: miscellaneous manufactured articles 119006 9273 9% 8%
9: commodities and transactions n.e.c. 38143 1177 1% 3%
Total 1095700 100279 100% 9%
Source: Euros tat , s ta t is t ics in focus, 48/ 2010 (17/ 9 / 2010) .
S e r v i c e s
(i) EU services exports to China 2009: 18 billion
(ii) EU services imports from China 2009: 13 billion
Eurostat1, reports that in 2009, EU27 external trade in services slowed down
compared with 2007 and 2008. EU27 exports of services to the rest of the word
fell by 10 and EU27 imports by 8. As a result, EU27 trade in services recorded areduced surplus. In 2009, the EU27 recorded relatively stable surpluses in trade
in services with all its main partners, except for the USA. Among the other main
partners, the highest surpluses were observed with the EFTA countries3 (23 bn),
Russia (7 bn), China and Japan (both 5 bn). The shares of China in these provi-
sional data on 2009 are: export of services (4%), import of services (3%) and in
the trade balance of services (9%).
D e v e l op m e n t s 2 0 1 0
In October 2010 Eurostat 2 reported that in 2010 the EU27 trade with all its major
partners grew again (January-July 2010 compared with January-July 2009), ex-
cept for imports from the USA which remained nearly stable. The most notable
increases were recorded for exports to Brazil (+57%), China (+41%) and Turkey(+38%), and for imports from Russia (+43%), China and India (both +25%).
The EU27 trade deficit with China increased China (-86.4 bn compared w ith -75.2
bn).
1 Newsrelease, euroindicators, STAT/10/177, 25/11/2010.
2
Eurostat, newsrelease, euroindicators, 152/2010, 15/10/2010.
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in-house lawyers, making it necessary for them to use externals that are
not always easy to find. A potentially important point is the commonly re-
ported view that perceived IPR problems dissuades some European SMEs
from entering China.
(ii) Firms entering new markets require various types of information about: forexample, market opportunities, potential distributors, laws and regulations,
and the availability of business services. However, for firms seeking to enter
China, access to g ood qual i ty inform at ion is reported to represent a higher
cost than in other markets. Once again this can be a particular problem for
SMEs faced with more limited internal resources than larger enterprises.
(iii)Similarly, when entering new markets businesses need to understand theregulat ions governing those markets, in order to identify the implications
for their (planned) activities. However, achieving this in China requires
more than just information about the relevant regulations; it a lso requires
knowledge of how these regulations are likely to be applied. This is a par-
ticular challenge because of frequently changing laws and uncertainties
about how laws and regulations will be interpreted and implemented, not
least because some laws can be conflicting. One informant gave the exam-ple of changes in tax laws in 2010, where it is unclear what the implications
will be for businesses. Local variations in regulations add to the difficulties,
with variations in interpretation and implementation additional issues. The
pattern was reported to be that in the more developed regions, interpreta-
tion of laws is re latively strict whilst in the less developed regions interpre-
tation is less predictable, because of lower competence levels on the part of
regulators. However, some informants also suggested there is a difference
in enforcement practice by the courts in China with respect to indigenous
and foreign companies.
(iv)Market access issues: non-tariff barriers exist in several industries, as partof the government's attempt to protect Chinese enterprises. One example is
the banking sector, which not only makes it difficult for European financial
service providers, but also for European enterprises in other sectors to deal
with financial (investment) issues in China. Another example mentioned
was China's Indigenous Innovation Policy which makes it difficult for non-
Chinese owned companies to access to public procurement contracts. Chi-
nese companies are favoured because the government believes innovation
needs to come from within China.
(v) Cultural di f ferences: Culture affects business practices, etiquette, interper-sonal habits, which mean that cultural differences can lead to misunder-
standings. For example, a Chinese business service provider referred to a
meeting involving himself, a European customer and two Chinese clients.
He reported that his European customers were well-dressed in summer,contrasting with Chinese clients who were only dressed in T-shirt and
shorts, and spitting on the ground. Being well dressed in business meetings
may be an unspoken rule in Europe, but not in China. It was reported that a
promising sale was prevented because of the culture clash. Of course, lan-
guage barriers can contribute to the cu ltural misunderstandings although
most are more deep rooted, because the approach of some European busi-
ness people is too strongly influenced by the experience they have gained
in more familiar markets. One example is an underestimation of the impor-
tance of building strong relationships with local government. Another ex-
ample mentioned is the attitude towards corruption, which as it was pointed
out is not unique to China.
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Additional barriers mentioned by some informants included:
Recruit ing the right local employees can be a major issue. Training is obvi-
ously one of the possible solutions to this and a number of Chambers and
support organisations are involved in cooperating with the Chinese govern-
ment to set-up more advanced technical training.
What one informant described as the big is beaut i fu l issue, which refers to the
widespread perception in China than large enterprises are more competitive
and competent than small firms. This represents a challenge for European
SMEs who need to overcome the view. Business support organisations can
help to change this attitude over time by organising meetings in their offices
where Chinese business people are invited to meet European SMEs.
Some SMEs are said to face f inancing const ra int s, when entering China, where
the thresholds for minimum investment are relatively high.
It is important to keep in mind that entering China is only the first stage in
successful market exploitation. As a consequence, SMEs may have different
support needs at different stages of market development. In this regard, oneinformant referred to growth const ra ints, which firms experience once they
become established. These include recruiting staff, ongoing regulatory issues
and relocation, which is often needed to accommodate expansion.
Fear can be a key bottleneck, according to informants representing two of the
EU's smaller Member States. This is fuelled by reports of national counterpart
firms having bad experiences in China. When asked for examples, they de-
scribed attempts on the part of their enterprises to do business with Chinese
partners who kept raising the level of investment required. They also referred
to cases of business partners disappearing, stating that bad experiences are
more than just isolated cases. Problems reported with Chinese suppliers in-
cluded orders placed but no delivery and some quality issues. As a result, one
of the messages promoted to companies is don't go to China w ithout a reliable
Chinese partner. Fear is also fuelled by a lack of any real success stories of
national companies in China.
The distance from Europe can also be a barrier to entry, particularly when in-
tervening market opportunities exist, such as Russia and Ukraine, which some
East European businessmen feel more comfortable in for h istorical reasons. A
similar argument applies to suppliers.
Ant i dumping disputes. As the Chinese side is sometimes accused of engaging
in dumping (supplying below cost price), and foreign government take action,
the Chinese government retaliates by banning some European products from
the market
It is important to recognise that the issues European businesses face in China
vary according to what's a company is trying to do. Informants often distin-
guished between firms looking for agents to sell into China and those wishing to
establish a physical presence in China. Whilst these two groups share some sup-
port needs, there are also important differences. Firms looking to establish a
physical presence need help in overcoming some of the basic entry requirements
such as legal registration, but they can also benefit from being part of an estab-
lished national business community in China, which increases the comfort factor
for them. Although China is a large market with many business opportunities,
most key informants reported that entering China represents a bigger challenge
for SMEs than entering many other markets.
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3.6 Overcoming bottlenecks
Although the informants offered a variety of detailed responses when asked how
European SMEs overcome the barriers and challenges faced, three interrelated
messages shone through. None of these are unique to China, but the idiosyncra-
sies of the Chinese market underline their importance.
(i) Thorough preparat ion before entering China. Whilst good preparation maybe recommended before entering any new market, it is doubly important in
the case of China because of the challenges and potential pitfalls described
above and the widely accepted importance of taking a long-term view. As
one informant put it 'do your home work' (better) and do not overlook re-
gional differences!' The initial investigation of the China market should ad-
dress the question 'is China right for my business?' This may lead to some
adaptation of products and services to the local market, where too much hi
tech can quickly price a good out of the market compared with "just-good-
enough-versions" which are able to survive price competition.
Concerning the popular perception by European businesses of the IPR prob-
lems that exist in China, most informants emphasised that insufficient atten-tion to due diligence on the part of European companies was at least partly
to blame for this. Early, pre-entry registration of trademarks is recom-
mended. Public relations and advertising material needs to be translated into
Chinese and adapted to local conditions. Thorough preparation requires an
investment of time and other resources, which are required to seek out good
Chinese partners and invest time in bu ilding relations with them and with
government officials. A reliable Chinese partner can help to bridge cultural
gaps1 and provide local market knowledge. One spokesperson stated 'it is
better to find local people with European experience to run your local ven-
ture than Europeans with some China knowledge'. Speaking to other Euro-
pean businesses that already have experience in China was recommended bysome informants.
(ii) Be wi l l ing to seek out exper t adv ice and support f rom organisat ions wi thpract ical exper ience of t he Chinese m arket . Clearly, accessing external ad-
vice is one of the ways businesses can overcome barriers. As far as IPR i s-
sues are concerned, 500 enquiries have been received by the EU IPR Help-
desk over a three-year period, although 50% of these were in 2010. Both
the level of demand and the fact that it appears to be g rowing, suggests
that advice with respect to IPR is an important support need of European
SMEs. In addition, as described in the following section a wide variety of
support is available from national and EU sources. This includes incubator
services, which involve not only an office and other facilities, but an envi-ronment with the possibility of learning from others.
(iii)Be sensit ive to Chinese business et iquette and pract ices. European firmsmust be willing to adjust to the business etiquette in China. This includes
sending out documentation about the company and its products ideally be-
fore visit is made; following up on visits; entertaining potential business
partners and government officials with lunch or dinner to build develop net-
1 Even overseas Chinese that set up a company in China after having been abroad for 10 years or
more experience such a cultural gap (huge changes last 10 years).
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works. Even details such as seating arrangements Chinese and European
guests spaced evenly are important in China. It is also necessary to be
careful when expressing criticism, since people should not be put in a posi-
tion where they 'lose face'. It is better to discuss such issues in private, and
consider using an intermediary to convey criticism for example to a person
of high social status.
3.7 Policy support for EU SMEs
A variety of business support is available from national and EU sources, both at
home and within China for EU SMEs interested in entering the China market.
Most service providers, such as bi lateral chambers, consulates and other service
providers, in the larger Member States, have a similar package of services, which
includes:
Information provision
Advice and consultancy
Visits to events in home country to inform business community on 'how to do
business in China'
Undertake market research and deliver market reports
Event management: trade missions, trade fair participation, matchmaking
events etc.
Overseas market introduction service
Help in setting up representative offices
Offering temporary office facilities (sometimes also temporary staff)
Being an intermediary where disputes develop between European and Chinese
business partners
Helping with sourcing on the Chinese market
Undertaking a legality check of a potential Chinese partner
Identifying potential distributors and/or suppliers in China
Helping with language, organising business meetings and accompanying to the
meeting (in some cases)
Helping companies find other business services such as interpretation, con-
sulting companies and will make recommendations (in some cases).
In the larger and more established Member States, the support offered appears
comprehensive, at least in Beijing and Shanghai. Whilst there is considerable
similarity in the types of support offered by national governments, not surpris-
ingly, the extent and intensity of support varies between Member States of dif-
ferent sizes, as well as between the more established and new EU members.However, not all of the new member countries are necessarily targeting China.
For example, one informant in an Embassy of one of the smaller Member States,
referred to better market opportunities for their SMEs existing in markets closer
to home, specifically Russia where for historical reasons their businessmen feel
more comfortable. With only one enquiry per week on average, and only 25% of
the Consuls time spent on commercial issues, the Chinese market is clearly not a
priority either for the country's businessmen or for the government.
Differences also exists between countries in the way business support is ac-
cessed at home, with potential implications for the system of linkage and referral
between support offered in Europe and that offered in China. This has potential
implications for the effectiveness of the channels used to disseminate informa-
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visory and networking services are not charged for but rather casted into the
rental charge. The complementary nature of the Centre's activities is reflected in
their cooperation with other organisations, such as the German Chamber, who
refer clients to them. The demand for space in the German Centre is high. Since
its establishment in 2000, it has increased its presence in the building which it
now occupies 100% (10,000 sq m). It was reported that all space is now occu-
pied by tenants and has been for two or three years.
The UK model also involves inter-agency cooperation. Led by UKTI , who have of-
fices in Shanghai, Chongqing, Guangzhou, as well as Beijing and a total of 100
staff, support for UK companies appears well resourced in China. The delivery of
business support offered by UKTI is through a service level agreement with the
British China Business Council, which has 13 offices in China and a geographical
coverage that complements the UKTI offices. A comprehensive range of business
support is offered including a general enquiry service, market research including
UKTI's Overseas Market Introduction Service (OMIS), help in researching mar-
kets and finding joint venture partners. Business support services are chargeable
as is lobbying on company specific issues, but sector level activities are not d i-rectly charged for.
In addition, UKTI have a lobbying, advocacy role with respect to access to mar-
kets, such as railways, where they work closely with the EU Chamber and the EU
Delegation. UKTI also develop market access strategies for specific sectors. They
have sector teams within the UK, which in the case of agriculture is contracted
out to an organisation in the West Midlands, who are responsible for arranging
an annual programme. Organising visits by ministers and the Prime Minister is
also part of UKTI service. These visits are used to lobby the Chinese government
for market access.
Businesses come to UKTI through a variety of routes: a website, international
trade advisers in Business Link in the UK, trade associations, the CBI and some
direct contacts. Compared with Germany, there are many stakeholders in the UK
whereas in Germany the Chambers and trade associations are the main source.
This has implications for how information about support services in China is dis-
seminated.
As in the case of Germany, complementary business support services for UK
companies involve partnerships between a number of organisations. The China
British Business Council (CBBC) , for example, with a membership of 900 busi-
nesses, offers a range of support in addition to that delivered as part of the con-
tract with UKTI. This includes organising events in China, some of which areopen to non-members, but also member focused events in di fferent parts of the
UK, which may lead to forming a delegation to visit China. Products offered to
members only include LAUNCHPAD It is aimed at its new entrants to China, spe-
cifically businesses that are interested in the Chinese market but are uncertain
as to whether or not they require offices, perhaps because of limited resources
as in the case of a SME. Members buying Launchpad hire a project manager from
CBBC. This represents low risk for the UK company who are avoiding the cost of
investing in property or to incorporate in China. Launchpad supports companies
for 1 to 2 years after which some pull out of China but most go on to establish
their own offices. The activities of the project manager are limited by legal stat-
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viewed mainly as training activities; they also work with business associations
throughout Europe on an ongoing basis. Other partners include IP Europe who
organised events offering general information about IPR, to which the he lpdesk
adds a China Day.
One IPR expert is employed in-house, offering one-to-one advice SMEs. Over the
three years since the Helpdesk was established, a total of 500 enquiries have
been received but 50% of these were in 2010. Approximately 70% of these were
described as simple queries which can be answered by e-mail using a template.
Of the remaining 30%, some involve referral to a Chinese organisation; some in-
volve tapping into a pool of experts. When asked about sustainability, our infor-
mant reported that the need to maintain the service was demonstrated by the
level of demand which was increasing. She also stated that it needs to be pro-
vided free of charge.
3.8 What support is missing?
(i) Recognising that market entry is only the first stage of successful marketexploitation, more explicit attention needs to be played to the support
needs of European SMEs at different stages of market development in
China. For example, one informant referred to the needs of companies af-
ter distributors have been identified and met face-to-face. He reported that
in 99% of cases contact with d istributors will need to be followed up once
EU companies visiting China are back in Europe. SMEs often lack the inter-
nal resources to manage this effectively.
(ii) Existing support for European SMEs in China is concentrated in Beijing and
Shanghai, with some countries having a presence in other large provincialcities such as Guangzhou. The geography of existing European business
support in China has been reinforced with the location of the IPR Helpdesk
and the new EU SME Centre in Beijing. A high priority for the future devel-
opment of business support in China is to pay explicit attention to increas-
ing access to support services outside these large centres.
(iii) SMEs in some Member States have little if any access to financial supportfor marketing activities for state budgetary reasons. This can affect finan-
cial support for individual companies for visits and other activities but also
exhibitions and networking activities organised by Embassies. This should
be part of basic provision across the EU.
(iv) Gaps exist