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: Co-referee:

Prof. Dr. Klaus North Prof. Dr. Günther Abstein

Written by:

Carolin Häner Konrad-Adenauer-Allee 19 64569 Nauheim

Wiesbaden, October 15, 2011

II Executive Summary: SMEs in turbulent times – A comparative analysis between European Countries, Brazil and Argentina The four year project ‘Sustainable competitiveness of SMEs in turbulent economic and social environment – a network approach’ was initiated in 2011 and aims to “ (…) create a co-evolvement process towards a successful management model for SMEs that combines the European innovation and organizational learning model with Latin American survival strategies in turbulent economies (…)”. As part of this project, the objective of this thesis is to investigate SMEs (small and medium-sized enterprises) in turbulent times and compare them among European countries, Brazil and Argentina.

Definition of SMEs  In Europe an enterprise is considered to be an SME if it employs fewer than 250 persons and has an annual turnover not exceeding US$ 66 million (50 million euro) and/or an annual balance sheet total not exceeding US$ 57 million (43 million euro).  SMEs in Brazil are characterized by a multitude of definitions and therefore it is hard to give one general definition. SMEs in Brazil are defined as clearly smaller in size (annual turnover) compared to Europe.  In Argentina there is one official accepted SME definition, which is broadly applied. This definition differs by sector of activity and approximates to that of Brazil.

Contribution to the economy In all researched countries SMEs play a key role in the economy. The following table provides an overview of the contribution of European, Brazilian and Argentinean SMEs:

III

EU-27
Number of SMEs/total of enterprises Total Micro Small Medium-sized Density of SMEs (per 1,000 inhabitants) 99.8% 91.8% 6.9% 1.1% 41.7 6.4 67.4% 29.7% 20.7% 17.0% 58% 24%

Brazil
99.7% 94.0% 5.1% 0.6% 30.4 4.2 68.3% 24.5% 27.7% 16.0% 20%* 19.7%

Argentina
98.2% 71.2% 21.7% 5.3% 11.9 10.3 51.8% 12.7% 19.2% 19.9% 40% 10.7%

Average size of an enterprise (employee/enterprise) Number of Total persons Micro employed by Small SMEs/total of Medium-sized enterprises Contribution to GDP Export turnover

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.

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 cooperations and innovation, as part of the answer to overcome the challenges. While neither of them can be elected as the single savior for SMEs, they can be used as drivers that will direct SMEs through turbulent times and towards a bright future. It is important to mention that it is challenging to get a response when asking a company ‘How do you cope with a turbulent environment in order to survive and still stay competitive?’. They likely will not have a simple answer to this question. Some companies survive and are successful, so they are doing things right, but often they are not conscious of how they do the right things. Studies show that European SMEs are well prepared with plenty of formal courses offered to employees, their stable long-lasting co-operations and high level of innovation. All of this contributes to their success and to the fact that European SMEs are the engine of the European economy. But at the same time, this formal or well organized approach contributes also to the fact that they are helpless at first, when the environment starts to become unstable. They rely too much on their plans and consultants do not have a quick answer to challenges they face in turbulent times. Conversely, in Brazilian and Argentinean SMEs, competence development is not a priority and non-formal in most cases. Furthermore they have a rather imitative character, their business is managed in an unorganized way, they trust on their gut feeling and are intuitive. One of Brazil’s secret recipes can be summarized with just one word – Jeitinho. The ‘jeitinho’ is basically a way of working around things. No matter what problem or challenge Brazilians face, they always have a way to figure it out, solve or bypass it. This flexibility, detached of all narrow-minded thoughts, is in Brazil essential to survive in turbulent times. European and Latin American SMEs are poles apart but they can and should learn from each other.

Table of contents

V

Table of contents
List of abbreviations .............................................................................................X List of figures ..................................................................................................... XII List of tables ...................................................................................................... XIV 1 Introduction ................................................................................................... 1 1.1 1.2 1.3 2 Scope ........................................................................................................ 1 Objectives ................................................................................................. 2 Methodology ............................................................................................ 3

Overview of SMEs ......................................................................................... 4 2.1 Definition of SMEs .................................................................................. 4 European SME definition.................................................................. 4 Brazilian SME definition .................................................................. 9 Brief introduction ....................................................................... 9 Definition by the general law of micro and small enterprises ... 9 Definition by Sebrae ................................................................ 11 Definition by IBGE .................................................................. 12 Definition by BNDES .............................................................. 12

2.1.1 2.1.2

2.1.2.1 2.1.2.2 2.1.2.3 2.1.2.4 2.1.2.5 2.1.3

Argentinean SME definition ........................................................... 13 Brief introduction ..................................................................... 13 Definition by SePyME ............................................................. 13 Definition by Fundación Observatorio PyME ......................... 15

2.1.3.1 2.1.3.2 2.1.3.3 2.2

Types of SMEs ....................................................................................... 16 Brief introduction ............................................................................ 16

2.2.1

Table of contents

VI

2.2.2

Europe ............................................................................................. 17 Knowledge intensity ................................................................ 17 Sectors ...................................................................................... 19 Internationalization .................................................................. 20

2.2.2.1 2.2.2.2 2.2.2.3 2.2.3

Brazil ............................................................................................... 21 Knowledge intensity ................................................................ 21 Sectors ...................................................................................... 23 Internationalization .................................................................. 23

2.2.3.1 2.2.3.2 2.2.3.3 2.2.4

Argentina ......................................................................................... 25 Knowledge intensity ................................................................ 25 Sector ....................................................................................... 27 Internationalization .................................................................. 28

2.2.4.1 2.2.4.2 2.2.4.3 2.3 3

Comparison ............................................................................................ 29

Contribution to the economy ..................................................................... 35 3.1 3.2 Brief introduction ................................................................................... 35 Europe .................................................................................................... 36 Number of enterprises ..................................................................... 36 Number of persons employed ......................................................... 40 GDP / Value added at factor costs .................................................. 44 Labor productivity........................................................................... 47 Export turnover ............................................................................... 48

3.2.1 3.2.2 3.2.3 3.2.4 3.2.5 3.3

Brazil ...................................................................................................... 50 Number of enterprises ..................................................................... 50 Number of persons employed ......................................................... 52 GDP ................................................................................................. 54

3.3.1 3.3.2 3.3.3

Table of contents

VII

3.3.4 3.3.5 3.4

Productivity ..................................................................................... 55 Export turnover ............................................................................... 56

Argentina ................................................................................................ 58 Number of enterprises ..................................................................... 58 Number of persons employed ......................................................... 60 GDP ................................................................................................. 62 Labor Productivity .......................................................................... 62 Export turnover ............................................................................... 63

3.4.1 3.4.2 3.4.3 3.4.4 3.4.5 3.5 4

Comparison ............................................................................................ 65

Challenges SMEs face ................................................................................. 68 4.1 4.2 Brief introduction ................................................................................... 68 Europe .................................................................................................... 68 The impact of EU enlargement ....................................................... 68 Globalization ................................................................................... 69 Trend toward a knowledge-based economy.................................... 70 Economic crisis 2008/2009 ............................................................. 73 Others .............................................................................................. 75

4.2.1 4.2.2 4.2.3 4.2.4 4.2.5 4.3

Brazil ...................................................................................................... 76 Globalization ................................................................................... 76 High bureaucracy ............................................................................ 76 Business management ..................................................................... 77 Tax changes ..................................................................................... 78 Informal business ............................................................................ 79 Economic crisis 2008/2009 ............................................................. 80 Others .............................................................................................. 80

4.3.1 4.3.2 4.3.3 4.3.4 4.3.5 4.3.6 4.3.7

Table of contents

VIII

4.4

Argentina ................................................................................................ 81 Globalization ................................................................................... 81 Inflation ........................................................................................... 82 Infrastructural problems .................................................................. 84 Economic crisis 2008/2009 ............................................................. 84 Others .............................................................................................. 85

4.4.1 4.4.2 4.4.3 4.4.4 4.4.5 4.5 5

Comparison ............................................................................................ 86

Coping in a turbulent environment ........................................................... 87 5.1 Europe .................................................................................................... 87 Brief introduction ............................................................................ 87 Competence development ............................................................... 87 Co-operations .................................................................................. 96 Innovation ..................................................................................... 102

5.1.1 5.1.2 5.1.3 5.1.4 5.2

Brazil .................................................................................................... 105 Brief introduction .......................................................................... 105 Competence development ............................................................. 105 Co-operations ................................................................................ 106 Innovation ..................................................................................... 107 Management of the enterprise ....................................................... 109

5.2.1 5.2.2 5.2.3 5.2.4 5.2.5 5.3

Argentina .............................................................................................. 113 Brief introduction .......................................................................... 113 Competence development ............................................................. 113 Co-operations ................................................................................ 115 Innovation ..................................................................................... 116 Management of the enterprise ....................................................... 117

5.3.1 5.3.2 5.3.3 5.3.4 5.3.5

Table of contents

IX

5.4 6 7

Comparison .......................................................................................... 119

Conclusion.................................................................................................. 122 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 9

Bibliography .............................................................................................. 131 Declaration of authenticity ....................................................................... 142

List of abbreviations

X

List of abbreviations
€ Art. AWU BNDES BRIC CEPAL CEPyMECE e.g. EC EIB EIF et al. etc. EU EU-19 EU-27 FDI GDP GDRC IBGE ICMS INDEC IRS IRSES IT LSE

Euro Article Annual Work Unit Banco Nacional de Desenvolvimento Econômico e Social Brazil, Russia, India, China Comisión Económica para América Latina y el Caribe Centro de estudios de la pequeña y mediana empresa (Centro PyME) exempli gratia (for example) European Commission European Investment Bank European Investment Fund et alii et cetera European Union European Union (19 stands for the 19 member states) European Union (27 stands for the currently 27 member states) Foreign Direct Investment Gross Domestic Product The Global Development Research Center Instituto Brasileiro de Geografia e Estatística Imposto sobre Operações relativas à Circulação de Mercadoria e sobre Prestação de Serviços de Transporte Interestadual e Intermunicipal e de Comunicação Instituto Nacional de Estadística y Censos Internal Revenue Service International Research Staff Exchange Scheme Information Technology Large scale enterprise

List of abbreviations

XI

MERCOSUR MTEySS n.d. N° NACE p./pp. PME PyME R$ R&D SC Sebrae SePyME SME UEAPME UK US$ USA VAT

Southern Common Market Ministerio de Trabajo, Empleo y Seguridad Social no date Número (number) Nomenclature Generale des Activites Economiques dans I`Union Europeenne (General Name for Economic Activities in the European Union) Page/Pages Pequena e média empresa Pequeña y mediana empresas Brazilian Real Research and Development Santa Catarina Serviço Brasileiro de Apoio às Micro e Pequenas Empresas Secretaría de la Pequeña y Mediana Empresa y Desarrollo Regional Small and medium-sized enterprises Union Européenne de l'Artisanat et des Petites et Moyennes Entreprises The United Kingdom United States Dollar The United States of America Value added tax

List of figures

XII

List of figures
Figure 1: Autonomous enterprise ............................................................................ 7 Figure 2: Partner enterprise ..................................................................................... 8 Figure 3: Linked enterprise ..................................................................................... 8 Figure 4: High-tech sectors, 2008, EU-27 ............................................................ 19 Figure 5: Number of SMEs by sector, 2008, EU-27 ............................................. 19 Figure 6: SMEs according to the level of innovation, 2008, Brazil ...................... 21 Figure 7: Number of SMEs by sector, 2008, Brazil .............................................. 23 Figure 8: Export development from 1998 – 2008, Brazil ..................................... 24 Figure 9: High-tech sectors, 2009, Argentina ....................................................... 27 Figure 10: Number of SMEs by sector, 2009, Argentina ..................................... 27 Figure 11: Density of SMEs, 2008, EU-27 ........................................................... 37 Figure 12: Average size of an enterprise, 2008, EU-27 ........................................ 38 Figure 13: Development of the number of enterprises by size class, 2002-2008, EU-27 .................................................................................................................... 39 Figure 14: Number of persons employed by enterprise size class, 2008, EU-27 . 43 Figure 15: Value added by SMEs (EUR 1,000 million), 2008, EU-27 ................ 46 Figure 16: Proportion of enterprises with revenue from exports, 2005, EU-27 ... 48 Figure 17: Development of the number of micro and small enterprises, 20002015, Brazil ........................................................................................................... 52 Figure 18: Development of employment in SMEs and LSEs, 2008, Brazil ......... 53 Figure 19: Distribution of employment by sector, 2008, Brazil ........................... 54 Figure 20: Relative share of export turnover, 2004-2008, Brazil ......................... 57 Figure 21: Development of the export turnover for SMEs in absolute numbers, 2004-2008, Brazil.................................................................................................. 57 Figure 22: Development of the number of enterprises, 2003-2009, Argentina .... 59 Figure 23: Development of the number of persons employed .............................. 61 Figure 24: Number of persons employed by sector and by size class, 2009, Argentina ............................................................................................................... 61 Figure 25: Development of labor productivity of industrial SMEs ...................... 62 Figure 26: Export turnover, 2005, Argentina ........................................................ 63

List of figures

XIII

Figure 27: Countries responsible for strong competitive pressure in Argentina .. 82 Figure 28: Frequency of renegotiations of industrial SMEs, 2010, Argentina ..... 83 Figure 29: Electric power/gas and industrial SME capacity, 2006, Argentina ..... 84 Figure 30: Formal and non-formal cooperation by enterprise size ....................... 97 Figure 31: Formal and non-formal cooperation by sector, percentage of European SMEs ..................................................................................................................... 98 Figure 32: Number of partners in formal and non-formal co-operations (in % of European SMEs) ................................................................................................... 99 Figure 33: Contact frequency in SME co-operation (in percentage of European SMEs).................................................................................................................. 100 Figure 34: Duration of SME co-operation (in percentage of European SMEs) .. 101 Figure 35: Level of involvement in co-operations by extinct and active SMEs, 2000-2005, Brazil................................................................................................ 107 Figure 36: Comparison among highly innovative, innovative and non-innovative SMEs ................................................................................................................... 108 Figure 37: Co-operations of SMEs among different activity sectors, ................. 116

List of tables

XIV

List of tables
Table 1: The thresholds of the European SME definition....................................... 6 Table 2: The thresholds of the Brazilian SME definition by ‘Lei Complementar N° 123/06’ ............................................................................................................. 10 Table 3: The thresholds of the Brazilian SME definition by Sebrae .................... 11 Table 4: The thresholds for exporting SMEs in Brazil by Sebrae ........................ 12 Table 5: The thresholds of the Brazilian SME definition by BNDES .................. 13 Table 6: The thresholds of the Argentinean SME definition by SePyME ............ 14 Table 7: The thresholds of the Argentinean SME definition by the Fundación Observatorio PyME ............................................................................................... 15 Table 8: High-tech SMEs, 2008, EU-27 ............................................................... 18 Table 9: High-tech SMES, 2008, Santa Catarina.................................................. 22 Table 10: High-tech SMEs, 2009, Argentina ........................................................ 26 Table 11: Comparison of SME definitions ........................................................... 31 Table 12: Comparison of types of SMEs .............................................................. 33 Table 13: Number of enterprises (non-financial business economy), 2008, EU-27 ............................................................................................................................... 36 Table 14: Number of persons employed, 2008 ..................................................... 41 Table 15: Value added in million Euro (non-financial business economy), 2008, EU-27 .................................................................................................................... 44 Table 16: Labor productivity (1,000 Euro/occupied person), 2008, EU-27 ......... 47 Table 17: Exporters by industry sector, 2005, EU-27 ........................................... 49 Table 18: Calculation of the export turnover, 2005, EU-27 ................................. 49 Table 19: Number of enterprises, 2008, Brazil ..................................................... 50 Table 20: Number of persons employed, 2008, Brazil ......................................... 52 Table 21: Growth rate of persons employed, 2002-2008, Brazil .......................... 53 Table 22: Export turnover (in million US$), 2008, Brazil .................................... 56 Table 23: Number of enterprises, 2009, Argentina ............................................... 58 Table 24: Number of persons employed, 2009, Argentina ................................... 60 Table 25: Comparison of SMEs’ contribution to the economy ............................ 67 Table 26: Forecasts of real production growth of gross value added at factor costs (annual growth rates in %), by size class, 2009-2011, EU-27 .............................. 73

List of tables

XV

Table 27: Forecast of employment growth (annual growth rates in %), by size class, 2009-2011, EU-27 ....................................................................................... 74 Table 28: Indicators from the report ‘ease of doing business 2011’ for Brazil .... 77 Table 29: Methods of developing in-house competencies, 2003, EU-19 ............. 89 Table 30: Sources of external competencies, 2003, EU-19 .................................. 91 Table 31: Main occupational groups benefiting from competence development activities ................................................................................................................ 93 Table 32: Extent and formalization of co-operation between European SMEs, 2003 ....................................................................................................................... 96 Table 33: Supportive skills for innovation .......................................................... 103 Table 34: Indicators of open innovation ............................................................. 103 Table 35: Activities to support innovation .......................................................... 104

1. Introduction

1

1
1.1

Introduction
Scope

The daily news is dominated by large and multinational corporations with their global expansion plans, billion dollar takeovers or bankruptcy headlines. This could easily give an impression that those companies are leading the economy. But appearances can be deceiving because in reality, the so-called SMEs (small and medium-sized enterprises) play a major role in the economy. In fact, 99 percent of all European businesses are SMEs. They provide two out of three of the private sector jobs and contribute to more than half of the total value created by enterprises in the EU. Besides their key role in innovation, R&D and entrepreneurial skills, they are responsible for the economic growth and wealth. What is really striking about the before-mentioned facts is that nine out of ten SMEs are actually micro enterprises, consisting of less than ten employees. Hence, micro enterprises build the basis of the European economy. Günter Verheugen, member of the European Commission and responsible for Enterprise and Industry, even calls SMEs “(…) the engine of the European economy” (European Commission, 2005, p. 3). In Latin America, in particular in Brazil and Argentina, the situation is similar: More than 98 percent of their companies account for SMEs, they provide more than half of the jobs and an economy without SMEs is unthinkable. However, there are significant differences when comparing Latin American SMEs to European SMEs. On the one hand, are the European SMEs, which are well organized, structured and innovative and on the other hand are the Brazilian and Argentinean SMEs, which are rather intuitive and unorganized but have the right feeling, or call it a ‘special talent’, to survive in turbulent times. The once stable European business environment is no longer, as today they have to deal with a changing turbulent environment. With all these globalization effects, interdependency of businesses and markets, financial or economic crisis and so forth, normal operations will not be the norm in the future anymore.

1. Introduction

2

On the other hand, Brazil and Argentina regularly encounter turbulences and it seems that they are ‘used to’ this kind of environment. This thesis will deal with SMEs in turbulent times and compares the SMEs of Europe, Brazil and Argentina.

1.2

Objectives

This thesis has been conducted within the framework of the project ‘Sustainable competitiveness of SMEs in turbulent economic and social environment – a network approach’, which is sponsored by the Marie Curie’s International Research Staff Exchange Scheme (IRSES). The projects’ main objective is “(…) to create a co-evolvement process towards a successful management model for SMEs that combines the European innovation and organizational learning model with Latin American survival strategies in turbulent economies (…)” (Anon., 2011, p. 2). This four year project is still in its early stages and therefore it is of high significance to first provide a solid basis for the project. The definition of SMEs has to be clarified, which is one of the main objectives of this thesis. Further objectives are to give a comprehensive overview of SMEs in Europe, Argentina and Brazil and compare them. The central questions are:  What is a SME? How are they defined? What is a typical European, Brazilian and Argentinean SME?    What do SMEs contribute to the economy? What are the factors affecting SMEs, especially in turbulent times? How are SMEs coping with turbulent environments?

1. Introduction

3

1.3

Methodology

This thesis is divided into four main chapters. In order to compare SMEs in Europe, Brazil and Argentina, it is necessary to first understand how SMEs are defined and typified. This will be done by the second chapter, which builds the foundation of this paper. Furthermore, it highlights similarities and differences in their definition. To show the importance of SMEs the third chapter gives a statistical overview of the role that they play in the economy. Indicators, such as the number of enterprises, number of employed persons in SMEs and the contribution to the GDP are used to assess their economic contribution and have been compared. Turnover has not been regarded, since GDP is a more common and widespread economic indicator. This statistical overview, especially the comparison, reveals differences among European, Brazilian and Argentinean SMEs. To understand the reason for these differences, the environment in which SMEs reside and run their day-to-day business has been analyzed in chapter four. The environment has proven to be turbulent, in particular in Latin American countries. In order to stay competitive and survive these turbulent times, SMEs have adopted different actions and manners. These have been described in chapter five. Note: Chapter two to five are structured in the same way: First each ‘country’ (Europe, Brazil and Argentina) will be analyzed separately and at the end of each chapter they will be compared. Finally, the main findings of this thesis are consolidated in the conclusion.

2. Overview of SMEs

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2
2.1

Overview of SMEs
Definition of SMEs European SME definition

2.1.1

In a single frontierless market, like the European Union, the importance of a common SME definition is eminent. A common definition allows a better basis of comparison, an improvement of consistency and effectiveness, and at the same time it limits distortions of competition. In April 1996, the European Commission (EC) adopted the ‘Recommendation 96/280/EC’, which established the first common SME definition in the European Union (EC, 2005, p. 6). The idea of a common definition found great acceptance by the member states. Thus the definition has widely been applied throughout the EU, so that other definitions within the European Union became relatively irrelevant (and therefore will be disregarded in this thesis). On May 6, 2003, this recommendation has been replaced by the ‘Recommendation 2003/361/EC’, which entered into force on January 1, 2005. This revision, which gives a new common definition for small and medium-sized enterprises, considers among other things the economic developments since 1996 (EC, 2005, p. 8). The use of the new common European definition is not mandatory but the Commission, together with the European Investment Bank (EIB) and the European Investment Fund (EIF) are inviting all member states to apply it as widely as possible (EC, 2005, p. 6). It only becomes mandatory for national state aid schemes and community programs (EC, 2009a, p. 2). To fully understand the common definition of SMEs, it is indispensable to have a closer look in the ‘Recommendation 2003/361/EC’ and its annex:

What is an enterprise? At first it is important to define the terminology ‘enterprise’. An enterprise is “(…) any entity engaged in an economic activity, irrespective of its legal form.” (Annex of the ‘Recommendation 2003/361/EC’, Art. 1, 2003). This wording is taken from the European Court of Justice, which uses it for its decisions (EC,

2. Overview of SMEs

5

2005, p. 12). The scope involves “(…) self-employed persons and family businesses (…), 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 employees with either an annual turnover or an annual balance sheet total not exceeding 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 employees with either an annual turnover or an annual balance sheet total not exceeding ten million euro (Annex of the ‘Recommendation 2003/361/EC’, Art. 2.2, 2003). Medium-sized enterprises are characterized as enterprises that have fewer than 250 employees with an annual turnover not exceeding 50 million euro or an annual balance sheet total not exceeding 43 million euro (Annex of the ‘Recommendation 2003/361/EC’, Art. 2.1, 2003). The following table will give an overview of the above-mentioned information.

2. Overview of SMEs

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Enterprise category Micro Small Medium-sized

Staff headcount: Annual Work Unit (AWU) < 10 < 50 < 250

Annual turnover or ≤ € 2 million ≤ € 10 million ≤ € 50 million

Annual balance sheet total ≤ € 2 million ≤ € 10 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 fulltime, 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 income, 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

2. Overview of SMEs

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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 independent, 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 Figure 1: Autonomous enterprise
(Source: EC, 2005, p. 17)

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).

2. Overview of SMEs

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Partner enterprise This kind of relationship corresponds to enterprises which established major financial partnerships with other enterprises, without one exercising 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. Figure 2: Partner enterprise
(Source: EC, 2005, p. 20)

Determining the eligibility for the SME status, Partner enterprises add a proportion 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 another enterprise and vice-versa (EC, 2005, p. 23). Figure 3: Linked enterprise
(Source: EC, 2005, p. 24)

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.

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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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 Micro Small Medium-sized Annual turnover ≤ R$ 240,000 > R$ 240,000 to ≤ R$ 2,400,000 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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2.1.2.3 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 Micro Small Medium-sized Micro Small
(Source: Sebrae, 2009, p. 47)

Industry, Construction, Commerce, Service Agriculture, others Staff Headcount 1 to 19 1 to 9 20 to 99 10 to 49 100 to 499 50 to 99 Annual turnover (see general law for SMEs) ≤ R$ 240,000 > R$ 240,000 to ≤ R$ 2,400,000

Table 3: The thresholds of the Brazilian SME definition by Sebrae

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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Enterprise category Micro Small Micro Small
(Source: Sebrae, 2011)

Industry, Construction, Commerce, Service Agriculture, others Staff Headcount 1 to 10 1 to 5 11 to 40 6 to 30 Annual turnover US$ 400,000 US$ 200,000 US$ 3,500,000 US$ 1,500,000

Table 4: The thresholds for exporting SMEs in Brazil by Sebrae

2.1.2.4 Definition by IBGE Another institution, which provides a different definition of SMEs, is the Brazilian 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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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 Micro Small Medium-sized Medium-large Large scaled

Annual Turnover ≤ R$ 2,400,000 > R$ 2,400,000 to ≤ R$ 16,000,000 > R$ 16,000,000 to ≤ R$ 90,000,000 > R$ 90,000,000 to ≤ R$ 300,000,000 > 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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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:
Industry, Mining 1,800,000 10,300,000 82,200,000

Enterprise category Micro Small Medium-sized

Agriculture 610,000 4,100,000 24,100,000

Commerce Annual Turnover 2,400,000 14,000,000 111,900,000

Service 590,000 4,300,000 28,300,000

Construction 760,000 4,800,000 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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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. Software and IT Services Production Services and Wholesale Trade Staff headcount <5 <5 5 - 20 5 - 20 21 - 150 21 - 150

Enterprise category Micro Small Medium-sized

Industry

Construction

< 10 10 - 50 51 - 200

<5 5 - 50 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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2.2 2.2.1

Types of SMEs 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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2.2.2

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 mediumsized 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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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 hightech (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. All size classes 4.97% 9.57% 95.03% 90.43% 100.00% 100.00%

SMEs High-tech sector Non hightech sector All Sectors Enterprise Employment Enterprise Employment Enterprise Employment 4.94% 5.12% 95% 62.32% 99.79% 67.44%

LSE 0.04% 4.45% 0.17% 28.10% 0.21% 32.56%

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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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.
4% 3% Chemicals, chemical products and man-made fibres 17% 1% 7% 55% 10% 3% Machinery and equipment Office machinery and computers Electrical machinery Radio, television & communication eqipment Medical, precision & optical instruments Computer & related activities R&D

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 Service Construction Industry 74% 12% 14%

(12%) is almost even and plays a smaller role for European SMEs. Figure 5: Number of SMEs by sector, 2008, EU-27
(Source: Eurostat, 2011a)

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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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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 4% 43%

2008, where they found out that around 53 percent of SMEs were not in any aspect innovative, 43 Non-innovator Innovator High-innovator 53%

percent were somewhat innovative and four per-

cent were very innovative Figure 6: SMEs according to the level of innovation, 2008, Brazil (Sebrae/SC, 2010a, p.4). (Source: 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 communication 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

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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. All size classes 1.5% 1.5% 98.5% 98.5% 100.00% 100.00%

SMEs High-tech sector Non hightech sector All Sectors Enterprise Employment Enterprise Employment Enterprise Employment 1.4925% 0.8% 98.2% 63.0% 99.7% 63.8%

LSE 0.0075% 0.7% 0.3% 35.5% 0.3% 36.2%

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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2.2.3.2 Sectors Brazilian SMEs are primarily active in the commerce and service sector. These

4%

11%

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.

85%

Service and Commerce Construction Industry Figure 7: Number of SMEs by sector, 2008, Brazil
(Source: Sebrae, 2010, pp. 41, 47, 53, 59)

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

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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).
Large Medium-sized "Micro and Small special" Small Micro 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

20000 15000 10000 5000 0

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.

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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 product 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 7th grade) and another 42.6 percent finished

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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 2.21% 2.37% 96% 49.43% 98.20% 51.80% LSE 0.13% 3.20% 1.67% 45.00% 1.80% 48.20% All size classes 2.33% 5.58% 97.67% 94.42% 100.00% 100.00%

High-tech sector Non high-tech sector All sectors

Enterprise Employment Enterprise Employment Enterprise Employment

Table 10: High-tech SMEs, 2009, Argentina
(Source: MTEySS, 2011)

The following figure shows important differences between industries in high-tech SMEs.

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22% 36%

Chemicals, chemical products and man-made fibres Machinery and equipment Electrical machinery

31% 1% 10%

Radio, television & communication eqipment Computer & related activities

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, employment and social security in the year 2009, Argentinean SMEs are mainly represented in the service and the commerce sector, with respective 55 percent and 33 percent. It is followed by the industry sector with around 12 percent. The proportion between the
Service Commerce Industry 33% 12% 55%

three (Source: MTEySS, 2011)

Figure 10: Number of SMEs by sector, 2009, Argentina

branches did not have any significant changes over the last decade.

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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.

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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

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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).

Country

Organzation/Law

Sectors

Micro Small Medium-sized Annual Annual Annual Annual turnover Annual Staff Staff Annual turnover Staff turnover in turnover in turnover in in local turnover in Headcount Headcount in local currency Headcount local currency US $ US $ currency US $ < 10 not considered ≤ R$ 240,000 $135,823 $135,823 $135,823 $135,823 < 99 ≤ R$ 2,400,000 $1,358,234 $1,358,234 < 49 ≤ R$ 2,400,000 $1,358,234 < 100 < 500 not considered < 99 ≤ R$ 2,400,000 $1,358,234 < 500 $1,358,234 ≤ R$ 240,000 ≤ R$ 240,000 ≤ R$ 240,000 ≤ R$ 2,400,000 < 20 <9 < 20 not considered ≤ € 2,000,000 $2,649,007 < 50 < 250 ≤ € 10,000,000 $13,245,033 ≤ € 50,000,000 $66,225,166

Europe
all sectors all sectors

EC (Recommendation 2003/361/EC)

2. Overview of SMEs

Lei Complementar N° 123/06

No definition for this enterprises size not considered -

Sebrae

Brazil

IBGE

Industry, Construction, Agriculture, others Commerce, Service Industry, Construction, Agriculture, others Commerce, Service all sectors <9 ≤ R$ 240,000 $135,823 < 49 ≤ R$ 2,400,000 not not ≤ R$ 2,400,000 $1,358,234 ≤ R$ 16,000,000 considered considered

BNDES

< 100 not $9,054,895 ≤ R$ 90,000,000 considered

$50,933,786

SePyME (Resolutión N° 21/2010)

Argentina
< 21 < 21 < 51

$155,573 $459,067 not $612,089 considered $150,472 $193,828 < 51

≤ $ 4,100,000 ≤ $ 10,300,000 ≤ $ 14,000,000 ≤ $ 4,300,000 ≤ $ 4,800,000

≤ $ 24,100,000 $1,045,652 ≤ $ 82,200,000 $2,626,881 not ≤ $ 111,900,000 $3,570,518 considered ≤ $ 28,300,000 $1,096,659 $1,224,178 ≤ $ 37,700,000 < 201 < 151 not considered < 151 < 151 not conisdered

$ 6,146,391 $20,964,040 $ 28,538,638 $ 7,217,547 $ 9,614,894

Fundación Observatorio PyME

≤ $ 610,000 Agriculture Industry, Mining ≤ $ 1,800,000 not ≤ $ 2,400,000 Commerce considered Service ≤ $ 590,000 Construction ≤ $ 760,000 < 10 Industry Software and IT <5 Services not considered Production Services <5 and Wholesale Trade Construction <5

-

Table 11: Comparison of SME definitions

(Source: see chapter 2.1)

Note: The European threshold ‘annual balance sheet’ has been disregarded in the comparison, because no other definition considers this threshold. The additional enterprise size ‘medium-large’ defined by BNDES in Brazil has been disregarded in this comparison because no other definition comprises this size class. Exchange rate: US$ 1 = € 0.755; R$ 1.767; $ 3.921 (Argentinean Peso)

31

2. Overview of SMEs

32

The table gives basically three conclusions:  First of all, it shows that the different SME definitions vary greatly and for that reason it is very hard to compare them.  Secondly, when considering the threshold staff headcount, the differences among the different definitions vary but are alike. The big difference is that in Europe, the threshold staff headcount is an inherent part in its SME definition by law, while in Brazil, this is not the case for all definitions but for the definition by Sebrae and IBGE. In Argentina staff headcount is not used by the SME definition by law but by the Fundación Observatorio PyME.  The third conclusion one can draw from the comparisons of the different definitions, is that each of them define the threshold turnover extremely different. As the table shows very clearly, the turnover by European definition is by far the highest of all. The only close relations that can be recognized, in terms of turnover, are between the definition of Brazil (except the definition by BNDES) and SePyME in Argentina with the definition of the sectors: agriculture, service and construction. The definition by BNDES in Brazil approximates to the European definition but still differs considerably.

When considering the type of SMEs there are differences among European, Brazilian and Argentinean SMEs. In order to find out differences and similarities, three main areas were analyzed:  The first area was the knowledge intensity of SMEs, which was measured on different indicators, like the level of innovation, the education of employees and the participation of SMEs in high-tech sectors.   The second area shows in which sectors SMEs are predominantly active. And in the last step it was analyzed if the SMEs are more local or international oriented. The rate of exporting SMEs has been regarded as the main indicator.

2. Overview of SMEs

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Europe Innovation Knowledge intensity Education of employees SMEs in high-tech sector Sectors Local or international (export) high n.a. 4.94% Service (74%)

Rating

Brazil medium/low

Rating

Argentina Rating low low 2.21% Service/ Commerce (88%) 3.18%

-

low 1.49% * Service/ Commerce (85%) 0.31%

25%/11%**

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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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 resources. 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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35

3
3.1

Contribution to the economy
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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36

3.2 3.2.1

Europe 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 EU-27 % Germany % France % UK % Italy % Spain % Czech Republic % 19,075,952 91.8 1,520,873 83.1 2,208,562 92.3 1,420,417 87.5 3,731,348 94.6 2,487,681 92.2 856,261 95.1

Small 1,425,346 6.9 257,525 14.1 155,000 6.5 170,372 10.5 189,294 4.8 184,117 6.8 35,285 3.9

Mediumsized 226,094 1.1 42,777 2.3 23534 1.0 27,348 1.7 20,151 0.5 22,048 0.8 7,212 0.8

SMEs 20,727,392 99.8 1,821,175 99.5 2,387,096 99.8 1,618,137 99.6 3,940,793 99.9 2,693,846 99.9 898,758 99.8

LSEs 43,178 0.2 8,840 0.5 5,050 0.2 5,970 0.4 3,096 0.1 3,268 0.1 1,513 0.2

Total 20,770,570 100 1,830,015 100 2,392,146 100 1,624,107 100 3,943,889 100 2,697,114 100 900,271 100

Table 13: Number of enterprises (non-financial business economy), 2008, EU27
(Source: Eurostat, 2011a)

In table 13 the European average, which is displayed by the EU-27, is compared to the six selected countries: Germany, France, UK, Italy, Spain and Czech Republic. Here it is important to focus on two different aspects:

3. Contribution to the economy

37

The first aspect comprehends a comparison between SMEs and large scale enterprises because it is very interesting to see that similar proportions are reflected by each country. At least 99.5 percent (see Germany) of all enterprises accounted to SMEs. Italy and Spain recorded the highest percentage (99.9%) of all selected countries, which shows that the relative importance of SMEs in the southern member states is very high. This above-mentioned difference between Germany and Italy/Spain can be explained by means of the relative importance of a certain sector in the national economy or the differentiation among cultures (Eurostat, 2011b, p. 11). In some cultures the preference of self-employment and/or to run a family business is higher than in other cultures. The second aspect to consider lies within the SME sector. In Germany and the United Kingdom the number of micro enterprises was lower compared to the European average, as well as to the other selected countries. In Germany and in the United Kingdom, the micro enterprises accounted to a percentage share of respectively 83.1 percent and 87.5 percent, while the European average was 91.8 percent. Thus the importance of SMEs and in particular micro enterprises varies from country to country. The indicators ‘density of SMEs’ and ‘average size of an enterprise’ confirm the above-mentioned statements and will be discussed in the following:

Density of SMEs The density of SMEs is the number of SMEs per 1,000 inhabitants. In the year
86.7 80.0 60.0 40.0 20.0 0.0 41.7 22.3 37.4 26.5 66.2 59.6

2008 the density of SMEs was about 41.7 in the European economy (Eurostat, 2011a and Eurostat, 2009). France was close to the European average with a density of SMEs of 37.4. Italy,

Figure 11: Density of SMEs, 2008, EU-27
(Source: Eurostat, 2011a; Eurostat 2009)

Spain and the Czech

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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.
12.1 12.0 10.0 8.0 6.0 4.0 2.0 0.0 10.9 6.3 3.9

6.4

5.3

4.1

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.

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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 and 12.5 percent. percent 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

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

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 mediumsized enterprises created 20.7 percent and 17 percent of the jobs.

3. Contribution to the economy

41

Micro EU-27 % Germany % France % UK % Italy % Spain % Czech Republic %
39,653,450 29.7 4,288,700 19.3 3,714,919 24.7 3,817,765 21.5 7,292,281 46.9 5,377,223 37.7 1,077,519 29.1

Small
27,671,127 20.7 4,843,235 21.8 3,130,988 20.8 3,183,757 17.9 3,351,855 21.6 3,636,271 25.5 693,604 18,7

MediumSized
22,689,920 17.0 4,288,582 19.3 2,435,146 16.2 2,723,685 15.4 1,935,295 12.5 2,109,383 14.8 733,587 19.8

SMEs
90,006,497 67.4 13,420,517 60.5 9,281,053 61.7 9,725,207 54.8 12,579,431 80.9 11,122,877 78.0 2,504,710 67.6

LSEs
43,448,150 32.6 8,762,628 39.5 5,757,419 38.3 8,012,260 45.2 2,961,028 19.1 3,130,652 22.0 1,199,348 32.4

Total
133,454,647 100 22,183,145 100 15,038,472 100 17,737,467 100 15,540,459 100 14,253,529 100 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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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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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% 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 25% 50% 75% 100%

Figure 14: Number of persons employed by enterprise size class, 2008, EU-27
(Source: Eurostat, 2011b, p. 15)

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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 EU-27 % Germany % France % UK % Italy % Spain % 1,316,318 21.0 191,950 15.5 180,538 21.0 215,745 18.5 219,235 32.6 158,726 26.5 Small 1,182,663 18.8 222,179 18.0 160,849 18.7 180,872 15.5 154,609 23.0 144,034 24.1 MediumSized 1,127,422 17.9 238,833 19.3 134,289 15.6 194,189 16.6 108,443 16.1 103,660 17.3 SMEs 3,626,403 57.7 652,962 52.8 475,676 55.2 590,806 50.7 482,287 71.7 406,419 67.9 LSEs 2,656,257 42.3 584,225 47.2 385,655 44.8 575,597 49.3 189,928 28.3 192,065 32.1 Total 6,282,660 100 1,237,187 100 861,331 100 1,166,404 100 672,216 100 598,485 100

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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45

In the year 2008, across the whole EU-27’s non-financial business economy, 6,282 billion Euro value added has been generated (Eurostat, 2011a). SMEs accounted for 58 percent (3,626 billion Euro). Large scale enterprises generated 42 percent (2,656 billion Euro) of the value added. Within the SME group micro, small and medium-sized enterprises accounted for respectively 21, 19 and 18 percent. Comparing the selected European countries with the EU-27, there are two important aspects to point on. Firstly, in Italy and in Spain the contribution of SMEs to value added was higher than the average of Europe (respectively 71.7% and 67.9% compared to 58%). Secondly, the contribution of SMEs and LSEs to value added by Germany and the United Kingdom was more or less equal (respectively 52.8% and 47.2%; 50.7% and 49.3%). Moreover, there is not only a difference between SMEs and large scaled enterprises but also among micro, small and medium-sized enterprises. In Italy and in Spain the micro enterprises play again a very significant role because they created respectively 32.6% and 26.5% of the total value added compared to the average of the EU (21%). Conversely in Germany, in the United Kingdom and in the Czech Republic micro enterprises are of minor importance (respectively 15.5%, 18.5% and 18.8%). In these three countries the share in the micro enterprise category compared to Italy, Spain and above all to the European average is lower and is replaced by value added produced by larger enterprises. During the period 2002-2008 the value added in the European Union increased by an average of 28 percent in the SME sector. Spain and the Czech Republic were the two countries where value added produced by SMEs increased above the European average level. In Spain it grew by 52 percent, which is well above the EU average level (growth of 28%) (EC, 2009c, p. 2). It seems that this vast growth has been fuelled by the overall positive macroeconomic climate, which Spain enjoyed during this period. Even more striking is the growth of the value added of Czech SMEs, which recorded 87 percent (EC, 2009b, p. 2). Germany with 21 percent (EC, 2009d, p. 2), the United Kingdom with 22 percent (EC, 2009f, p. 2) and Italy with 26 percent (EC, 2009g, p. 2) were below the EU

3. Contribution to the economy

46

average. France almost aligned with the European average (respectively 29% compared to 28%) (EC, 2009e, p. 2). It is very important to always remember that the national economic situation of the particular country is the driving force and therefore explains the different growth rates of value added among the European countries. For instance Spain and the Czech Republic recorded a high growth rate of value added because during this time, they experienced an economic boom.

Value added by sector Similar to the analysis of employment, the sectors distributive trades, manufacturing and construction played an important role because there the highest level of added value has been generated (Eurostat, 2011b, p. 20). This is the outcome of, on the one hand, the great representation of the number of enterprises active in these sectors, and on the other hand, the numerous number of persons employed in this area.
0 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 200 400 600 800

Figure 15: Value added by SMEs (EUR 1,000 million), 2008, EU-27
(Source: Eurostat, 2011b, p. 20)

3. Contribution to the economy

47

3.2.4

Labor productivity

However the contribution of SMEs with respect to value added (58%) compared to the contribution of SMEs with respect to employment (66.7%) is lower. This indicates low labor productivity by SMEs, which will be proved in the following. Labor productivity is expressed in 1,000 Euro/occupied person. Micro EU-27 Germany France UK Italy Spain Czech Republic
(Source: Eurostat, 2011a)

Small 42.7 46 51 57 46 40 20

Medium-Sized 49.7 56 55 71 56 49 24

SMEs 40.3 49 51 61 38 37 19

LSEs 61.1 67 67 72 64 61 33

Total 47.9 56 57 66 43 42 24

33.2 45 49 57 30 30 16

Table 16: Labor productivity (1,000 Euro/occupied person), 2008, EU-27

The average of EU-27 has a labor productivity of 40.3. In Germany, France and UK the labor productivity is higher than the average with respective 49, 51 and 61. In contrast to that, in Italy, Spain and the Czech Republic labor productivity is considerably low with respective 38, 37 and 19. In general apparent labor productivity is not so high due to the fact that SMEs usually do not benefit from economies of scale, they are less capital intensive and/or have difficulties to develop innovations (Eurostat, 2011b, p. 20). Another very remarkable reason is, that less qualified labor force is used in SMEs. Therefore large enterprises have higher labor productivity ratios than SMEs, meaning that there is a positive correlation between labor productivity and enterprise size. In the year 2008, in each of the selected countries, the labor productivity increased parallel with the increasing size of an enterprise.

3. Contribution to the economy

48

3.2.5

Export turnover

As already mentioned, the role of SMEs in exports is less than in large scale enterprises. According to a survey of the Observatory of European SMEs, in 2005, there is a large number of European SMEs that does not export at all (EC, 2007b, p. 44). Only around eight percent of the European SMEs had export turnover in 2005. (This number differs from the stated number in chapter 2.2 of 11 percent export because firstly it was from the period 2006-2008 and secondly it was elaborated in a different study. Nevertheless, in order to calculate the export turnover, the proportion of income of exports has to be used, which is only given in this study.) Across the EU, the differences are high. While Germany and the UK reported a higher involvement in exports than the EU-27 (respectively 9% each compared to 8 percent), Italy, the Czech Republic, France and Spain were below the EU 27 average.
10% 8% 6% 4% 2% 0% EU 27 Germany France UK Italy Spain Czech Republic 8% 9% 6% 9% 7% 7%

3%

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).

3. Contribution to the economy

49

Any export turnover in % SMEs Micro Small Medium-sized LSEs Manufacturing Construction Wholesale and retail Hotels and Restaurants Transport, storage and communication Financial intermediation Real estate, renting and business activities Health and social work Other community, social and personal service Size class 8 7 13 24 28 14 5 12 1 9 2 6 2 3

Proportion of income from exports in % 4.6 5.0 7.9 14.9 19.4 7.8 2.0 5.9 0.8 9.0 1.7 4.2 0.4 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 €) 11,877,533.5 8,783,746.3 Proportion of income from exports (%) 4.6 19.4 Export turnover (in € / %) 546,367 / 24 1,704,047 / 76

SME activity sector

X

=

SMEs LSEs

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.

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50

3.3 3.3.1

Brazil 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 Brazil % North % Northeast % Southeast % South % Mid-West % Small Medium-Sized 33,597 0.6 1,542 0.8 4,674 0.5 19,164 0.6 6,011 0.4 2,206 0.5 SMEs LSEs Total

5,486,649 300,047 94 5.1 182,634 92.2 810,720 94.1 12,983 6.6 43,316 5.0

5,820,293 17,777 5,838,070 99.7 0.3 100 197,159 99.6 858,710 99.7 836 0.4 2,609 0.3 197,995 100 861,319 100

2,783,357 162,694 93.5 5.5 1,314,549 95.2 395,389 93.8 58,078 4.2 22,976 5.4

2,965,215 10,500 2,975,715 99.6 0.4 100 1,378,638 99.8 420,571 99.7 2,656 0.2 1,176 0.3 1,381,294 100 421,747 100

Table 19: Number of enterprises, 2008, Brazil
(Source: Sebrae, 2010, p. 34)

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51

Table 19 gives an overview of the number of enterprises of Brazil as a whole and of its five main regions. In all of the five regions, the SMEs are represented by at least 99.6 percent. Consequently large scale enterprises count only for the minor part, which ranges from 0.2 to 0.4 percent in the five big areas. Within the SME sector (micro, small and medium-sized), it is interesting to see that each region reflects more or less the same proportions for each enterprise size. The importance of the micro enterprises is seen in each of the five regions.

Density of SMEs The density of SMEs is the number of SMEs per 1,000 inhabitants. In the year 2008 the density of SMEs was about 30.4 in the Brazilian economy. According to the World Bank (2011b) the population was 191,543,237 in that year.

Average size of an enterprise Having a look at the average size of an enterprise in Brazil, it clearly underpins the importance of micro enterprises. Brazil reached an average of 4.2 persons employed per enterprise, while the five regions show a similar picture.

Development of the number of Brazilian SMEs During the last years, the number of Brazilian SMEs has steadily been growing: According to Sebrae (2010, p. 35), the total number of enterprises in Brazil grew, in absolute numbers, from 5,640,870 in 2007 to 5,838,070 in 2008. Considering the SME sector, the number of SMEs in Brazil increased from 5,624,222 in 2007 to 5,820,293 in 2008 which gives an average growth rate of 3.5 percent. In September 2008, Sebrae published a presentation with a forecast for the period 2009 – 2015 of micro and small enterprises in Brazil. Since the medium-sized enterprises play a minor role in Brazil (0.6%), Sebrae focuses only on micro and small enterprises, which represent about 99.1 percent of all enterprises.

3. Contribution to the economy

52

According to this study the following number of micro and small enterprises has been observed: 4.1 million (2000), 5.0 million (2004), 6.8 million (2010) and 8.8 million (2015), whereupon

10,000,000 8,000,000 6,000,000 4,000,000 2,000,000 0 2000 2004 2010 2015

the number of the years Figure 17: Development of the number of micro 2010 and 2015 are and small enterprises, 2000-2015, Brazil
(Source: Sebrae/SP, 2008)

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 Brazil % 6,112,602 24.5

Small 6,914,631 27.7

MediumSized 3,988,142 16.0

SMEs 17,015,375 68.3

LSEs 7,908,324 31.7

Total 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

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
Millions 20 16 12 LSEs 8 4 0 2000 2002 2004 2006 2008 SMEs

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

Figure 18: Development of employment in is SMEs and LSEs, 2008, Brazil facing the problem that a (Source: Sebrae, 2010, p. 179) following table. Brazil 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 9.4% 10.0% 11.4% 5.0% 4.2% 2004 10.1% 8.3% 11.6% 10.5% 15.3% 2006 11.2% 9.4% 12.1% 12.8% 18.3% 2008 13.0% 9.6% 14.9% 15.0% 20.2%

SMEs Micro Small Medium-sized LSEs

Table 21: Growth rate of persons employed, 2002-2008, Brazil
(Source: Sebrae, 2010, p. 179)

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.

Commerce Service Industry Construction 19.8 17.8 20.3

37.8 23.0 24.7 28.4 9.0

35.9

9.9 48.1

16.4

26.0 28.3

31.4 23.0

Micro

Small

Medium-sized

Large

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

3. Contribution to the economy

55

more jobs than medium-sized enterprises, respectively 24.5 percent). This shows that the significance of medium-sized enterprises for the Brazilian economy should not be undervalued. Although micro and small enterprises represent more than 99 percent of all Brazilian companies, they attribute this low volume (20% of GDP). Whereby it is not said how this 20 percent was calculated or which calculation approach has been used. This issue definitely has to be looked into in the future. Furthermore, Carlos Alberto dos Santos stated the following:
"We have entered a cycle of sustainable development, with decreased concentration of income and reducing disparities. The outlook for the coming years is very good. We must work now on the quality of development and growth and not the quantity” (translated by the author from Portuguese into English: “Entramos em um ciclo de desenvolvimento sustentado, com diminuição da concentração de renda e redução das disparidades. As perspectivas para os próximos anos são muito boas. Precisamos trabalhar agora na qualidade do desenvolvimento e do crescimento e não no quantitativo”) (Agência Sebrae de Notícias, 2010).

He noted that about 52.2 percent of the labor force are employed by micro and small enterprises (68.3 percent by SMEs) and noted the challenge of doubling the importance of these enterprises in GDP over the next ten years. This can only be reached by increased productivity, efficiency and competitiveness of SMEs.

3.3.4

Productivity

There are no exact numbers of the productivity of Brazilian SMEs available, but when comparing the number of employed persons in SMEs with their contribution to the Brazilian GDP, it implies that the productivity in SMEs is very low. Moreover the current president of Sebrae, brought up in an interview in September 2010, that the productivity is too low and has to increase in SMEs (Agência Sebrae de Notícias, 2010). To be more concrete, in 2008 around 99.7 percent of all Brazilian enterprises accounted for SMEs, which created 68.3 percent of all persons employed. But Brazilian SMEs (micro and small enterprises) contributed only to 20 percent of the GDP. This leads to the presumption, that productivity and the efficiency of

3. Contribution to the economy

56

Brazilian SMEs are considerably low. But it has to be considered that the amount of contribution by SMEs (micro and small enterprises) to GDP (20%) is not a good basis and seems tremendously small. Another indicator, like the education of the workers, indicates that the productivity is low. More than 43 percent of the workers employed in SMEs did not finish high school (in Brazil the high school is from the 10th grade until 12th grade) (Sebrae, 2010, pp. 155-160). Another 45 percent finished high school but did not finish the university. Furthermore, which is a general problem of SMEs, they cannot profit from the economies of scale-advantage, have less resources to train their workers and have difficulties to develop innovations. Due to the aforementioned reasons, productivity tends to be low but since the data are insufficient and some of the data are even put into question, this issue has to be looked at in more detail.

3.3.5

Export turnover

According to Sebrae (2009, p. 57) the total export turnover in the year 2008 was US$ 197,597.8 million (exports realized by individuals is excluded). SMEs play an important role in the contribution to the export value because around one fifth of the export value has been attributed by SMEs. This proportion is highly dependent to the medium sized company, which accounted, in 2008, for 11.7 percent of the total value exported. The micro enterprises accounted for 0.1 percent, small enterprises represented one percent of the total turnover exported and the micro and small special size 6.8 percent.
“Micro and Small Special” 13,482.8 6.8

Micro Brazil % 184.6 0.1

Small 2,072.3 1.0

MediumSized 23,092.5 11.7

SMEs

LSEs

Total

25,349,4 158,765.5 197,597.8 19.7 80.3 100

Table 22: Export turnover (in million US$), 2008, Brazil
(Source: Sebrae, 2009, p. 57)

3. Contribution to the economy

57

However, it is possible to see from the figure below that the relative participation of SMEs in the total export turnover has been decreasing since 2004.
100%

75%

50%

LSEs SMEs

25%

0%
2004 2005 2006 2007 2008

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.
Million (US$)

40

41

37
34

37

35

31
28 29

27 25 2004 2005 2006 2007 2008

Figure 21: Development of the export turnover for SMEs in absolute numbers, 2004-2008, Brazil
(Source: Sebrae, 2009, p. 57)

3. Contribution to the economy

58

From this seemingly paradox information, some conclusions can be drawn. Firstly, that the growth of large companies in the export turnover is much higher than that of SMEs. This is due to the fact that large scale enterprises had many benefits from the booming in the world trade during this period (Sebrae, 2009, p. 9). Their exports had a greater share of commodities, which had a great rise of demand as well as the price. Secondly, SMEs had problems with the exchange rate evaluation and the rise of the real wage in Brazil, since their exports are more concentrated in goods that require intensive labor force. These products are traditionally very sensitive to changes in the exchange rate. Furthermore they also suffered from a strong international competition, especially from the Asian market.

3.4 3.4.1

Argentina 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 Argentina % 344,890 71.2

Small 105,259 21.7

Medium-Sized 25,565 5.3

SMEs 475,714 98.2

LSEs 8,830 1.8

Total 484,544 100

Table 23: Number of enterprises, 2009, Argentina
(Source: MTEySS, 2011)

3. Contribution to the economy

59

Density of SMEs The density of SMEs is the number of SMEs per 1,000 inhabitants. In the year 2009 the density of SMEs was about 11.9 (with a population of 40,062,470 (The World Bank, 2011c)).

Average size of an enterprise The average size of an enterprise is the total number of persons employed per enterprise. In the year 2009, the average size of an enterprise in Argentina was 10.3.

Development of the number of enterprises During the last years, the number of enterprises has been steadily growing. During the period 2002 to 2009 there was an increase of 38 percent in the number of enterprises (MTEySS, 2011). As can be seen in the figure, the number of large enterprises has been growing more compared to SMEs. It had an increase of 64 percent during this period, while the number of medium-sized enterprises increased by 55 percent, the number of small and micro enterprises by respectively 49 percent and 34 percent. Comparing the year 2009 to 2008, the number of micro enterprises went down by two percent, the
70%

growth rate from small and mediumsized enterprises is also slowing down, respectively a

60% 50% 40% 30% 20% 10% 0% 2003 2004 2005 2006 2007 2008 2009 LSEs Medium-sized Small Micro

growth rate of two percent and one

percent (compared Figure 22: Development of the number of enterprises, 2003-2009, Argentina to 2008, respect(Source: MTEySS, 2011)

ively 5% and 5%). This is due to the crisis, which especially hit SMEs.

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.
MediumSized 990,513 19.9

Micro Argentina % 630,346 12.7

Small 955,181 19.2

SMEs 2,576,040 51.8

LSEs 2,394,523 48.2

Total 4,970,563 100

Table 24: Number of persons employed, 2009, Argentina
(Source: MTEySS, 2011)

Development of the number of employment Between the period from 2002 to 2010 there was an overall growth rate of 63.8 percent (in 2002: 3,024,006 and in 2010: 5,163,419 workers employed). The number of employment in large and micro enterprises rose more than the overall growth rate with respective 68.7 percent and 67 percent. Small (60.2%) and medium-sized enterprises (54.6%) were below the overall growth rate. In the year 2009, the number of employment decreased in each size class. But the recovery was fast because in the year 2010 it exceeded already the number before the crisis.

3. Contribution to the economy

61

0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 -0.1 LSEs Medium-sized Small Micro

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
Service 11.3 16.0 20.4 52.3 Commerce 23.0 27.6 15.2 34.3

employment generated by each size class, divided by sector.

Industry

6.9

19.1

23.0

51.1

Micro

Small

Medium-sized

LSEs

Figure 24: Number of persons employed by sector and by size class, 2009, Argentina
(Source: MTEySS, 2011)

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.

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.

Industrial SMEs

Industry average

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)

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 Figure 26: Export turnover, 2005, Argentina the sales abroad.
(Source: CEPAL, 2006, p. 12) 89.3% LSEs SMEs 10.7%

3. Contribution to the economy

64

Another noteworthy fact is that the average of price/ton of exported good is higher the smaller the firm is (CEPAL, 2009, p. 47). This shows that the products exported by SMEs in Argentina in general have a higher aggregated value than that of LSEs. The average price per ton exported by micro and small enterprises amounts to US$ 1,064, while the medium-sized enterprises account to US$ 871. Moreover, the LSEs export the proportion of US$ 382 per ton, what is almost three times less than the value for SMEs.

3. Contribution to the economy

65

3.5

Comparison

In Europe, Brazil and Argentina the majority of enterprises are SMEs. Europe and Brazil have roughly the same share (respectively 99.8% and 99.7%). In Argentina the share is lower (98.2%) but still remarkable high. Within the SME group, it is noteworthy that the micro enterprises play a significant role. Whereupon Brazil has the highest share of micro enterprises (94%) and Argentina the lowest (71.2%). Another interesting fact is that in Argentina the small (21.7%) and medium-sized (5.3%) enterprises have a very high share compared to Brazil (5.1% small and 0.6% medium-sized) and Europe (6.9% small and 1.1% medium-sized). To sum it up, in Brazil and in Europe there are more enterprises that are classified micro and in Argentina are more enterprises that are classified as small or medium-sized. Due to this fact, in Brazil, for instance, there is more specific support for micro and small enterprises, while medium-sized enterprises are disregarded. The density of SMEs shows that in Europe there are more SMEs per inhabitant (41.7) when compared to Brazil (30.4) and Argentina (11.9). This shows the importance of SMEs in Europe and Brazil, which is significantly lower for Argentina. When regarding the average size of an enterprise, the importance of SMEs, especially of micro enterprises, for Europe and Brazil, becomes clear. In Europe the average size of an enterprise consists of 6.4 employees and in Brazil of 4.2 employees. Argentina has around 11.9 employees, which again shows that in Argentina the enterprises tend to be larger. In both, Europe and in Brazil, SMEs create more than two thirds of the jobs and therefore are an important source of jobs. Argentinean SMEs contribute to only about half of all jobs. It is important to mention that in Europe and in Brazil the micro enterprises create surprisingly many jobs (respectively 29.7% and 24.5%), although they are so small. In Argentina it is the opposite situation, the bigger SME size classes (small and medium-sized) contribute to more jobs. The smaller the SME, the more likely it is active in the service or commerce sector, due to the fact that a service business in general does not require a high

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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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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
Total Micro Small Medium-sized Density of SMEs (per 1,000 inhabitants) Average size of an enterprise (employee/enterprise) Number of Total persons Micro employed by Small SMEs Medium-sized Number of SMEs Micro Sector with most Small persons employed Medium-sized Contribution to GDP Labor productivity (1,000 Euro/occupied person) Export turnover 99.8% 91.8% 6.9% 1.1% 41.7 6.4 67.4% 29.7% 20.7% 17.0% Service Construction, Service Manufacturing 58% 40.3 24% Rating

Brazil
99.7% 94.0% 5.1% 0.6% 30.4 4.2 68.3% 24.5% 27.7% 16.0% Commerce Commerce, Construction Construction, Industry 20% n.a. (low)* 19.7%

Rating

Argentina Rating
98.2% 71.2% 21.7% 5.3% 11.9 10.3 51.8% 12.7% 19.2% 19.9% Commerce Commerce Industry 40% low** 10.7%

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
4.1

Challenges SMEs face
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 environment, which originate from different forces like political, economic, sociocultural, technological, legal and environmental forces. This chapter describes in which environment European, Brazilian and Argentinean 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 4.2.1

Europe 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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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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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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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 understood 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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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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4.2.4

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 20092011: Micro - 4.6 0.9 1.7 Small - 5.7 0.8 1.9 Medium-sized - 6.4 1.0 2.2 SMEs - 5.5 0.9 1.9 LSEs - 6.5 1.1 2.4

2009 2010 2011

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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The impact of the crisis on production was especially in the short-run on mediumsized 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 -1.0 -1.8 -0.8 Small -2.1 -1.8 -0.4 Medium-sized -3.5 -1.3 0.1 SMEs -1.9 -1.7 -0.5 LSEs -3.9 -1.0 0.6

2009 2010 2011

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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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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(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 4.3.1

Brazil 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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Starting a Business (rank) Procedures (number) Time (days) Cost (% of income per capita)

128 15 120 7.3

Paying taxes (rank) Payments (number per year) Time (hours per year) Total tax rate (% of profit)

152 10 2600 69

Dealing with construction permits (rank) 112 Procedures (number) 18 Time (days) 411 Cost (% income per capita) 46.6
(Source: The World Bank, 2010, p. 152)

Closing a business (rank) 132 Time (years) 4.0 Cost (% of estate) 12 Recovery rate (cents on the dollar) 17.1

Table 28: Indicators from the report ‘ease of doing business 2011’ for Brazil

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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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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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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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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4.4 4.4.1

Argentina 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 20052007 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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100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 8% 5% 5% 4% 2008 Other countries Rest of Latin America Brasil 9% 6% 5% 2% 2009 EU Rest of Asia China 4% 4% 3% 3% 2010 34% 30% 29% 44% 48% 57%

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.

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With suppliers regarding the delivery conditions of inputs and raw materials With suppliers regarding the buying price of inputs and raw materials With suppliers regarding the payment terms With the clientes regarding delivery conditions of the enterprise's products With clients regarding the selling prices of the enterprise's products With clients regarding the payment terms Monthly Quarterly

48% 60% 48% 46% 45% 45% Semiannually

31% 30% 29% 28% 34% 31% Annualy

12% 9% 8% 3%

13% 9% 14% 11% 17% 4% 14% 10%

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.

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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
Insufficient to increase capacity Sufficient to increase capacity

43% 61%

50% 31%

SMEs argued that the installed capacity is sufficient to expand. However,
Insufficient to 100% of capacity
7% Eletric Power 8% Gas

this input is not as prev- Figure 29: Electric power/gas and industrial SME alent for production as capacity, 2006, Argentina
(Source: CEPyMECE (Centro PyME), 2006)

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

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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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4.5

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 knowledgebased 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
5.1

Coping in a turbulent environment
Europe Brief introduction

5.1.1

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, takeovers, 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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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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Micro Small Visits to expos/trade fairs Courses/seminars/conferences provided by own personnel Courses/seminars/conferences provided by external trainers Study visits Job rotation (in-house or in other firms) Tutor/mentoring activities for staff Promote reading of professional literature Co-operation with consultants and advisers for developing internal competence Meetings amongst personnel for knowledge exchange Other activities Do not know/no answer % of SMEs not involved in any of the suggested methods % of SMEs not having formal training activities Average number of methods applied by enterprises 57 19 39 17 8 10 36 21 32 4 0 20 61 3.1 70 38 56 22 17 20 39 32 46 5 0 9 44 3.8

Mediumsized 78 54 70 41 29 27 58 39 56 5 0 4 30 4.8

Total 58 21 41 18 9 11 37 22 33 4 0 19 59 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 nonformal 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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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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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 Recruitment of personnel with required new competence Auditors & Banks Consultants Clients and/or suppliers Other entepreneurs (no business relations) Training centres/ Universities (public or private) Business and Trade Associations Public authorities Other actors Don't know/ no answer
(Source: EC, 2003b, p. 25)

Small

Mediumsized 48 26 35 40 16 35 36 17 4 2

Average

13 14 18 33 13 15 20 8 5 1

27 20 24 34 12 27 26 9 3 2

14 14 18 33 13 16 21 8 5 1

Table 30: Sources of external competencies, 2003, EU-19 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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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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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 15 24 35 37 26 60 1 Small 28 43 56 55 47 56 1 Medium-sized 37 51 68 64 68 67 1 Average 16 26 36 39 28 60 1

Manual, low-skilled workers Semi-skilled (e.g.drivers, machine operators) Technicians, engineers Clerks, administrative personnel Middle management foremen Directors and managers Don't know/no answer

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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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 mediumsized: 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 nonexporting SMEs (EC, 2003b, pp. 32-33). Exporting SMEs encounter much higher

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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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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 cooperation 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 cooperations. This means that European SMEs tend to have non-formal cooperations.
Model of co-operation Percent of SMEs Comment No co-operation 49% Non-formal co-operation only 25% In total 38% non-formal co-operation Formal and non-formal co-operation 13% In total 25% formal co-operation Formal co-operation only 12% Missing/non-respondents 1% Total 100%

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

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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.
50 40 30 20 10 0 Micro Formal co-operation Small Medium-sized Non-formal co-operation

Figure 30: Formal and non-formal cooperation by enterprise size
(Source: EC, 2004b, p. 23)

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 cooperations. 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.

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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 cooperation. 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).
Business service Transport/ communication Manufacturing Wholesale Personal service Construction Retail 0 10 Non-formal 20 Formal 30 40 50

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 cooperate (EC, 2004b, pp. 27-29). Around 66 percent of them have less than seven

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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.
35 30 25 20 15 10 5 0

Non-formal Formal

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.

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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.
50 40 30 20 10 0 Once or less Once per half Once every per year year month Micro Small Once every Several times Don't know/ week per week no answer Total

Medium-sized

Figure 33: Contact frequency in SME co-operation (in percentage of European SMEs)
(Source: EC, 2004b, p. 32)

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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 cooperate 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 Figure 34: Duration of SME co-operation (in percentage of European SMEs) early stages. (Source: EC, 2004b, p. 33) 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.
80 60 40 20 0 Less than one year Micro 1-2 years Small 3-5 years More than 5 years Total

Medium-sized

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

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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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areas the companies are more likely to pay attention when hiring new employees and when offering training: Team working capacity 53% 59% Crosscultural abilities 40% 35% General communication Creativity skills 54% 46% 64% 50%

Negotiation skills 43% 49%

Small Medium-sized

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: Involve Internet-based Testing potential users discussion products by in innovation forums potential users activities 12% 25% 22% Small 15% 28% 26% Medium-sized Table 34: Indicators of open innovation
(Source: EC, 2009h, p. 42)

Share or exchange intellectual property 20% 26%

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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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 30.8% 17.3% 73.2% 13.5% 44.3% 26.7% 8.3% Medium-sized 42.2% 28.2% 78.5% 16.8% 56.5% 32.1% 11.4%

Research and development within the company Research and development performed for the company by other enterprises or by research organizations Acquisition of new or significantly improved machinery, equipment and software Purchase or licensing of patents, inventions, know-how, and other types of knowledge Training to support innovative activities Design (graphic, packaging, process, product, service or industrial design) Application for a patent or registration of a design 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 mediumsized 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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5.2 5.2.1

Brazil 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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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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when comparing the active with the extinct micro and small enterprises. Amongst other things, Sebrae analyzed the participation in co-operations.

2000/2002

Extinct Active Extinct Active Extinct Active Extinct Active 0% 20% Do not co-operate

90% 85% 96% 88% 99% 90% 93% 88% 40% Co-operate 60% No answer 80%

4% 6% 8% 7% 3% 1% 10% 2% 1% 8% 1% 7% 7% 10% 2% 100%

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

2005

2004

2003

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

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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.
92% 67% 48% 86% 77% 64% 47% 58% 42% 72% 65% 53% 43% 30% 17%

Production volume

Total income of Productivity per Average wage Total number the SME employee per employee of employed persons Highly Innovative Innovative Non-Innovative

Figure 36: Comparison among highly innovative, innovative and non-innovative SMEs
(Source: Sebrae/SC, 2010a, p. 3)

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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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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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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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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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5.3 5.3.1

Argentina 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 noncompetitive 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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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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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 cooperation, 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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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

35% 32% 28% 26% 25% 23% 23% 23% 20% 19% 17% 14%

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

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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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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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5.4

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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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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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

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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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 cooperations 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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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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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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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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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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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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Appendix 12: Evolution and growth rate of employment in Brazil (20002008)

(Source: Sebrae, 2010, p. 179)

Appendix 13: Employment by sector in Brazil (2008)

(Source: Sebrae, 2010, p. 182)

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

130

(Source: Sebrae, 2009, p. 57)

8. Bibliography

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8

Bibliography

Please note that the paper has been written according to the Harvard System of Referencing. References in the text that do not name page numbers (pp.) refer to internet sources.

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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

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