ENTREPRENEURSHIP AND VENTURE CREATION IN BRAZIL: KEY POLICY ISSUES
Renata Lèbre La Rovere, Pedro Vilarinhos, Tainá Albuquerque Bravo de Souza
InstituteofEconomics, Universidade Federal do Rio de Janeiro, Brazil
Abstract:
Recent research on entrepreneurship and venture creation suggests that there are several elements that frame the entrepreneurial ecosystem which may influence the decision to engage in entrepreneurial activities. The aim of this chapter is to present the results on Brazil of a research project whose main purpose is to identify the main elements of the entrepreneurial ecosystem in the BRIC countries. We first made a survey among ICT entrepreneurs concerning their perceptions on the relative importance of key elements of the entrepreneurial ecosystem that are: individual and personal characteristics; socio-cultural context; Government programs and policies; access to finance; access to information, opportunities for knowledge and skill building and exposure to global markets. We then made the same survey among non-ICT and non-entrepreneurs, to assess the specificities of knowledge-intensive entrepreneurs such as those in the ICT sector. We combined these quantitative surveys with a qualitative research where we interviewed entrepreneurs and policy-makers engaged in entrepreneurial support. Based on these results we propose some key policy issues to support entrepreneurship in Brazil.
Keywords: entrepreneurship, development, policies of support
1. Introduction
The importance of institutional and social factors for the success of enterprises is a subject that has been discussed by several scholars. Some of them, like Casson (2008) highlight the importance of individual capabilities of entrepreneurs. Most of the studies that focus on entrepreneurial capabilities, however, assume that the entrepreneur is a rational agent that will maximize gains obtained with allocation of resources, in line with the assumptions of the economic neoclassical theory (Brandão et al., 2011).
A different path of research related to the rationale of entrepreneurs is proposed by Saraswathy and Dew (2005); these authors propose that entrepreneurs, as agents with procedural rationality[1], set decision-making principles in a context of uncertainty, that leads them to focus on their own capabilities and use them to reach satisficing objectives framed by the business environment. In this same path, Aldrich and Wang (2014) suggest that the process where entrepreneurs learn how to deal with the challenges and opportunities of setting a business is continuous, starting with family influences in childhood and adolescence and continuing as entrepreneurs engage in setting their enterprises.
Other authors like Julien (2007) suggest that as institutions have an important influence on the decisions of entrepreneurs, it is important to consider the milieu[2] in order to understand how entrepreneurs act and position themselves in the market.Working with the concept of entrepreneurial ecosystem – that encompasses all elements of the milieu important to entrepreneurship - Manimala (2008a, 2008b), divides the main elements conducting to entrepreneurship in six main groups, that are:
- Individual and personal characteristics
- Socio-cultural context
- Government programs and policies
- Access to finance
- Access to information, opportunities for knowledge and skill building
- Exposure to global markets
The objective of this chapter is to present the results on Brazil of a research project that is investigating how these elements are perceived by entrepreneurs and what are the main policy implications of these perceptions. In fact, our research suggests that perceptions from Brazilian entrepreneurs on how to be successful are different from perceptions of policy-makers. The cognitive distance[3] between firms and support institutions leads to challenges that will be discussed in this chapter.
Support to entrepreneurs in Brazilhas been deemed as important by Brazilian institutions because most Brazilian firms are small and have limited resources that inhibit their innovation capabilities. Feldens et al. (2012) suggest that in Brazil there is a mix of individual and institutional characteristics that limits innovation activityby Brazilian small firms. As for individual characteristics, several entrepreneurs regard their business as alternatives to jobs and not necessarily pursue innovative activities. Those who search innovation frequently have a technical education and limited managerial capabilities and there is a tendency among entrepreneurs to centralize decisions and be resistant to new partners. As for institutional characteristics, Universities, especially public Universities that attract the best students, do not promote an entrepreneurial culture, a fact that was also observed by Campelli et al. (2011).
In addition, Government norms and regulations are a hindrance to create a new business and to get credit. It may also be noted that the domestic market is so huge that firms do not feel the need to export and thus be exposed to strong competition.Feldens et al. (2012) suggest that incubators fail to train start-ups in managerial capabilities. In fact, a survey made by Guimarães (2011) with high-tech firms located in incubators in the south of Brazil found that most entrepreneurs considered innovation costs, reduced access to finance and high economic risk as obstacles to innovation. Sarfati (2013) suggests that most public policies to support entrepreneurs in Brazil are in fact policies to give credit to SMEs and to support clusters and not policies to support innovation in SMEs. In his view Brazil should try to follow other countries such as Canada and Ireland that have specific policies of support to high-tech firms that have high rates of growth (gazelles).
Data compiled by the National Science Foundation (NSF) and the World Economic Forum (WEF) illustrate the challenges for Brazilian policy makers. According to NSF´s National Science Indicators 2014, Brazil`s R&D expenditures share in GDP was 1,16% in 2010, the highest ratio among Latin American countries and the second ratio among BRIC countries, behind China. The share of knowledge and technology industries in total industry (around 21%) is lower than the share of developed countries (32% on average) but similar to the other BRICS countries. However, the country ranks very poorly in some of WEF´s indicators published in the Global Information Technology Report 2013, such as business and innovation environment (126 in 144 countries) and skills (91 in 144 countries).In a study that compared institutional conditions for entrepreneurs from Brazil, China, India and South Korea, Brazil ranks last in general institutional environment, perception of institutional environment and regulatory environment (Gupta et al. 2012).
Despite this unfavourable environment, most entrepreneurs in Brazil open their business motivated by an opportunity (Scarpin et al. 2012) and entrepreneurs keep opening firms in high-technology sectors in Brazil. For example, the number of Brazilian companies in the Information Services and Software Industry grew 11.7% per year between 2007 and 2010, reaching a total of 73.387 enterprises in 2010. Of those, only 3.3% have more than 20 employees (Duarte, 2013).
2. Methodology
The research started in 2010 and was conducted in several steps. The first was to apply a pilot in-depth questionnaire with questions related to the six factors mentioned above to a group of 12 ICT enterprises. Of those, six enterprises were chosen between the 200 SMEs that had the largest growth rates in Brazil between 2007 and 2009 and six were start-ups located in Rio de Janeiro. ICT enterprises were chosen because, as they are in a knowledge-intensive sector, they tend to have shorter cycles of innovation than traditional industries, therefore suffering a strong competitive pressure.
Based on the in-depth questionnaires we devised an on-line questionnaire that was applied to 120 ICT enterprises that were contacted in large ICT conferences, by email and through social networks. Entrepreneurs had to classify elements linked to each factor as very important, medium importance, no importance or no opinion. In addition to the questions related to the six factors mentioned above, we also asked entrepreneurs to mention the three most important factors of success and the three most important factors of failure. After the process of validation we got 76 valid questionnaires. As a second round of validation further eliminated more 26 questionnaires,this chapter will present results of 50 questionnaires answered by ICT entrepreneurs.
Results of these questionnaires raised several interesting questions. We noted a strong bias of entrepreneurs towards considering their own capabilities as the most important for success in entrepreneurial activities. We also noted that elements that are considered in the literature as important for entrepreneurs such as entrepreneurial education, incubator activities and start-up programs were not deemed relevant. The questions that arose from this observation were the following:
1. Is the limited importance attributed to institutions a result of different perceptions of what is important for entrepreneurship when we consider entrepreneurs and policy-makers?
2. Is the focus on individual capabilities a specific result for knowledge-intensive entrepreneurs such as the ICT entrepreneurs?
In order to answer these questions, the next steps of the research were, first, to make in-depth interviews with institutions that may influence the decisions of ICT entrepreneurs and second, to apply the same online questionnaire to a group of 50 non-ICT entrepreneurs. We also applied the questionnaire to a control group of young non-entrepreneurs, to identify which of the elements of the entrepreneurial ecosystem listed above are perceived as important by potential entrepreneurs[4].
As we already presented the results of the interviews with institutions elsewhere (La Rovere and Melo, 2012), this chapter will focus on the results of the online questionnaires, applied to ICT and non-ICT entrepreneurs and the control group. It will also discuss key policy issues related to these results.
3. Results
3.1 ICT and Non-ICT Entrepreneurs
As mentioned before, the first question we raised was about how ICT entrepreneurs see themselves in the milieu. We asked entrepreneurs to state whether their individual abilities were important for success. The results revealed a strong perception among Brazilian entrepreneurs that individual characteristics are the main factor that guarantees success (see Figures 1 and 2). While taking risk is more important for non-ICT entrepreneurs, ability to organize the resources for start-ups are more important for ICT entrepreneurs.
This result may be explained by difficulties reported by the group of in-depth interviewees concerning organization of resources. According to this group, most entrepreneurs in the sector had difficulties to select employees, get financial resources and establish networks. Therefore, the entrepreneur ends up making decisions individually and in a daily basis and if he is successful he tends to believe that this stems from his own capabilities.
In contrast, a survey conducted by Bulgacov and Vicenzi (2013) with entrepreneurs from the south of Brazil showed that the most important individual characteristic for them is motivation and determination. On the other hand, taking risk had the lowest scores among all the possible answers, a fact that surprised the authors.
Figure 1: Importance of Individual and Personality Traits- ICT Entrepreneurs
Figure 2: Importance of Individual and Personality Traits- Non-ICT Entrepreneurs
When asked about the importance of the socio-cultural context, both ICT and non-ICT entrepreneurs gave more importance to opportunities for new venture creation and culture for encouraging innovation. However, they reckoned that Brazil is not a country where entrepreneurship is considered a good career choice; this result poses a challenge to policies to support entrepreneurs (Figures 3 and 4).
These results are in line with the ones obtained by Gupta et al. (2012) in their research, which compared the entrepreneurial environment of the so-called Rapidly Emerging Major Economies (REMEs): Brazil, China, India and South Korea. They collected surveys from business students from the four countries and the results showed that Brazil, compared to the others REMEs, has the worst environment for the creation of new ventures.
Figure3: Importance of Socio-Cultural Context – ICT Entrepreneurs
Figure 4: Importance of Socio-Cultural Context – non-ICT Entrepreneurs
While access to institutions such as Government agencies and banks could improve capabilities of entrepreneurs, institutions are not considered important (see Figures 5 and 6). Among the in-depth interviews, most entrepreneurs said that Government policies were not important; to our surprise, this was not mentioned only by very small entrepreneurs (which have limits to access institutions due to size) but also from entrepreneurs from medium-sized companies. Entrepreneurs seem to be very critical of the favourableness of Government policies.
It is important that Brazilians policy-makers can understand what is leading entrepreneurs to ignore the importance of Government support, so that they can work on new policies to help boost entrepreneurship. Lerner (2010) pointed out three main reasons why Government should support entrepreneurship: importance of innovations in economic growth; impact of entrepreneurship for developing innovations; and the historical evidence that shows that Government can in fact play an important role in developing entrepreneurial activity.
Figure 5: Importance of Government Programs and Policies – ICT Entrepreneurs
Figure 6: Importance of Government Programs and Policies – Non- ICT Entrepreneurs
When it comes to access to finance, the in-depth interviews revealed that most entrepreneurs from this group had used money from relatives and friends to start their businesses and just two companies had access to private equity financing. This reliance in their own resources explains why entrepreneurs do not view financial institutions as important, because companies try to keep growing with their own resources or by partnerships with customers and suppliers. As a result, they attribute a limited importance to access to bank loans and do not consider important access to Government subsidies (see Figures 7 and 8). This behaviour is coherent with the proposition of Blumberg and Letterie (2008) that most SMEs tend to get credit from commercial banks as this type of credit is given in an individual basis and does not affect the control of the entrepreneur over his business (differently from private equity operations, for instance).
Figure 7: Importance of Access to Finance- ICT Entrepreneurs
Figure 8: Importance of Access to Finance – Non-ICT Entrepreneurs
Concerning access to information for creating knowledge and skill building, results showed that surprisingly, entrepreneurs do not reckon the importance of interaction with educational institutions and with public agencies. The only training institutions considered relevant were industry associations and incubators (see Figures 9 and 10).
Figure 9: Importance of Access to Information – ICT entrepreneurs
Figure 10: Importance of Access to Information – Non-ICT entrepreneurs
Our results also show that Brazilian SMEs have a limited access to the external market. This may be explained by the fact that in recent years the internal market in Brazil has been expanding quickly, therefore SMEs do not feel stimulated to go to the external market (see Figures 11 and 12).
Figure 11: Importance of Internationalization – ICT Entrepreneurs
Figure 12: Importance of Internationalization- Non-ICT Entrepreneurs
3.2 The Control Group
The control group showed interesting results. Similar to the group of entrepreneurs, people from the control group attributed a great importance to individual traits. They also pointed opportunities of new venture creation and culture favourable to innovation as the more important elements of the socio-cultural context (see Figures 13 and 14). Like the entrepreneurs, they do not consider that Brazilian society praises careers linked to entrepreneurship. However, the perception on Government policies is remarkably different (see Figure 15).
Figure 13: Importance of Individual and Personality Traits- Control Group
Figure 14: Importance of Socio-Cultural Context – Control Group
Figure 15: Importance of Government Programs and Policies – Control Group
Concerning access to finance, the only element deemed relevant is access to bank loans, a result similar to the result of the group of entrepreneurs (see Figure 16).
Figure 16: Importance of Access to Finance – Control Group
Results concerning importance of access to information and internationalization were also similar to the results of the group of entrepreneurs. The most important elements for promoting entrepreneurship are support from industry associations and incubators. Internationalization is not considered important for success of a business (see Figures 17 and 18).
Figure 17: Importance of Access to Information – Control Group
Figure 18: Importance of Internationalization – Control Group
4. Discussion:
The results show that there are few differences between ICT entrepreneurs and entrepreneurs from other sectors. Both groups attribute a stronger importance to individual traits and rely on their own resources. They recognize few elements of the socio-cultural environment that may be important for their business and are sceptical about the possibilities of getting relevant support from Government. They also do not attribute much importance to interaction with universities and training institutions (excepting incubators) and do not seem much interested in globalization. The control group confirmed all these results, with the exception of the perception of Government policies. Whether this is related from the specificity of the control group is a question that deserves further investigation.
The picture that emerges from the questionnaires may lead to the conclusion that policy-makers in Brazil have not been attentive to the support of entrepreneurs. However, this is not the case. On the contrary, Brazil has many programs to support entrepreneurship, at the federal, state and local levels (La Rovere and Melo, 2012). When we had only the results from the ICT entrepreneurs, some specialists suggested that this self-made man culture was typical of the sector. Nevertheless the results of the non-ICT entrepreneurs show that this culture prevails also among entrepreneurs from other sectors.