Introduction
In this generation, entrepreneurship is becoming a major field of business. As lifestyles change, more people desire to be their own managers instead of being managed under another.
There has also been an increase in the number of entrepreneurs worldwide. We will focus on the distinction between entrepreneurships in the U.S. and Brazil[MSOffice1]. We hope to gain insight into the differences in entrepreneurial activity imposed by the cultural, legal, and economic conditions.
In order to do this, we will look at the effective policies for enhancing entrepreneurial businesses and the key factors for entrepreneurial success. Then, we will compare the background of the U.S. and Brazil and study the existing differences of the entrepreneurial environment between the two countries. After that, we will talk about a specific state in Brazil, Paraiba.
Effective policies for enhancing entrepreneurship
Promoting entrepreneurship and enhancing the entrepreneur dynamic of the country should be an integral element of any government commitment to boosting the economic well being. Government programs and policies targeting the entrepreneur sector will have a significant impact on the level of activity. In order to be effective, the government programs need to:
- Be designed to encourage entrepreneur activity.
- Raise the participation of the age from 24-55 years old.
- Enforce the participation of women in entrepreneur programs.
- Have a long-term growth target focusing on increasing investment in education at the post secondary level (college, university, graduate program).
- Integrate skills and capabilities required to start up a business into specific educational and vocational training programs at all educational levels.
- Emphasize on developing individual capacity to recognize and pursue new opportunities
- Increase capacity of society to accommodate higher-level income disparity associated with entrepreneurial activity (9).
On a final note, government, public policy officials, and opinion leaders are the ones who can create a culture that validates and promotes entrepreneurial activity throughout society (2).
Key factors for differences in entrepreneurial activity between the U.S. and Brazil:
The study done by Babson College, the London Business School, and the Kauffman Center for Entrepreneurial Leadership, shows one in every eight people starts a business in Brazil. In the United States, it is one in every ten or twelve people who starts a business (10). The factors this study mentions, which are essential to entrepreneurial success, are:
- Entrepreneurial capacity, which deals with the motivation and skill to take advantage of the opportunity (10). The entrepreneur needs to understand the demands of his/her position. This way the entrepreneur can access if he or she has the necessary qualities to undertake the challenge. An entrepreneur needs to be persistent, adaptable to a changing environment, and tolerant to instability. An entrepreneur also needs to have leadership skills consisting of organization, charisma, and the ability to inspire others.
- Infrastructure, which is the availability of financing, land, facilities, employees, suppliers, government assistance, utility costs, transportation, tax concessions, etc (10). The entrepreneur needs to understand the business environment and infrastructure available. This way he/she can formulate a viable business plan.
- Demographic make-up of population, which includes age, gender, and population growth (10). The entrepreneur needs to understand the above factors to market its product. Therefore, this information should be available in the business plan. One may also argue that in an older age bracket environment, one may find more financing.
- Education
(10). This is important
because entrepreneurs need to have enough business knowledge to make
effective and efficient decisions.
Education is also a prime concern for entrepreneurs that need a
specialized workforce.
- Culture, which includes expectations and participation of women in new business start-ups, acceptance within the country of difference in the level of income among individuals and respect for start-ups (10). There is a greater acceptance of women in the workforce, and a growing number of women have been running businesses successfully. This trend is happening due to a new attitude of all-around economic self-sufficiency for women, and for existing business being open to change (14).
Country Backgrounds
Legal System
Brazil and the United States differ in many areas. Even though both countries are federal republics, they have different legal systems. For instance, the justice system in the United States is based on English Common Law and the judicial review of legislative acts. The Brazilian legal system, on the other hand, is based on Roman codes. The main difference between these systems is that, in America, a ruling in one case influences all future related cases, while in Brazil, the laws and punishments remain outdated due to the difficulty of law code changes and the fact that one ruling does not influence future cases of the same nature.
Economic and Demographic Conditions
Brazil and the United States also vary in economic conditions. According to the World Bank, Brazil has a population of 170.1 million people, with a population growing at 1.3% (6). On the other hand, the United States has a population of 278.1 million people, with a .9% growth rate (6). Although the United States has a higher population, the growth rate is significantly smaller. The previous data is evidence of the correlation between development and population growth. A small growth rate is a factor of countries with better standards of living. According to the World Fact Book (16), from the CIA, 97% of Americans are literate compared to only 83% of Brazilians. We see a strong association between literacy and income, which is further backed up by our findings that Brazilian GDP per capita is $6,500 and in the U.S. it is $36,200.[1] This suggests Brazil’s literacy rate is lower than that of the United States, assuming that a high growth rate is due to population lack of education and skills.
The higher population growth rate of Brazil is also correlated with a higher percentage of younger people. About 29% of Brazilians are between 0 and 14 years and about 5% are 65 years and older. On the other hand, only about 21% of Americans are between 0 and 14 years old, while 13% are 65 years and over[2]. The data obtained helps us make assumptions between Brazil and America. For instance, it is possible that younger people are more risk takers than older people. Also, it is probable that older people are more investors and savers. Therefore, we can assume that one of the reasons Brazil has more entrepreneurs is because there is a higher youth population than the United States.
Table I
Source: (6)
Government Intervention
The government plays a role in small business success. The government does not do much financing in new industries in Brazil. However, the Brazilian government has opened up state owned companies to private investors[3] in the areas of steel, petroleum, electricity and telecommunications. In fact, in 1995, Brazil ranked among World Bank’s upper middle-income countries. The United States has been a country whose laissez-faire government allows for little government intervention on privately owned business matters[4].
One of the main government contributions to small business success is the control of inflation. In 1990, Brazilian inflation reached 5000%. By 1996, inflation was reduced to 20%. As of today, due to the government intervention, inflation is at 7.1% (6). In 1991, the United States National Annual Inflation was of 3% (13). Recently, between 1999 and 2000, the inflation rate was 3.3% (13). As we can see, the United States has had a lower inflation rate then Brazil. Lower interest rates allow entrepreneurs to be more willing to ask banks for financing. A stable economy allows entrepreneurs to focus on other area of their business other than money devaluation management.
The Importance of Small Business in Brazil
Brazil is in the top tier of entrepreneurial activity and it’s expected that Brazil will have seven million small companies by 2005 (5). In fact, the small companies in Brazil are responsible for the absorption of a large number of employees. Small companies employ 59% of the population and pays 42% of the total income (12). In the United States, small companies were responsible for 26.6% of the population as of 1995. Please see Table II for data about the U.S. Small businesses are also very geographically flexible. Therefore, it allows more development in areas that otherwise would not be attractive to settle in. Small companies are also responsible for the creation of a national entrepreneurial business class with a management technique that is adapted to the countries own environment. In another words, the entrepreneurs of Brazil are the product of that environment and their management abilities are based on the need of the Brazilian businesses.
Table II
Source: (18)
The reasons for starting a business
In Brazil, there are two main reasons for entrepreneurs to start their own companies. They are to have money and to improve social status (12). The social and cultural values are what encourage a new enterprise. It is the prerequisite and defining feature of an entrepreneurial society. Like in America, having your own business is seen as a sign of independence and success in Brazil. Along with this, people desire to have a better quality of life.
Problems of small companies in Brazil
Brazilians encounter many problems in trying to start up and manage a small business. The first major problem is the lack of government incentive for the creation and development of small businesses. One of the differences between the American entrepreneur and the Brazilian entrepreneur is that the latter has to deal with the “Brazilian cost.” The Brazilian cost is the complex and bureaucratic legislative procedures for the beginning and continuation of a company.[5] In comparison, it is not so costly to begin a business in America.
Another major problem with entrepreneurship is the lack of resources available to entrepreneurs. It is difficult for entrepreneurs to find and employ knowledgeable and technologically able employees. As noted earlier, the U. S. has a much higher literacy rate, increasing the chances to hire more educated employees.
Even if entrepreneurs do find knowledgeable employees, other problems usually arise. Entrepreneurs confront a drawback dealing with the lack of cash flow. Due to the volatility of the Brazilian market, and the risk taken by entrepreneurs, it is hard to find investors for the business. It is also hard to obtain financing, such as loans, credits, or leases. The United States has a much less volatile market, making them more able to take riskier investments.
Taxes
Another major difference between the United States and Brazil is the high taxes Brazilians have to pay. For instance, a family whose total income is $17,500 per year will be in the 30% tax bracket[6]. In addition, Brazilians pay many “hidden” taxes that are not easy to be quantifiable[7]. The cost of opening a company is so high that many do not register the business and operate on the black market. It is technically illegal to produce goods and services without being registered in the Ministerio da Fazenda. This causes many problems for the country itself, because they are not receiving the tax money, but also for the company since they cannot commercialize their business to the open market. In fact, they have to limit their market so they are not discovered, or they will be closed down. Those companies that do not register themselves employ people who cannot declare income taxes. If the employee is fired and decides to sue the company, the Ministerio will discover it and take proper actions.
Although small businesses are common, they often not last due to a deficient entrepreneurial management. Anielson Silva (12) also believes that small companies in Brazil are becoming social-political institutions by taking social responsibilities. The reason social responsibility can be a problem is because some companies’ main goals shift from creating wealth for the owners to improving the economic conditions of Brazil. The shift to social goals may create inefficiencies and high costs leading to the closure of the company.
The Paraiba Case
Paraiba is one of Brazil’s 26 states. It is located in the Northeast of Brazil. Paraiba suffers from recurring droughts that contribute to the suffering of its people. It is considered one of the poorest state in Brazil due to its low contribution to the country’s GDP. In Paraiba, the “social status” gained by owning small companies is more visible than in other states. The reason is because there are not many large companies headquartered in the state, and the higher social groups are the politicians and entrepreneurs.
Mr. Bruno Queiroz
We interviewed two Paraiban entrepreneurs and one Pernabucan entrepreneur. Mr. Queiroz, the entrepreneur from Pernambuco[8], owns a marketing company called Cartelo. He opened up his company using his own capital, because it is cheaper than borrowing from banks. Mr. Queiroz believes that the main problem he faces as an entrepreneur is the lack of a specialized workforce. The people available for employment have a well-rounded background, but do not focus their studies in any specific area.
Mr. Luiz Dantas
Luiz Salvio Galvao Dantas, is the owner of a construction company, Lareira Construtora e Imobiliária LTDA, and a bentonite mining company, Bentonisa Bentonita do Nordeste S.A.. He says that when he started his most successful company in 1977, at the age of 31, he did not have a business plan. Right now, after years of practical learning experience, he implemented the ISO 9000 quality program and had to create quality procedures for the company. He believes the company’s main purpose is to serve clients, shareholders and the community. Mr. Dantas said the main problem he had starting the company was finding capital. He found capital by getting a project approved by Sudene. At that time, Sudene was an government institution responsible for the development of obsolete areas. Sudene financed Bentonisa, the bentonite mining company, by creating public shares for the company, buying the shares and trying to sell them at a secondary market.
Sudene was responsible for the starting of many companies. However, it was closed down due to ineffectiveness of operations and employees corruption. The stock market Sudene tried to create still exits today but fails terribly. Dantas thought it was hard to get a group of partners to invest in the other assets not financed by Sudene. There were many partners who decided to quit in the middle of the process, and Mr. Dantas had to come up with capital to pay the partners that quit for their investment.
Mr. Dantas believes that the main problem he suffers as an entrepreneur is high taxes and high interest rates. This goes along with the difficulties encountered by every Brazilian entrepreneur, as we mentioned before.
Bentonisa’s management team meets monthly to make immediate decisions and also every six months to set goals and evaluate performance. The company’s annual revenues are of R$ 6,000,000 (around $ 2,500,000) and he takes out R$ 144,000 per year. It is a family company, but he is proud of being able to make the final decisions.
One interesting fact Mr. Dantas added is that one of his first companies was a construction company, whose only client was the government. He specialized in public projects like the construction of schools and hospitals. That company, called Sotema, went bankrupt due to the government failure to pay for the services they ordered.
Mr. Dantas’ experiences as an entrepreneur are examples of characteristics seen in Brazilian entrepreneurship. The government, sometimes, is the one to promote the bankruptcy of companies by defaulting on payments. We see that there is a lack of government support of entrepreneurial ventures as seen in the United States. We also have shown that it is hard to finance a small business. We see that the manager learned as he worked on his job. He graduated with a degree in construction engineering. This shows that a higher level of education can be beneficial to the success of a small business.
Mr. Alexandre Dantas
Alexandre Dantas, the financial director of Bentonisa says “every once in a while, one of the Bentonisa’s investors shows up asking Bentonisa to repurchase its shares from him.” However, the company has no motivation to do so. Even though the investor may have access to some “privileged information”, management can legally manipulate the information and hide important data so the investor would not be able to sell the information. The investor voting rights are insignificant, and the company is not required to disclosure their financial statements. The stock has no liquidity; therefore the investor cannot sell it to anybody.
References:
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(2) Accessed on 02/10/02. <http://www.businessweek.com>
(3) Accessed on 02/10/02. <http://www.ybiz.com/directoryofresources/brazil.htm>
(4)
<http://www.lcweb2.loc.gov>
(5) Babson College London Business School, Ernst & Young UK and Coffman Center for Entrepreneurial Leadership. GEM Study 2000. Accessed on 02/17/02. <http://www.entrepreneurs.about.com/library/weekly>
(6) Country Information. World Bank Group. 2001 Accessed on 02/10/02. <http://www.worldbank.com>
(7) Dantas, Luiz Salvio Galvao. Telephone Interview. 17 February 2002.
(8) Dantas, Alexandre de Almeida. Telephone Interview. 17 February 2002.
(9) Effective Policies for Enhancing Entrepreneurial Businesses. Accessed on 02/17/02. <http://www.entrepreneurs.about.com>
(10) Key factors For Differences in Entrepreneurial Activity. Accessed on 02/10/02. <http://www.entreworld.org>
(11) Queiroz, Bruno. Email to the
authors. 19 February 2002.
(12) Silva, Anielson Barbosa. A
pequena Empresa na Busca da Excelencia. Editora Universitaria UFPB. Paraiba, pg. 17, 1998.
(13)
<http://www.boisechamber.org/area_demo/rates.htm>
(14) Mulher, Charlotte. Like father, like daughter. <http://www.entrepreneur.com/
Magazines/Copy_of_MA_SegArticle/0,4453,228103----1-,00.html> 1998. Accessed on 04/29/02.
(15) <http://www.odci.gov/cia/publications/factbook/geos/br.html> Accessed on 04/02/02.
(16) <http://www.odci.gov/cia/publications/factbook/geos/us.html> Accessed on 014/02/02.
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About the Authors
The authors of this study are Lila Dantas and Poppy Baumgartner. The two students currently attend Creighton University. Lila Dantas is majoring in finance, management information systems, and international business through the College of Business Administration. She is currently a senior. Lila currently works as an intern in the Investment Management Division of Mutual of Omaha. She plans on going back to her home country of Brazil and become an entrepreneur herself. Poppy Baumgartner is majoring in finance through the College of Business Administration and is currently a junior.
Appendix A
The steps to open an entrepreneurship in Brazil:
- Elaborate a social contract and company constitution.
- Check with the urban service secretary to make sure it is possible to implement the company at the chosen address.
- Search in the Junta Commercial of the Municipio if the social reason and/or name of the company is already registered by another business. This is very costly.
- Formalize the constitution of the company in the Junta Commercial
- Receive the Cadastro Geral de Contribuintes that is issued by the Federal Revenue Services for tax payment purposes.
- Ask for a license at the firefighters office. Buy fire extinguishers and pay a fee according to the square feet of the company building.
- Register the company with the City Office to get the license to practice business in the chosen address. Pay a fee according to the location.
- Ask for a state application in your state office.
- Check for any other fees that might apply for your specific type of business.
The price to fulfill the previous steps will cost in between one and a half months to three months of minimal wage pay.
* Silva, Anielson Barbosa. A pequena Empresa na Busca da Excelencia. Editora Universitaria UFPB. Paraiba, pg. 20, 1998.