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Workshop on "Internet Use in the Americas"Panel 3: Business Use of the Internet

CIDE, Mexico City, 16-17 June 2005

Small is Digital? IT & Internet Diffusion in Brazil's SMEs

Antonio José J. Botelho

Genesis Research Unit, PUC Rio, abotelho@dctc.puc-rio.br

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Agenda

1. Overview 2. Ornamental stones cluster3. Aeronautics cluster

4. Problems for SMEs in introducing and utilizing IT

5. Policy responses 6. Conclusions

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Agenda

1. Overview

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From 1996 to 2001, micro and small enterprises went from 3.1 million to 4.6 million Going from 98.9% to 99.2% o

total Generated 3.5 million new jobs

Whereas medium and large, only 686 thousand

Acounted for 14.5 million formal employment, 56.1% of the total

Micro and Small Enterprises in Brazil, 2001

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Exports are 15% of GNP (2003)Growth rate 58% (2004 to August) Exporting micro and small enterprises

represent over 75% of the country’s total export base, BUT account for less than 11% of exports by value

This share is further reduced to 5%, once excluded a select group of about 200 high exporting enterprises, made up mainly of trading companies and others

Exporting SMEs

Source: Markwald e Pessoa, 2003

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Brazil accounts for 1.7% of total global IT expenditures (contrast 1% world exports)

4.7% of GDP (2002) PC per 1,000 inhabitants of 7.5% (smaller

than world) Mobile growth rate 30% (above world) In 2003, electronic transactions in Brazil

(B2B, B2C, B2G, m-commerce and on-line retail) reached USD 47.2 billion (about 4% of world) B2B over 2/3; B2G = B2C

IT Development

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Less than 35% of the 5 million formal firmss have a computer

Of these, less than 40% have internet access

In São Paulo and other developed states these numbers are about 50%.

SMEs IT Diffusion

Source: FIESP, Pesquisa Perfil da Empresa Digital 2003/2004

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Half of SMEs do not have any intention of implementing Internet-based EDI

20% do not even have a website Among Micro enterprises

only 8% make use of B2B for sales 16% use it for purchases 8% do B2C.

Among Small enterprises 15% use B2B (purchases and sales) 11% do B2C.

SMEs IT Diffusion– São Paulo (FIESP)

Source: FIESP, Pesquisa Perfil da Empresa Digital 2003/2004

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Progress: 47 per cent of sampled enterprises (2002) make use of IT (“informatizadas”), versus 31 per cent in 1997 and just 19% in 1993.

On the one hand, diffusion in small enterprises reaches 61% and in services 47% of MSMEs have at least one computer, against 43% in retail.

On the other, of the micro and small enterprises without IT (53%), well over half (64%) indicated they did not see a real need or perceive a benefit in adopting IT tools

SMEs IT Diffusion– São Paulo (Sebrae-SP)

Source: FIESP, Pesquisa Perfil da Empresa Digital 2003/2004

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54 per cent of SMEs access Internet; Half of the IT users has only one

microcomputer IT use is greater in older firms, in the

industrial sector and in larger MSEs By contrast, IT use is smaller in MSEs in

the commerce and services sectors, in traditional activities and in smaller and newer enterprises

SMEs IT Diffusion– São Paulo (Sebrae-SP)

Source: FIESP, Pesquisa Perfil da Empresa Digital 2003/2004

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Internet access main uses are: 1- Banking services; 2- Government services; 3-News; 4-Communications (e-mail); 5-Research on business deals, prices

and suppliers 6-Website for advertisement of

business.

SMEs IT Diffusion– São Paulo (Sebrae-SP)

Source: FIESP, Pesquisa Perfil da Empresa Digital 2003/2004

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MSEs non-users of IT do not see a clear benefit in use of IT

Find it expensive for their current level of revenues Those opting not to invest in IT in the short term are

divided between those that see no need, those which already have the required IT resources or are

happy with their current level of use of IT.

Lack o human resources with specofic knowledge on how to best use IT to improve SMEs managerial processes

Barriers to IT diffusion

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Government regulations Privacy of data or security issues Lack of business law for e-

commerce Inadequate legal protection for

Internet purchases Internet taxation

Staff with e-commerce expertise

Cost of implemengting e-commerce

Barriers to e-commerce

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Agenda

2. Ornamental stones cluster

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In Brazil 6.6% of SMEs exports Brazil 7th largest exporter in volume

Exports growing faster than world

Espirito Santo: marble and granites (90%) Largest producer (47% of total) and exporter ($ 222

million or 52% of total; 10 largest just 6% of that) 24 thousand employees in 1,200 firms, mainly

SMEs, of which 12% exporters Horizontal cluster with ring structure governance Most advanced technologically

Characteristics

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Sindirochas trade group (1973) Organizes fairs Training (Sebare/Senai) Technological research (Cetemag)

Maqrochas (2004) : 20 associates Regional Action Program: vortal (Prossiga)

Static / Portuguese only Other (private) websites:

Marble: on-line price quotes The Way of Stones E-commerce website: Marmoregranito

Policies and Impacts

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• Small production scale

• Unfamiliarity with new technologies

• Access to financial resources

• Shortage of specialized workers

• Vortal discontinued

Cooperate and shareRole for APEX and BNDES Prosoft and

Bank of Brazil IT deployment credit line

Barriers to IT use

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Export promotion policies (PNPE) increased value-added

IT could deal with low productivity IT could also help overcome barriers to

exports: foreign language, lack of experience in foreign business information on export procedures

Emerging cooperative relations geared to IT diffusion

Lessons learned

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Agenda

2. Aeronautics cluster

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Embraer - One of Brazil’s largest firms World’s fourth largest aircraft manufacturer Revenue: USD 3 billion (2003) Located in São José dos Campos, SP. Share in the state’s

economy went from 6.5%, in 1996 to 11%, in 2001 Buys over USD 60 million from SME’s

50% in Brazil and 50% foreign companies Over 30 small specialized suppliers located near

its plant

Goal of cluster: Capture 0.5% of $ 33 billion market

Characteristics

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Characteristics

Product Firms

Manufacturing, bashing in parts and composite materials

Aeroserv (HTA), Autômata Industrial (HTA), Mirage (HTA), Alltec (HTA), Graúna- Carpini & Marques Indústria (HTA), Elane Ferreira Pereira, Metinjo Metalizacao Industrial Joseense, Mirage (HTA), SPU Indústria e Comércio de Peças (HTA), Status Usinagem Mecânica (HTA), Tecplas Indústria e Comércio de Fibras (HTA)

Engineering projects and software system

Akros, Dynamic Sollutions, Akae, Cenic, Compoende Equipamentos para Ensaios e Serviços Especializados (HTA), Fibraforte Engenharia de Softwares, LEG -Engenharia e Comércio (HTA), New Plotter Engenharia, Poly Card Engenharia e Comércio de Informática,

Decoration / Interiors C&D (USA),

Landing gear ELEB/LIBERHERR

Sub-systems Sobraer

Radar Mectron

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Policies and Impact

APEX program: in 2002 (process began in 1999), 11 SME’s formed High Technology Association – HTA, an export association

Average of 15 years in the aeronautical sector Most companies founded by ex EMBRAER employees,

bringing 20 years experience in several areas Firms have complementary capabilities HTA is a trading company – High Technology Aeronautics Since then, the HTA has participated in several international

fairs and missions Participation in fairs and trade missions ISO 9000 certification

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Low level of Internet and e-commerce use Relatively high level of IT use Average:

11 PCs per company 1 PC per 7 employees

No use of EDI or any form of e-commerce All information websites are available in 3

languages: Portuguese, English and Spanish

HTA website is still in early stage of development. It shows only static information about

consortium, its products and services

IT Use

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• technology gap of about 30% from state of the art• distance from major markets• freight costs• high cost of inputs (often imported)• lack of working capital• lack of investment capital • lack of guarantees• Embraer does not award long-term contracts

– does not generate the necessary incentives for firms to invest in technology and productivity

• grace periods, and finance rates are generally unfavorable

Barriers to export

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Websites does not have A reserved area for associates or potential

clientsPossibility to register potential clients Even links associated firms’ websites

Only 4 (36%) of the firms have their own website. Sites allows client registration, but some do not

even provide product and services information

Barriers to Export with IT

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SMEs in high-tech vertical clusters face particular problems toward exports in so far as the nature of the business exposes them to intense international competition very early on

Lead or anchor firm in a vertical cluster is a mixed blessingsubcontracting patterns has developed to the point of

relying on a limited number of first-tier suppliers. Breaking into this closed group, often made up of foreign

firms is hard task.

A lead national firm could, in principle, assist SMEs in this endeavor

Lessons learned

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Agenda

4. Problems for SMEs in introducing and utilizing IT

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Group 1: High cost of purchasing equipment and

operating it, Scarcity of affordable quality human

resources, and Difficulty in identifying the company’s

IT needs ad designing and implementing a strategy to meet them

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Group 2: Limited scope and administrative

burden of finance programs, Availability of expertise on SME’s IT

functions and needs and Lack of knowledge of sector-specific

network and export-oriented IT processes

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Main barriers that inhibit SMEs IT adoption: Industrial structure (in the case of high tech

sectors), Industry fragmentation (in the case or

ornamental stones) and, One-size fits all format of existing support

programs and Quality of the public activities /services

offered

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Agenda

5. Policy responses

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Export promotion finance programs Program of Technology Support to Exports-PROGEX

provide technological assistance to the micro and small enterprises which want to become exporters or to those already exporting that wish to improve their performance in external markets

Project National Network of Trade Agents –

REDEAGENTES Until December of 2003 trained more than two thousand agents of

foreign commerce and about six thousand entrepreneurs and employees of diverse institutions such as cooperative, trade associations, city halls and other similars. The agents of foreign commerce, after the training, are integrated in a net based on the Internet, the REDEAGENTES. In this net, they start to contribute in the process of spreading the exporting culture and to give orientations to other small business on how to export.

BNDES

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PROSOFT-Comercialization

Acquisition of products and services Funds up to 100% of qualified productsFunding of related services limited to

100% of product valueDemands certification of origin during

online accreditation process (BNDES/MCT)

BNDES

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Balcão de Comércio Exterior allows an online export operation and responds to a demand by small firms willing to start exporting.

Wweb site www.bb.com.br gives entrepreneur access to a virtual international business room, with no restrictions to a bank client (exporter). The service takes advantage of the streamlining of the

export process for values up to US$10 thousand. From its beginning in January 2003 until December

of the same year, the service registered 2.846 exporters and 680 importers and completed 173 operations valued at US$483 thousand.

Today, there are 4.790 export product offers and 701 importing firms registered.

Banco do Brasil - Foreign Trade Platform -

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Exporter´s Portal (Portal do Exportador in Portuguese) (http://www.portaldoexportador.gov.br/)

Exporter´s Window (Vitrine do Exportador in Portuguese) (https://www.exportadoresbrasileiros.gov.br/), both managed by MDIC

Brazilian Trade Net (http://www.braziltradenet.gov.br/), managed by the Ministry of Foreign Relation (MRE).

Web sites for SMEs that wish to export

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• Exporta Fácil (November 2000) aims to take Brazilian products to the four corners of the world.

• In 2003, MSEs products accounted for 62% of total sales and MSEs for 67% of the exporting firms in the program.

• Main results are:– in 2001, 6,745 shipments were made to a total value of

R$ 8,670,349.89; – in 2002 there were 11,440 shipments totaling R$

19,011,898.37, with a significant increase in the value of exported merchandise;

– and in 2003 shipments reached 19,631 valued at R$ 35,543,007.40, a growth of 87% in relation to the previous year.

Postal Service - Easy Export

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Goals Qualifying entrepreneurs and workers in the use of the

technologies of the information, Promote emergence of new enterprises, Increase exports, Enlargement of partnerships Productive and service quality improvement strengthening of projects of productive arrangements.

By July of 2004, 400 infocenters were operating and 10 cooperation terms were signed to implant more 163 units.

The project’s goal is to implement one thousand infocenters up to July of 2005 and at least one unit in each of Brazilian 5,567 municipalities up to 2007.

Infocenters of Information and Business

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Credit line to SMEs that want to buy computers

Operated by the Brazil Bank (BB). purpose to finance the acquisition of

computer and peripherals to the micron and small companies, being aimed at modernizing its management and to make possible the electronic communication of the customer with the BB.

Enterprise Informatization Program

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In June of 2004, the federal government has launched a new program to promote SMEs exportsFinances the exporter of goods produced by SMEs, in the

phase pre-embarkment, through credential finance institutions

Credit can go up to 100% of FOB value and will be related to the long rate term rate, plus 1% a year of BNDES remuneration (the program agent) and remuneration of credential finance institution (of no more than 4%).

• These exporters will operate as Anchor Enterprises, making possible the indirect export– Trading companies, commercial exporting firms or firms

in the supply chain that acquire the production of a significant set of SMEs looking for exportation.

New networks or websites

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Agenda

6. Conclusions

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Experiences analyzed show us the importance of paying attention to the nature of the industry and its structure.

In the case of aeronautics parts, the small number of firms, their highly specialized production capabilities and the critical role played by the lead firm Embraer in the vertical cluster requires: a tighter cooperation between firms to negotiate better

and more long-term contracts with the lead firm to develop foreign niche markets which are often part of

national industry supply chains. Need a marketing strategy aimed at building trust with

potential clients, Long-term process. Firms need to integrate their complementary capabilities

and fill in absent ones in order to offer foreign customers a more solid solution platform.

Lessons learned

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In aeronautics proto-cluster, non arm-lengths forward linkages to first-tier suppliers might be more important than backward linkages to even smaller firms, and in complement to the current direct strictly business linkages to the lead firm.

For these first-tier suppliers, pressured by end buyers will be always pursuing cost reductions, including in services provision and new parts development.

Lessons learned

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In the ornamental stones, the cluster is more horizontal and centerless.

The relatively large number of firms and the length of the supply chain with several levels of inputs and equipment suppliers, make the formation of stronger and denser networks more difficult to achieve.

The cluster is very active in exports, particularly when compared to other industry-like clusters and in other regions.

Success partly due to previous export promotion policies. The challenge ahead is to sustain its momentum and to

increase exports’ value-added An emphasis is being put by the new administration in a

wholesale policy of expansion of telecenters, which while needed may be a setback to the in relation of the previous orientation of IT diffusion of targeted local empowerment

Lessons learned

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SME export promotion policies in Brazil are entering a second-generation, those for IT are still in their infancy.

Beginning to gain an understanding of the SMEs IT needs and uses individually. Do not yet fathom possibilities for IT use in SME networks. Beyond the basic goal of achieving widespread diffusion, there has

been little policy development in this area.

In regard to broad diffusion, the new government initiative of developing a cheap computer could be part of the answer

SMEs will still face problems adequate software and, most important, qualified IT personnel aware of the organizational and strategic challenges facing SMEs

Assessment of the experiences

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The full potential of Internet-based instruments has not yet been fully grasped by export promotion

Full interactivity and high-quality graphic interfaces are critical into breaking into an overcrowded export market.

Marketing is often the weak or lacking export capability in exporting SMEs. Either because of the type of specialized training

in the case of high-tech firms or a lack thereof in the case of traditional industries’ clusters.

Internet tools can be employed effectively in building missing capacities

Assessment of the experiences