Encouraging Entrepreneurship: Brazil’s Bid in Latin America
Friday, April 12th, 2013
William Hertz became an entrepreneur at thirteen years old because he wanted to help his friends learn how to make money. Since then, the twenty-something Brazilian has co-founded the international network Good People Share, helped the non-governmental organization Sonhar Acordado start a social program to prepare underprivileged youth for higher education and career development, received his bachelor’s degree, and co-founded the successful advertising consulting firm apis3, which he continues to lead today. Perhaps the most interesting thing about Hertz, though, is that he comes from a community where simply being a young entrepreneur is not interesting: São Paulo, Brazil.
Brazil has the third largest entrepreneurship community in the world, behind only China and the United States. One in four adults is self-employed, and small businesses make up two out of three new jobs in the private sector. Women run almost half the country’s startups, 49 percent, compared to the global average of 37 percent. Within Latin America, Brazil boasts the largest e-commerce market, and the upcoming 2014 World Cup and 2016 Olympics are inspiring additional business activity.
In March 2008, the Economist wrote, “Brazil does not lack go-getters.” The country’s history of peaceful governmental transitions has set the stage for a comfortable pace of development with few external threats, but overcoming the difficulties of starting a business in Brazil does require a certain “go-getter” attitude. Though empirical economic and social-science studies argue that entrepreneurship in a country aides its development, the government of Brazil has yet to create a friendly environment in which startups can truly flourish. Analysis of the benefits and challenges to opening a business in Brazil clearly points to a public-policy recommendation for the country’s government: it is past time for the government to encourage entrepreneurship.
From Province to Prominence: Context for Brazil’s Business Environment
Aside from the brief military dictatorship between 1964 and 1985, during which the government severely restricted import and export activity, Brazil has enjoyed global development and trade. Free from the violent revolutions embroiling its Latin American neighbors—even the transition from the authoritarian military regime to a democratically elected government was uniquely pacific—Brazilian businessmen and politicians have reaped the benefits of globalization, and today the country booms with multinational corporations (MNCs) and other internationalized firms.
Empreendedorismo, Portuguese for entrepreneurship, began blossoming in the country only a few years after the end of the military dictatorship. More than forty-seven books published in Portuguese since 1989 include the word for entrepreneur.[i] In the past several years entrepreneurship has become an even more popular path; at the Fundação Getulio Vargas School of Business Administration in São Paulo (FGV), one of the top business schools in Latin America, students increasingly turn down job offers from major banks and consulting firms to start their own businesses.[ii] Spurred on by confidence and a belief in change, many young Brazilians believe that history’s tide has turned toward startups. Yet, despite a globalized environment filled with hopeful young entrepreneurs, Brazil is one of the world’s most difficult countries in which to start a business. The state applies the same regulations and taxes to startups as to any organization, and small businesses struggle to get off the ground as a result. In her doctoral thesis on the institutional environment for entrepreneurs in Brazil, Ana Beatriz Tomás Salles describes Brazil as “still incoherent and inhospitable for entrepreneurs,” since support for startups remains sparse and privately-focused rather than government-sponsored, complaining that “governments still appear as the distributor of the rules of the game and civil society acts as a mere follower.”[iii]
Wild Spirits: The Effect of Entrepreneurs on Economic and Social Development
João Marinheiro embodies the joyful hope of the young Brazilian entrepreneur. João, who recently quit a lucrative job with an international consulting firm to pursue his dreams, acts as the curator for São Paulo’s Entrepreneur Week, and firmly believes that entrepreneurship can bring about economic and social development in ways that traditional measures cannot.[iv] This is precisely what Joseph Schumpeter observed in the early 1900s, sparking the first study of entrepreneurship: certain businesses powered by technological change and innovation affected the economy in ways that traditional forces could not, revolutionizing the market by impacting the production and delivery of even established goods and services.[v] Schumpeter also noticed that these businesses succeeded in politically “wild” environments marked by trade freedom and few restrictions, and so he coined the German term unternehmergeist—entrepreneurial spirit—which would come to identify these enterprising businessmen in years to come.[vi]
American economist Harvey Leibenstein built off Schumpeter’s work during the 1960s, studying the effects of entrepreneurship on a country’s social and economic development through indicators such as labor, migration, unemployment, and saving and investment balances.[vii] Leibenstein’s conclusion that particularly innovative entrepreneurs can fill gaps in imperfect markets revolutionized the understanding of entrepreneurship as a social tool.[viii] Work that is more recent shows correlations between entrepreneur activity and GDP growth per capita; a 2005 report that examined thirty-six countries between 1999 and 2003 discovered that entrepreneurship has increasingly positive benefits for relatively rich countries.[ix] In 2011, Wim Naudé of the United Nations University wrote that, in general, entrepreneurship will “contribute to growth and employment creation in advanced, emerging and least developed economies alike.”[x] However, Naudé cautions that entrepreneurship can only spur growth and development when it enjoys the political and legal encouragement of the state.[xi]
The effect of entrepreneurs on development is particularly pertinent to economists and public-policy professionals interested in emerging countries, such as BRIC economies, where the need to “sustain growth through sustainable access to resources, knowledge, markets, and low-carbon industrialization puts a premium on innovative entrepreneurship.”[xii] Young Brazilians are seizing the opportunities to fill that need. After a recent trip to Rio de Janeiro, Kauffman Foundation Senior Fellow Jonathan Ortmans raved in a company letter that “an entrepreneurial mindset is flourishing among Brazilians.”[xiii] The Kauffman Foundation helps produce the Global Entrepreneur Monitor (GEM) reports that dissect the available statistical data about entrepreneurship for ninety-nine different economies.[xiv] Ortmans’ own report found that “small and medium size-enterprises (SMEs) are responsible for 96% of the jobs in Brazil and comprise 98% of all companies in the country,” and that “according to the technical director of the Brazilian Micro-Enterprise and Small Business Support Service ( SEBRAE)…the increase of new companies in Brazil is directly related to Brazilians’ growing entrepreneurial spirit.”[xv]
João Marinheiro agrees. He sees daily the effect of increasing entrepreneurial activity in Brazil, and lights up when he talks about Generation Y (Gen Y), the population of twenty and thirty year olds known for their curiosity, creativity, optimism, passion for meaningful work, and ability to find solutions outside the box. João credits Gen Y Brazilians for the country’s startup boom. “The young masses are constantly thinking, what does Brazil need?” he says. “What is it lacking? How can we fix it? The changes they want to make are for the better.”[xvi]
Marinheiro’s predecessor at São Paulo’s Entrepreneur Week, Bárbara Teles, focuses on the political effects of entrepreneurship in Brazil, highlighting the adjustment in the way the government now looks at businesses and businessmen. Brazilian politicians today face pressures to reexamine taxes, import regulations, and business infrastructure. Marinheiro is cautiously hopeful about these measures, but believes the entrepreneurial phenomenon in Brazil is already transforming the country. When questioned about GDP growth and economic change he started to quote statistics, but then just smiled and said, “People are starting companies to create a positive impact. They are sharing knowledge and their idealism is a shared idealism—they want everyone to grow and prosper together. This is good for Brazil.”[xvii]
Confidence, Courage, and Caring: Entrepreneurial Drivers of Generation Y
Entrepreneurs from Gen Y certainly approach business differently from previous generations. More than thirty percent of Brazilian entrepreneurs are between eighteen and thirty-five, and Gen Y is responsible for 52 percent of Brazilian startups; these young tycoons question everything and “don’t accept the current reality.”[xviii] The Huffington Post describes today’s entrepreneur as “the person to follow . . . adaptable, flexible, reacts to shifts in the business climate with ease, and adopts change as easily as blinking.”[xix]
Young Brazilians possess another important characteristic in the startup world: an abundance of confidence, stemming in part from their identification with famous Brazilian entrepreneurs.[xx] Since the military dictatorship precluded entrepreneurial activity until the mid-1980s, many of the founders of the most successful and recognizable startups in Brazil are still prominent figures in the media and in their local communities.[xxi] The heroes in Brazil are self-made men like Eike Batista, Jorge Paulo Lemann, and Silvio Santos, who built their wealth from extremely modest beginnings. Former president Luiz Inácio Lula da Silva rose through the political ranks without even a high school degree, yet became one of Brazil’s most popular presidents through a combination of sweat, charm, and impressive results.[xxii] Lemann, Lula, and others are “proof that wealth can be achieved through hard work and persistence,” and like their role models, young Brazilians are jumping into the risky startup market with dreams of social revolution and economic growth.[xxiii]
When Harvey Leibenstein postulated that the psychological returns from beginning one’s own business might not outweigh the benefits of working for established businesses, he clearly did not know any Gen Y Brazilians.[xxiv] Less driven by money and job security, they pursue work for the pleasure or passion for the cause.[xxv] Many young entrepreneurs focus their efforts on the multitudes of Brazilians still living below the poverty line, “exploring market-based solutions to poverty challenges, including access to affordable housing, health care services, and information technology.”[xxvi] Entrepreneurs in Brazil are increasingly investing in “Class D,” the 39 percent of the population characterized by a new middle class emerging in the city slums.[xxvii] Class D members usually work as service providers, such as fulltime housekeepers or live-in nannies, in the major cities and have begun to desire commodities that are more modern. As they grow out of extreme poverty, they form a class that entrepreneurs target with socially beneficial programs, such as those that promote technological access, convenient shopping malls for basic needs, educational initiatives, and even travel agencies.[xxviii]
William Hertz laughs at the idea of starting a business to make money. He says he now works three times as hard to earn much less, but that “it’s just a good feeling. I feel like there is something wrong with my market…I want there to be other options. I’m happy to be part of a movement that can be good for Brazil.”[xxix]
Startup Support: Funding and Resources for Entrepreneurs in Brazil
Socially oriented startups in Brazil frequently rely upon crowdfunding, a practice that has flourished since its arrival in Brazil four years ago with the website Vakinha.[xxx] Crowdsourcing websites allow individuals to post proposals requesting backing for anything from startups to plastic surgery; you can fund whatever you can sell to a web investor.[xxxi] Crowdfunding has proved helpful for many young entrepreneurs, especially those whose business ideas revolve around internet-based or socially-motivated projects.[xxxii] Brazilian entrepreneurs have also begun to try crowdsourcing by employing website platforms to find professionals to aid in project development.[xxxiii] Entrepreneurial at heart, “both crowdfunding and crowdsourcing stimulate creativity as the person gets to perform a professional job without necessarily being a professional. [They value] talent, innovation and experience more than educational degrees.”[xxxiv]
Brazilians increasingly use online resources to help build businesses, finding that doing so reduces business transaction expenses and bureaucratic obstacles.[xxxv] Before he turned to the web, Brazilian entrepreneur Fabio Seixas had three businesses fail because of the difficulties of accessing venture capital or receiving bank loans.[xxxvi] His fourth business, selling t-shirts online, has been extremely successful, which he ascribes to the relative ease and low sunk costs of a web-based business.[xxxvii] Internet businesses are particularly successful in Brazil because Brazilians spend a remarkable amount of time online; even the poorest members of society, including the homeless and unemployed, log in at Telecentros, free city-council run internet centers where anyone can browse the web for jobs or housing alternatives.[xxxviii]
In addition to online resources and funding opportunities, entrepreneurs can seek out the growing number of private and non-profit organizations that support and encourage startups. Endeavor, a private non-profit organization, launched in Brazil in 2000. It introduces entrepreneurs to business leaders who provide mentorship, networks, strategic advice, and inspiration.[xxxix] The organization has been widely influential and boasts on its website that “before Endeavor the word entrepreneurship was not in the dictionary in Portuguese.”[xl]
Institutions such as the aforementioned SEBRAE also provide options for entrepreneurs. The Brazilian government launched SEBRAE in 1972 to assist small business development in the country, which it does by offering services and classes.[xli] Brazil Business, an online journal that explains the complexities of business in Brazil to English speakers, writes that SEBRAE “intends to facilitate the market entry for small companies and make it easier for them to obtain credit, reducing bureaucracy and tax burden through partnerships with the government and financial institutions.”[xlii] SEBRAE is in every state, not just the major cities, and is available to individuals, companies, employers, and students.[xliii] The organization has a solid reputation as a reliable resource for startups, but lacks both the private funding of firms like Endeavor and the full authority of the government.
The government has made some strides in public policy, but as Professor Tales Andreassi of FGV points out, those strides are not enough.[xliv] Andreassi, who coordinates FGV’s Center for Entrepreneurship and New Business and is one of the primary researchers and writers of Brazil’s Global Entrepreneurship Monitor (GEM) report, credits the Lula administration for two initiatives that support startups: the Microempreendedor—Small Entrepreneur—which allows for small firms to be formal contractors instead of working illegally under the table; and the Simples Nacional—Simple National—a 2007 unified tax collection initiative for entrepreneurs and small business owners.[xlv] Businesses maintaining monthly revenues of under R$60,000 are eligible for the Simples Nacional, which significantly reduces tax rates and helps diminish filing time.[xlvi]
Additionally, the government created and runs the Brazilian Innovation Agency (FINEP), which sponsors such programs as the Primeira Empresa Inovadora (PRIME)—Top Innovative Company—an initiative to award financial aid to particularly innovative new businesses.[xlvii] Furthermore, in January 2012 the government began a program of limited liability for individual business owners, known as the Empresa Individual de Responsabilidade Limitada (EIRELI)—Limited Responsibility Individual Business.[xlviii] Historically, limited liability companies in Brazil have required at least two founders or owners, which encouraged many small startups to exist informally or illegally—or for ghost partners to sign on. Though it has always been possible to start a business as an individual entrepreneur, in such an organization, the individual maintains no autonomy or personal protection against his business. With the advent of EIRELI, a single individual can open a limited liability corporation, no matter how small the business. EIRELI businesses are also eligible for the Simples Nacional taxation.[xlix]
Losing to Lebanon: Common Challenges of Entrepreneurship in Brazil
In spite of the government’s recent efforts, Brazil’s Ease of Doing Business rank is 130 in the World Bank’s “Doing Business 2013” report, down two places from 2012.[l] This puts the country far behind two world leaders in entrepreneurship, the United States, in fourth place, and China, in ninety-first place; it also puts Brazil behind Argentina, Ethiopia, and Lebanon.[li]
Common challenges to Brazilian startups include scarcity of investors, legal and financial difficulty of hiring and firing employees, and obscenely high taxes. William Hertz says that part of the investment issue is that many young business owners fail to understand the difference between bank loans and private investments. Investors are not like banks, and “investors aren’t like your parents. They expect to get their money back.”[lii] When young entrepreneurs in Brazil go belly-up with no returns for investors, private investing opportunities dry up. Many successful entrepreneurs lobby for the government to invest additional funds, but so far, none has struck gold.[liii]
Brazilian labor laws exist to protect employees in large corporations, but they give startup owners little wiggle room when it comes to overtime or lawsuits, making hiring processes particularly problematic. Finding talent can be equally burdensome, especially since some of the more pragmatic Brazilians interested in entrepreneurship head to Silicon Valley to pursue their dreams with fewer obstacles.[liv] Hiring a new employee often costs at least as much in taxes as it does in wages.[lv] Of course, the tax system is the best-known challenge to opening a business in Brazil: it seems that the government taxes every aspect of startup activity. Andreassi complains that the system “penalizes entrepreneurs; even to become part of Simples Nacional you have to meet a lot of requirements.”[lvi]
The odds are stacked. The International Finance Corporation’s “Doing Business in Brazil” report shows that opening a business in Brazil may take up to 152 days, will require an estimated 2,600 hours of tax accounting per year, and will require the firm to pay as much as 208 percent of gross profit in taxes.[lvii] Yet despite the taxes, bureaucracy, hiring difficulties, and investment scarcities, young Brazilians continue to open businesses.[lviii] As a 2008 article in the Economist put it, “Harder to explain than why Brazil’s entrepreneurs are as they are is why they exist at all.”[lix]
Gen Y advocates cheer proudly for Brazilians’ passionate entrepreneurial endeavors to effect meaningful social change, but Hertz wonders if the Gen Y fervor is a positive development. Hertz sees a lot of hype and only a little effort in his fellow entrepreneurs. The confidence that Marinheiro praises is undeserved in Hertz’s eyes. Though he believes in startups and opportunities, he worries that the Gen Y mentality produces “a bunch of people with no experience at all, with no idea of self-critics.” He said “this is creating a monster…I see all these startup guys say, you know, I will be the next big thing. But look, you aren’t even working. You’re talking to the media, you’re saying you have an idea or an investment, but you have to work. You need more than a nice story to tell. You have to put in the effort.”[lx]
To the Olympics and Beyond: Time to Encourage Entrepreneurs
If the entrepreneurs should heed Hertz’s advice to put in more effort, the Brazilian government should take it up as a mantra. As emphasized by Professor Tales Andreassi, for Brazil to become a friendly environment to entrepreneurs, the government must enact significant additional public policy measures.[lxi] Andreassi hopes the future will see the current wave of entrepreneurship benefit Brazil’s innovation and technological advances, but he cautions that this is impossible without investment in education and people.[lxii] “Make sure people can work where they really want, rather than being forced to work somewhere they don’t want in order to survive,” he says; “when this happens Brazil will really improve.”[lxiii] He highlights problems in education, corruption, and infrastructure, and notes the importance of continued social involvement.[lxiv]
The “GEM Brazil 2011 Report,” authored in part by Andreassi, proscribes an overwhelmingly long list of recommendations for government action.[lxv] Undeterred, Brazilian entrepreneurs believe their government is willing to attack the necessary course of action. In a recent issue of Forbes Magazine, well-loved President Dilma Rousseff was named Brazil’s Entrepreneur-in-Chief.[lxvi] Rousseff plans to expand upon Lula’s initiatives to incentivize entrepreneurs, heading up policies to lower interest rates, invest further in infrastructure, and cut taxes for targeted portions of the population, which she calls “pro-growth bonuses.”[lxvii] Rousseff has become a champion for the aspiring Brazilian entrepreneur.[lxviii] Entrepreneurial tycoon Eike Batista fondly told Forbes that he attributes “substantive reforms” to the current president, saying, “Dilma is building a fertile environment for investors.”[lxix]
Young entrepreneur William Hertz also looks to the government to make changes, especially with taxes and labor legislation, and his “hope is that entrepreneurs will be good for Brazil. Not because of the economy, but to make conditions better for Brazil.”[lxx] He acknowledges that success is hard to come by and that many startups fail, but he still believes “the biggest thing this movement can do is bring attention for better conditions for…business in Brazil,” so that the country’s new businesses become competitive worldwide, not just nationally.[lxxi] After all, he asks, “Do you want to be the best in your neighborhood or the best in the Olympic Games?”[lxxii]
With 2016 around the corner, the whole world is watching to see what Brazil will do. In 2013, Brazil has managed to become the third-largest entrepreneurial community despite being one of the most difficult countries in which to begin a business. Imagine the level of innovation that could result with government encouragement.
Lee Catherine Booker is a recipient of the Lemann Fellowship, established by Brazilian entrepreneur Jorge Paulo Lemann to encourage study and research in Brazil. She lives in São Paulo, where she is finishing the second year of a dual-degree program between SIPA and the Fundação Getulio Vargas School of Business Administration.