Workshop on "Internet Use in the Americas" Panel 3: Business Use of the Internet CIDE, Mexico City, 16-17 Jun

1. Workshop on "Internet Use in the Americas"Panel 3: Business Use of the InternetCIDE, 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

2. Agenda 1. Overview 2. Ornamental stones cluster 3. Aeronautics cluster 4. Problems for SMEs in introducing and utilizing IT 5. Policy responses 6. Conclusions

3. Agenda 1. Overview

4. Micro and Small Enterprises in Brazil, 2001 • 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

5. Exporting SMEs • 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 Source: Markwald e Pessoa, 2003

6. IT Development • 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

7. SMEs IT Diffusion • 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%. Source: FIESP, Pesquisa Perfil da Empresa Digital 2003/2004

8. SMEs IT Diffusion– São Paulo (FIESP) • 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. Source: FIESP, Pesquisa Perfil da Empresa Digital 2003/2004

9. SMEs IT Diffusion– São Paulo (Sebrae-SP) • 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 Source: FIESP, Pesquisa Perfil da Empresa Digital 2003/2004

10. SMEs IT Diffusion– São Paulo (Sebrae-SP) • 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 Source: FIESP, Pesquisa Perfil da Empresa Digital 2003/2004

11. SMEs IT Diffusion– São Paulo (Sebrae-SP) • 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. Source: FIESP, Pesquisa Perfil da Empresa Digital 2003/2004

12. Barriers to IT diffusion • 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

13. Barriers to e-commerce • 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

14. Agenda 2. Ornamental stones cluster

15. Characteristics • 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

16. Policies and Impacts • 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

17. Barriers to IT use • Small production scale • Unfamiliarity with new technologies • Access to financial resources • Shortage of specialized workers • Vortal discontinued • Cooperate and share • Role for APEX and BNDES Prosoft and Bank of Brazil IT deployment credit line

18. Lessons learned • 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

19. Agenda 2. Aeronautics cluster

20. Characteristics • 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

21. Characteristics

22. 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

23. IT Use • 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

24. Barriers to export • 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

25. Barriers to Export with IT • Websites does not have • A reserved area for associates or potential clients • Possibility 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

26. Lessons learned • 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 blessing • subcontracting 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

27. Agenda 4. Problems for SMEs in introducing and utilizing IT

28. 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

29. 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

30. 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

31. Agenda 5. Policy responses

32. BNDES • 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.

33. BNDES PROSOFT-Comercialization • Acquisition of products and services • Funds up to 100% of qualified products • Funding of related services limited to 100% of product value • Demands certification of origin during online accreditation process (BNDES/MCT)

34. Banco do Brasil - Foreign Trade Platform - • 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.

35. Web sites for SMEs that wish to export • 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).

36. Postal Service - Easy Export • 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.

37. Infocenters of Information and Business 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.

38. Enterprise Informatization Program • 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.

39. New networks or websites In June of 2004, the federal government has launched a new program to promote SMEs exports • Finances 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.

40. Agenda 6. Conclusions

41. Lessons learned • 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 trustwith 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.

42. Lessons learned • 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.

43. Lessons learned • 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

44. Assessment of the experiences • 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

45. Assessment of the experiences • 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