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SMEs and regional economic growth in Brazil

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Abstract

This paper examines the relationship between the small and medium-sized enterprise (SME) sector and economic growth for an annual panel of Brazilian states for the period 1985–2004. We investigate the importance of the relative size of the SME sector measured by the share of SME employment in total formal employment and the level of human capital in SMEs measured by the average years of schooling of SME employees. The empirical results indicate that the relative importance of SMEs is negatively correlated with economic growth, a result that is consistent with previous studies examining developing countries. In addition, our results show that the human capital embodied in SMEs may be more important for economic growth than the relative size of the SME sector.

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Notes

  1. In 2004, SMEs accounted for approximately 52.5% of the Brazilian labour force (Relação Anual de Informações Sociais). See Table 1 for further details.

  2. According to Baumol (1990), unproductive entrepreneurship takes many forms such as litigation and takeovers, tax evasion and avoidance efforts.

  3. For instance, government policy can improve institutions by reducing the entry cost and the level of taxes that entrepreneurs must pay (Dias and McDermott 2006). Besides, a more efficient judicial system that prevents litigations and tax evasion might provide positive incentives for productive entrepreneurs.

  4. For example, Table 1 in Beck et al. (2005) shows that SMEs’ employment share in Brazil is 58.8% while in Finland it is 58.15%. However, the effect of SMEs on growth is very likely to be different due to different characteristics of the SME sector. Therefore, a proxy for the presence of SMEs does not reflect the true impact of SMEs on growth.

  5. Necessity entrepreneurship defines the act of starting a business as the last resort. In contrast, opportunity entrepreneurship refers to the other motivation for starting a business, i.e. to exploit a perceived business opportunity (Acs et al. 2008).

  6. This is probably linked to the fact that the ratio of opportunity to necessity entrepreneurship is higher in developed countries (see, for instance, Acs et al. 2008).

  7. Population growth is adjusted for depreciation (d) and technological growth (g), under the usual assumption, based on previous results in the literature, that d + g equals 0.05. The term with the population growth in Eq. 2 is ln(n + d + g). This comes from the derivation of the steady-state value of the stock of capital per effective unit of labour in the growth theory. For more details regarding this issue, see Mankiw et al. (1992).

  8. A longer time series is not available due to a change in the national accounts’ methodology from 2004 onwards.

  9. Using annual data allows more degrees of freedom for the relatively short panel time length of our study. However, to control for business cycles we used a 3-year average to reduce its influence. This approach still allows the use of five cross-sections in the GMM-DIFF estimates, since two cross-sections are lost to control for the lagged GDPpc and to take the first difference. Increasing the time length to the usual 5-year average would reduce the degrees of freedom and leave us without the minimum of three cross-sections necessary to calculate the diagnostic tests for the GMM estimates (see Arellano and Bond 1991).

  10. In 2004, RAIS covered 31.5 million workers. If an establishment fails to report the information required by RAIS, employers face fines that are proportional to their workforce size. However, because the payment of the annual wage supplement is based on RAIS, employers and workers have a strong incentive to fulfil RAIS records. The software SGT micro, provided by the Ministry of Labour, was used to retrieve the information necessary to construct our SME measures using the two-digit level of IBGE’s classification of activities.

  11. We also used 100 employees as a cut-off point to define SMEs and found similar results.

  12. The SMEs proxies based on manufacturing and the extended sector with service and commerce provide a reasonable representation of the economy as a whole. In 2004, according to the two-digit level sectoral classification, manufacturing, commerce and services accounted for 68% of the formal employment in Brazil. In addition, the IBGE’s official figures for 2004 show that these sectors were responsible for 67.5% of the Brazilian GDP.

  13. See the appendix for further details.

  14. The regional nature of this study also limits our choice of measures related to the SME sector.

  15. The omission of information in small municipalities is not likely to affect the quality of data at state level. In addition, agriculture, construction and public administration information are not used to construct our SMEs measures.

  16. Brazil is divided into 27 federal units including the Federal District of Brasília. The most recent state (Tocantins) was created in 1988, constituting the northern territory of the former state of Goiás. These two states were excluded from the sample due to concerns with the quality of the data.

  17. Similar nonsignificant results for population growth were found by Nakabashi and Salvato (2007). This result could be related to the fact that income per capita is the main determinant of migration in Brazil. This growth endogeneity may account for the insignificant coefficient.

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Acknowledgements

We would like to thank the Brazilian Ministry of Labour for providing access to the RAIS database.

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Authors and Affiliations

  1. Loughborough University, Loughborough, England

    Túlio A. Cravo, Adrian Gourlay & Bettina Becker

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  1. Túlio A. Cravo
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  2. Adrian Gourlay
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  3. Bettina Becker
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Correspondence to Túlio A. Cravo.

Appendix

Appendix

See Table 7

Table 7 Educational range and years of schooling
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Cravo, T.A., Gourlay, A. & Becker, B. SMEs and regional economic growth in Brazil. Small Bus Econ 38, 217–230 (2012). https://doi.org/10.1007/s11187-010-9261-z

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