Brazil’s most business-friendly cities aren’t necessarily where you might assume, according to the latest Index of Entrepreneurial Cities (ICE), by Endeavor. São Paulo maintained its top position in the rankings for the third consecutive year, and scored top marks for connectivity, airport terminal infrastructure, and services, as well as an initiative to reduce bureaucracy in the process of opening and licensing companies – but it’s got competition.
Among other significant entrepreneurial cities in Brazil, the southern cities of Joinville, Florianópolis, and Curitiba climbed the rankings, achieving top results. Other cities in Brazil’s Southeast region also scored well, with Vitória and Campinas finding themselves high up in ICE’s league table. And while cities in the country’s North and Northeast found themselves near the bottom of the rankings, several cities made ground-breaking strides when it came to overcoming obstacles.
Rio de Janeiro makes strides
Entrepreneurs and small business owners in Brazil’s marvelous city, Rio de Janeiro, benefitted heavily from pre-Olympic investments in infrastructure, according to Endeavor’s findings. The city climbed eight places in this year’s rankings, bringing it to 5th place overall. Last year, Rio got the lowest mark of all the cities surveyed for its traffic troubles. This year it climbed to 24th place, and although its congestion problems mean the city remains well below average, the improvement was sufficient to bolster it in the survey rankings.
“This index takes into account the effects of the urban infrastructure investments made for the Olympics,” Pedro Lipkin, the research’s coordinator, told Brazilian press. “But there’s still a lot to improve with urban mobility. The works were very concentrated. The main improvements link Barra da Tijuca and the West Zone.”
The research found that while all cities struggle with the same issues when it comes to tackling bureaucracy, traffic and congestion problems have their own peculiarities and complexities in each city. Other factors measured included regulatory atmosphere, market, access to capital, innovation, human capital and entrepreneurial culture.
Rio’s connectivity also improved, but remains below average – currently, 10.97 percent have access to high-speed internet (12mbps or higher). While this is an improvement on last year, where just 10.77 percent had access, the median access was 11.31 percent. Rio also had the highest levels of innovation, benefitting particularly from concessions and investments from BNDES and FINEP and climbing two places on the previous year’s rankings. As a result, the postcard city surpassed São José dos Campos, Florianópolis, Blumenau and São Paulo in terms of innovation.
‘Zombies’ are slowing state economies
Despite progress, researchers for Endeavor warned that bureaucracy is creating high numbers of ‘zombie’ businesses – companies which have been unable to close their doors due to bureaucratic obstacles, despite their lack of ability to generate revenue. It hurts both the state and national economies, with companies ceasing their roles as economic actors but still remaining within the system. Nor does current legislation facilitate the process of closing a business: companies wishing to close with remaining tax debts can only do so if the debts are transferred to the CPF of a partner.
Rio had the highest level of ‘zombies’ businesses anywhere in the country: 633,000 businesses that were active in 2016 are currently economically inactive, making up one-third of the state’s small businesses. Rio’s average was almost twice as high as the national average, which registered 18 percent of small businesses in a similar state. Nor was Brazil’s business beacon São Paulo exempt: the city had the 6th highest level of ‘zombies’, with 28.4 percent of small businesses declared ‘living dead’ by higher education business institute, INSPER.
However, Endeavor’s report says the high level of ‘zombies’ may also be related to optimism. Many traders made the decision to close their doors but not shut down the economy, based on the belief that healthier conditions will soon return for the economy and produce conditions for business to resume.
Bureaucracy is harming innovation
Bureaucratic hurdles mean that Brazilians encounter serious difficulties in opening, closing and running small businesses in a way that complies with the law, new research finds. However, most worrying is the effect of this on the country’s economy: the time small businesses spend dealing with administrative tasks costs an estimated 79.5 billion BRL (24.6 billion USD) per year.
“More than the loss of time for entrepreneurs, the impact of bureaucratic dysfunctions on the economy is far greater than we ever imagined,” said Guilherme Fowler, a chair of non-profit entrepreneurship organization Endeavor, which carried out the research. “Bureaucratic dysfunctions negatively impact the lives of businesses and individuals.”
The study, which measured 32 Brazilian cities using seven categories, found that bureaucracy stumps small business owners and entrepreneurs across Brazil. Overall, Brazilians needed an average of 80 days to open a new business – fourteen times longer than the average wait in the US.
Additionally, once companies manage to open their doors, small Brazilian businesses lost an average of 85 days per year completing administrative tasks: the World Bank estimated companies each spend a total of 2,038 hours every year filling out the necessary documents and paying taxes.
To further complicate matters, Brazil’s tax legislation for movements of goods and services is constantly under revision; it has been altered 558 times in the last four years, roughly equivalent to one legislative change every four days. This frequency, according to Endeavor’s research, makes it almost impossible for businesses to remain in complete compliance with the law.
Bureaucracy can benefit from innovation, too
Despite the difficulties that bureaucracy can pose to business life cycles, some cities are finding new ways to open doors for innovation. “Fortaleza did its homework, with a job carried out as much by the city as by the state,” said Insper’s Lipkin. The Northeastern city climbed 30 places in the regulator atmosphere rankings, due to the implementation of a tool allowing small construction businesses to obtain immediate permits for projects of up to 750 square meters.
Blumenau, São Luis, and Vitória also took important steps when it came to tackling bureaucracy for small businesses, allowing them to climb significantly in the rankings. But, Endeavor’s Fowler warns, further progress is needed if small businesses are to thrive in Brazil. “The state must facilitate – and do not disturb – the entrepreneurs,” he said. “The bureaucratic dysfunctions only hinder and cause noise in the trajectory of those who seek to create and sustain their business.”