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| Small Businesses in Chile |
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| By Tom Azzopardi |
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In this Special Report, bUSiness CHILE takes a look at Chile's small and medium-sized businesses - or PYMEs - and at why they have become such a hot topic in the run-up to the December presidential election.
Definitions of small businesses abound. The European Union - in true Brussels style - has one of the most reglamented. According to the EU, a medium-sized business is a firm with annual sales of up to 50 million euros and 250 employees while, for small firms, these ceilings drop to 10 million euros and 50 employees and, for micro firms, to 2 million euros and 10 employees.
The United States uses a more flexible definition that varies from industry to industry although, in order to be eligible for federal government programs, a “small” business cannot, in general, have more than 500 employees. But these are the world’s heavyweight economies. In emerging markets, small businesses are usually far more modest and often precarious concerns.
In Chile, the National Tax Service (SII) provides a definition based on turnover. According to the SII, a company with annual sales of more than US$3 million is a large company while the rest of the approximately 700,000 firms that operate in Chile are PYMEs (pequeñas y medianas empresas), a category that includes medium-sized firms (sales of between US$750,000 and US$3 million), small businesses (US$75,000-US$750,000) and micro firms (less than US$75,000).
As a result, the term PYME can cover anything from an up-and-coming wine producer, with revenues in the hundreds of thousands of dollars, to an artisan eking out a living by selling his wares at craft fairs. And even within the medium, small and micro brackets, there is staggering variety.
According to last year’s tax statistics, Chile had 570,544 micro firms and 105,524 small businesses. By contrast, the country’s large companies, even on the SII’s relatively modest sales definition, numbered just 6,858.
According to Iván Vuskovic, president of the National Confederation of Micro, Small and Medium-Sized Businesses (CONUPIA), the sectors favored by small and micro firms are commerce, agriculture (including fishing), services and transport, while they are notoriously absent in capital-intensive sectors, such as electricity and mining. However, most medium-sized businesses - like large companies - are concentrated in the manufacturing and financial services sectors, as well as in commerce.
But why are the PYMEs attracting so much attention from the country’s presidential candidates? The answer is simple. According to the SII, Chile’s large companies account for close to 80% of the country’s total sales, but they employ just 1% of its workforce.
It is the PYMEs that provide jobs for more than 95% of working Chileans (more than 80% of them in micro firms). And it is the PYMEs that are doing the most to reduce unemployment, creating seven out of ten new jobs.
And it is not just a matter of their sheer weight of numbers. While the overwhelming majority of the country’s business giants are based in Santiago or other urban centers, small businesses are present all over the country, providing livelihoods and services to people in even the poorest and remotest communities.
Sharing in growth
Small businesses are also vital to the big fish of the economy, providing a myriad of goods and services required by large companies. “They are the lifeblood of the economy, they are central,” argues Pedro Corona, president of the National Chamber of Commerce (CNC). He points to the example of Coca-Cola which, he says, uses more than 300,000 intermediary operations in Chile alone, many in the form of small stores and street vendors, to reach millions of customers.
And the PYMEs are also key for the country’s booming foreign trade, says Roberto Fantuzzi, president of Chile’s Association of Manufacturing Exporters (ASEXMA). “Take a big wine producer like Concha y Toro; it needs small companies to cut the grass, clean windows and so on,” he notes. And, of course, if an exporter’s suppliers are not efficient, its competitiveness will be impaired.
However, although there is widespread awareness of the PYMEs’ importance for Chile’s economic wellbeing, there is also a perception that they have not been able to join in the good times enjoyed by the rest of the economy. Despite the recent rebound in growth, Vuskovic says that times are hard for small and micro businesses.
Rafael del Campo, assistant director of the government’s Technical Cooperation Service (SERCOTEC), which provides support for small and micro businesses, disputes this diagnosis. The legal and regulatory environment for small businesses has improved significantly over the last decade, he argues.
Support for this view is found in a study published by the World Bank last year. It reported that, in Chile, just nine procedures are required to start a business as compared to a Latin American average of 11 and an average of six in OECD countries. But where Chile scored particularly well was on the costs involved in setting up a business. According to the World Bank, these are equivalent to just 10.0% of per capita gross national income, slightly above OECD countries (8.0%), but way below the average of 60.4% found in Latin America.
But it is clear that the PYMEs are not yet taking full advantage - at least directly - of the new opportunities afforded by Chile’s Free Trade Agreements. According to ProChile, the government’s export promotion agency, 728 PYMEs exported to the United States in 2004, up from 695 in 2003, but their sales - although a 54.6% increase on 2003 - reached only US$160 million.
Moreover, although some 6,600 Chilean firms currently export products or services to markets around the world, just 90 companies, concentrated in the mining, forestry and fruit sectors, account for around half of total export revenues. By contrast, according to the United States Small Business Administration, 97% of U.S. exporters are “small” businesses.
Working together
But small businesses can also be their own worst enemies, shying away from the cooperation that would help them to challenge the market share of their larger rivals. One anecdote relates how a group of ten small flower growers from Chile jointly negotiated a breakthrough deal during a government-sponsored trip to New York.
But once back in Chile, each producer individually picked up the phone and tried to secure a bigger slice of pie by undercutting the agreed price. The deal subsequently collapsed.
SERCOTEC encourages small businesses to develop links among themselves and its financing programs makes special provisions for cooperative ventures. But, despite this, Rafael del Campo reports that it is an uphill struggle.
And, at CONUPIA, Iván Vuskovic maintains that the government’s actions continue to be attuned to the interests of large companies. Large and medium-sized companies receive 70% of the government funds available for environmental improvements and workplace training, he claims. And almost three-quarters of corporate lending goes to a handful of megacompanies, he adds.
According to Vuskovic, no real improvement in the lot of small businesses will be achieved unless measures are taken to limit the concentration of economic power in the hands of a relatively small number of large companies. As an example, he points to the retail sector where, he argues, the dominance of three large department store chains is not only driving out smaller competitors, but also harms small suppliers. Late payment by large customers is, he insists, a leading cause of failure among small companies.
Del Campo recognizes the problem, but says that ways can be found for small and large businesses to coexist to mutual advantage. He reports that, in Region IV of northern Chile, local supermarkets have agreed to adhere to strict rules on paying suppliers on time. In return, the stores have gained in terms of the loyalty of their customers, many of whom depend on local agriculture for their livelihood.
Similarly, in the shellfish industry, the government recently reserved at least 50% of concessions for small fishing businesses in a bid to promote the recovery of dozens of remote fishing villages. “Without this, 200,000 people would have had to abandon the coast for want of a livelihood,” notes del Campo.
This case illustrates the social concerns that have helped to make PYMEs a popular election issue. But, in the sector, there is considerable skepticism as to whether this limelight will deliver concrete results. “The trouble with politicians is that they talk a lot, but don’t do much,” accuses Vuskovic.
Access to finance
One problem frequently cited as preventing the growth of small businesses is lack of access to finance. In the case of medium-sized businesses, credit may be available, but often on shorter terms than the company needs, while small firms may lack access to financial services of any kind.
But although credit is still an issue, the situation is changing, argues Jaime Pizarro, manager of small-business banking at BancoEstado. That is so, he says, since the state-owned bank entered the market four years ago.
In Chile, unlike other Latin American countries, it has been banks, not non-governmental organizations (NGOs), which have led lending to micro businesses, he explains. And, unlike NGOs, the banks´ interest in opening their doors to this sector has been driven by the fact that it makes financial sense.
Still the leader in the field despite growing competition from privately-owned rivals, BancoEstado last year lent US$177 million to around 150,000 small-business clients, usually without collateral, and only 1.3% reneged on their debt. As a result, the bank aims to double the number of its small-business clients by 2007.
With competition heating up in the micro-business market, Pizarro says that the next challenge is to bring Chile's informal sector onto the books, granting them access to financial services. Meanwhile, BancoEstado is also advising other countries in the region on how to improve access to credit for small businesses.
Through SERCOTEC, micro firms - defined as those with annual sales of up to approximately US$75,000 - and individuals can obtain seed capital grants. This year, more than 90,000 business ideas were submitted to the program, of which 5,000 have been selected to compete for total financing of just under US$1 million. In the case of a single firm, the grant can reach a maximum of some US$8,750, although if a number of firms join together to develop a project, this rises to around US$35,000.
But, as well as providing seed capital, the program also seeks to improve the quality of micro businesses. At each stage, applicants have the chance to consult with advisors and fine-tune their ideas, emphasizes del Campo.
Through SERCOTEC, the government is now also planning to encourage further lending to micro firms by providing incentives to banks and other financial institutions, which would receive a subsidy of one peso for each 16 pesos lent under the program. The loans, worth between US$250 and US$7,500 would be available to companies with sales of less than US$6,000 a month.
And, in a further measure included in a capital markets reform currently before Congress, the law on collateral would be modified in a bid to improve small-business access to credit. By creating a national electronic register of assets that have been used as collateral, it would simplify the work of lenders and would, in addition, widen the range of assets that can be used for this purpose, including, for example, future cash flow.
Growth hurdles
Training and technology is another key issue for the owners and employees of Chile’s small businesses. Often with less education than their counterparts in larger companies, they tend to use older technology and are, as a result, often less efficient.
Chile has, for example, one of Latin America’s highest rates of Internet penetration and, according to government figures, Internet access is almost universal among large and medium-sized firms but, among small firms, drops to 40%.
And that can be a trap even for the best-laid plans. ChileCompra, the government’s online procurement marketplace, was designed not only to increase transparency but also to make it easier for small businesses to win government contracts. In fact, by the end of last year, some 110,000 suppliers were registered with the system which, in 2004, channeled business worth US$ 1.9 billion.
But, particularly since local governments began to use ChileCompra, the system has, in practice, proved an entry barrier for some micro firms, particularly those outside Santiago. Although public Internet centers provide access, they also need to learn how to use Internet, a problem that is currently being addressed through the government’s computer literacy program.
SERCOTEC also provides training, as well as financial support, to micro firms. Rafael del Campo says that, in order to help as many businesses as possible, most of the service’s budget goes on improving the environment for small businesses, rather than on grants to individual or groups of companies.
Central to SERCOTEC’s strategy is its website, www.redsercotec.cl, which has 30,000 registered users. Here, small businesses can follow training courses online, seek free advice from dozens of academics and experts, and find tools to analyze how their business is performing.
According to del Campo, the ability to analyze a firm’s performance is just as important as technical training and is key for the development of a more entrepreneurial culture in Chile. He argues that the social stigma traditionally attached to failure in business means that too many small business owners wage a hopeless struggle to keep their firms afloat when they clearly have no future.
“The best thing they can do is close down and avoid getting into lots of debt, which is how too many get into difficulties,” he says. “A failed business should not mean a failed businessman as long as he learns from his mistakes.”
And helping Chile's PYMEs to thrive is important not only for the economy, but also for Chile’s social development, adds del Campo. It is, he argues, crucial for social mobility and for improving income distribution. And that is also one of the issues that are very much to the fore in this year’s presidential race. |
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Although credit is still an issue for the PYMEs, the situation is changing, argues BancoEstado’s Jaime Pizarro.
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Según Rafael del Campo, de SERCOTEC, la capacidad de una pequeña empresa para analizar su funcionamiento es crucial.
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“The trouble with politicians is that they talk a lot, but don’t do much,” maintains Iván Vuskovic at CONUPIA.
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Small and medium-sized firms are key for the country’s booming foreign trade, notes ASEXMA president, Roberto Fantuzzi.
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Chile’s small and medium-sized firms are doing the most to reduce unemployment, creating seven out of ten new jobs.
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“The PYMEs are the lifeblood of the economy, they are central,” argues Pedro Corona, president of the National Chamber of Commerce.
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Special Report 
