country studies of the seven key target markets

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I n t e r n a t i o n a l i s a t i o n o f S M Es

Background document 6:

Country Studies of theSeven Key Target Markets

Zoetermeer, 20 July, 2011


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This report was prepared with financial assistance from the Commission of the EuropeanCommunities. The views expressed herein are those of the Consultant, and do not represent

any official view of the Commission.

EIM Business & Policy Research, www.eim.nl

PO Box 7001, 2701 AA Zoetermeer, The Netherlands

Phone: + 31 79 3430200

Fax: + 31 79 3430204

Rue Archimde 5, Box 4, 1000 Brussels, Belgium

Phone: + 32 2 5100884

In cooperation with:

Centre for Strategy & Evaluation Services CSES

Westering House, 17 Coombe RoadOtford, Kent, TN14 5RJ, United Kingdom

http://www.cses.co.uk

Phone: +44 1892 544025

and:

European Network for Social and Economic Research ENSR

Contact: [email protected]


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5.7 Policy support used by EU SMEs 111

5.8 What support is missing? 113

5.9 Which role could the EU play in stimulating EU SMEs to do more

business in Japan? 115

5.10 Workshop agenda 118

6 Russia 123

6.1 Profile of Russia 123

6.2 EU-Russia relations in trade and commerce 127

6.3 Opportunities for EU SMEs in Russia 132

6.4 Bottlenecks of doing business in Russia, especially for EU SMEs 134

6.5 Overcoming bottlenecks 137

6.6 Policy support offered to EU SMEs 139



6.9 Which role could the EU play in stimulating EU SMEs to do more

business in Russia? 148


6.11 Major conclusions 153

7 South Korea 159

7.1 Profile of South Korea 159

7.2 Trade with and investment from the European Union 163

7.3 Opportunities for EU SMEs 167

7.4 Bottlenecks and key issues and challenges for European SMEs in South

Korea 168

7.5 Overcoming bottlenecks 170




7.9 Which role could the EC play in stimulating EU SMEs to do more

business in South Korea? 173


7.11 Major results from the workshop discussions 174

8 Ukraine 181

8.1 Profile of Ukraine 181

8.2 Orientation of trade with and FDI in Ukraine 185

8.3 Opportunities for EU SMEs 187

8.4 Bottlenecks of doing business, especially for SMEs 1888.5 How did EU SMEs overcome the bottlenecks? 190




8.9 Which role could the EU play in stimulating EU SMEs to do (more)

business in Ukraine? 196


8.11 Major results from the workshop discussions 198

9 Overview of support provided by interviewedorganisations in the seven countries 207


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ANNEX I Support provided by interviewed organisations in Brazil 211

ANNEX II Support provided by interviewed organisations in China 221

ANNEX III Support provided by interviewed organisations in India 231

ANNEX IV Support provided by interviewed organisations in Japan 241

ANNEX V Support provided by interviewed organisations in Russia 248

ANNEX VI Support provided by interviewed organisations in South Korea 259

ANNEX VII Support provided by interviewed organisations in Ukraine 266

ANNEX VIII National researchers 275

ANNEX IX Country coordinators 277


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EIM provided the local researchers with an overview of existing EU support

programmes and support programmes implemented by EU Member States for

their country.

Next the local researchers were asked to prepare an interview programme and

make appointments with people and organisations to be interviewed.

The first series of 5-7 face-to-face interviews in each country were undertaken

by the local researcher together with the national coordinator from the Core

Team.

The additional interviews were held by the local researcher.

Most interviews were held in the capitals of the countries. In India interviews

were also held in Pune and Mumbai, in China also in Shanghai, and in Russia

also (by phone) with people in St.-Petersburg, Yekaterinburg, Zelenograd, and

Krasnodar. Most interviewees were very much willing to share their experi-

ences with the team. A few interviewees in Russia requested anonymity,

which was of course respected.

Based on a.o. the interview results, the national researchers prepared provi-

sional national reports.

Next, the national researchers organised in each country a half-day workshop

to discuss all findings. All people and organisations who had been interviewed

were invited to the workshop. The national coordinator attended (and often

chaired) the workshop. In most countries simultaneous interpretation was

available during the workshop.

The local researchers together with the national coordinators prepared the

country reports incorporating the conclusions of the workshops. These country

reports are presented in this report as Chapters 2 to 8.

Finally the local researchers prepared overviews of support provided by or-

ganisations interviewed in the seven target countries. These overviews can be

found in Chapter 9.

1.3 How to read this Background Document?

Each country chapter in this Background Documents starts with a brief pro file of

the target market concerned. First a general profile is provided based on public

sources1:

some key figures on the country (size in te rms of population and in square

kilometres) and the economy (GDP and GDP/capita);

some key figures on imports (total volume, main goods and main trading

partners);

some key figures on imports (total volume, main goods and main trading

partners); a brief narrative on the economy.

Secondly three graphs present some main findings of the present study based on

the trade analysis and the survey among internationalised SMEs in the European

Union:

development of exports 2000-2010 from EU27 to the country concerned for

SME and non SME sectors compared to similar data for the total export of

EU27;

1 World fact book CIA (//www.cia.gov/library/publications/the-world-factbook/geos/ks.html; 28-5-

11)


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2.2 Trends in trade with and investment from the European Un-ion

Figure 2.5 External trade of Brazil with the European Union (27), EUR millions.1

Table 2.1 External trade of Brazil with the European Union (27) in million , 2000-2009

Impor ts Expor ts

2000 16,826 16,308

2001 18,462 17,312

2002 15,201 15,984

2003 12,338 16,035

2004 14,082 19,459

2005 16,044 21,342

2006 17,582 24,181

2007 21,469 29,435

2008 26,795 31,588

2009 22,655 24,132

Brazil ranks 9th & 12th in the world as a trade partner of the EU (respectively for

imports from and exports to Brazil) and 4 th & 8th of the countries outside the

European continent. The EU is Brazil's biggest trading partner, accounting for

22.5% of its total trade (2009). As can be seen in Table 2.1 and Figure 2.5,

since 2003, the external trade between Brazil and the EU increased steadily, ex-

cept for 2009 when the effects of the international financial and economic crisis

1 Source: Eurostat, External and intra-EU trade - statistical yearbook: 1958/2009 Data, Luxem-

bourg, 2010, pp. 20-23.


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were felt. After the first years of the millennium, Brazilian trade balance has kept

a surplus ranging from 15 to 30% of the EU exports.

The EU is the largest foreign direct investor in Brazil with an annual average of

about EUR 12.4 billion in the last 5 years. The annual FDI from EU Member

States underwent a fast growth trend in this period. As to individual countries, 6

out of the 10 largest direct investors in Brazil are from the European Union and

account for about 61% of the aggregate investment of this group.

Figure 2.6 Foreign Direct Investments in Brazil. EUR millions, EU 271

1

Source: Banco Central do Brasil, http://www.bcb.gov.br/ , accessed February 2011.


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O r i e n t a t i o n o f E U e x p o r t s

Viewed across products (using the sections of the SITC - Standard International

Trade Classification, Rev. 4), Brazilian external trade with Europe is still showing

a specialisation typical of a relationship between developing and developed

economies.

Figure 2.7 External Trade of Brazil with the EU (27) by product groups. EUR millions.1

1 Source: Eurostat, "External and intra-EU trade - statistical yearbook: 1958/2009 Data, Luxem-

bourg, 2010, pp. 45-52.


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Brazilian surpluses occur in commodities (food and raw materials), while EU sur-

pluses arise in semi-processed (chemicals) and manufactured goods (machinery

and transport equipment).

The Brazilian market is quite protected with an applied customs averaging tariff

of 12%. EU tries to encourage Brazil to reduce tariff and non-tariff barriers, and

to maintain a stable regulatory environment for European investors and traders.

The basis of the EU's b ilateral trade relations with Brazil will be a wide-ranging

EU-Mercosul1 Association Agreement which will also result in the creat ion of a

vast free trade area. This agreement has been in negotiations since long. Until

summer 2004 there was gradual but substantial progress in the negotiation

which, however, stalled in September 2004. Since then, regular contacts have

taken place both at ministerial and technical level in order to explore ways on

how to re-engage the process. Recently (Madrid Summit, May 2010) it was de-

cided to resume negotiations.

2.3 Opportunities for SMEsAccording to interviewees there is a wide range of opportunities in Brazil for

European SMEs to invest. Some of such opportunities arise in connection with

known Brazilian shortcomings (e.g.: poor or insufficient infrastructure, mainly in

the transportation sector)2, abundance of natural resources (e.g.: oil and gas in-

dustries), the needs of the burgeoning middle class of the country and the sheer

size of the internal market. With the award to Rio de Janeiro of two of the high-

est profile sports events in the world, the 2014 World Cup and the 2016 Summer

Olympics, additional opportunities were generated.

The Table 2.2 shows areas where investment opportunities in Brazil a re available

as indicated by the interviewees3.

1 Mercosul (Portuguese) or Mercosur (Spanish) is an economic and political agreement betweenArgentina, Brazil, Paraguay and Uruguay, founded in 1991 by the Treaty of Asuncin. Its purposeis to promote free trade and the fluid movement of goods, people, and currency. The official lan-guages are Portuguese and Spanish. It has been updated, amended, and changed many timessince. It is now a full customs union. In 2004, Mercosul concluded free trade agreements withColombia, Ecuador, Venezuela, and Peru, adding to its existing agreements with Chile and Boliviato establish a commercial base for the newly-launched South American Community of Nations. In2008 Mercosul concluded a free trade arrangement with Israel, and another arrangement withEgypt was signed in 2010. Mercosul is pursuing free trade negotiations with Mexico and Canada.The trade bloc also plans to launch trilateral free trade negotiations with India and South Africa,building on partial trade liberalization agreements concluded with these countries in 2004. InJuly 2006, Venezuela officially joined the Mercosul trade bloc; its full membership is pendingratification by the Paraguayan congress.

2 Former Brazilian President Lula da Silva announced in March 2010 a USD550 billion long-terminfrastructure investment plan called the PAC II (the second instalment of the government's 'ac-celerated growth program', PAC or PAC I, a major investment plan of the government announcedin 2007. When combined with the USD504 billion in budget allocations outlined by PAC I in 2007,Brazil's targeted infrastructural investments should eventually total more than USD1 trillion overa 10-year period. "BRAZIL Fantastic OpportunitiesSpectacular Potential", The Address Maga-zine, issue 7, November 2010, http://www.theaddressmagazine.com/2010/10/brazil/ , accessedFebruary 2011.

3 While Brazil is known to possess rich mineral deposits (48 billion tonnes of iron ore, 208 milliontonnes of manganese, 2 billion tonnes of bauxite, and 53 million tonnes of nickel, reserves ofpotassium, phosphate, uranium, cassiterite, lead, graphite, chrome, gold, zirconium, thorium andother, as well as gems, such as diamonds, aquamarines, topazes, amethysts, tourmalines, andemeralds), none of the interviewees mentioned the mining industry as a field offering opportuni-

ties to European SMEs.


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Between 2003 and 2009 only, 29 million Brazilians got out of poverty. This

trend, which is expected to go on in the future1, is creating many opportunities

for investing in local businesses to manufacture consumer products or to provide

consumer services.

2.4 Bottlenecks of doing business in Brazil

Brazil ranks 58th in the ordered list of 139 countries (median rank: 70) partici-

pating in the last Global Competitiveness Index 2010/2011 (GCI)2. According to

this benchmarking study, "Brazil is fairly stable at 58 th, with a slight improve-

ment in score (4.3 vs. 4.2 in 2009), after following an impressive upward trend

for the last couple of years (up 16 positions between 2007 and 2009)."

From the 3 sub-indexes that contribute to the global index, it is in first one ("Ba-

sic Requirements") that Brazil performs worst, particularly in what concerns the

pillars "health & primary education" (87), "institutions" (93) and "macroeconomic

environment" (111). Other pillars contributing to other sub-indices that are

clearly above the median rank (i.e.: worst than the median) are "Goods market

efficiency" (114) and "Labour market e fficiency" (99), both contributing to the

sub-index "Efficiency Enhancers). In the last sub-index ("Innovation and sophis-

tication factors"), Brazil has a reasonable ranking: 38 th.

The results from the interviewing programme of public and private executives

and entrepreneurs in Brazil, between November 2010 and February 2011, gener-

ally corroborate the assessment of the factors made in the 2010/2011 version of

the GCI benchmarking study.

In the following sections these results are discussed.

2 . 4 . 1 M a j o r o b s t r u c t i o n sMore than 50% of interviewees concurred in mentioning 4 major obstructions

that are impairing the starting up and development of businesses in Brazil, par-

ticularly of direct investment projects in productive facilities by foreign SMEs,

notably from the EU.

Bureaucracy

Excessive bureaucracy is quite pervasive in Brazil, harming significantly the

business dealings of private companies with the public administration, absorbing

effort and time of their specialized staff. Bureaucracy is present in all govern-

1 By 2050, Brazil will rank as the fourth-largest economy in the world. Its economy, Latin Amer-ica's largest, is set to pass the economies of France this year and the United Kingdom in 2013. Itwill also overtake Germany in 2025 and Japan in 2039, according to projections in purchasingpower parity terms. The projections foresee an average annual GDP real growth of 4.4 percentfor Brazil in the 2009-2050 period. By comparison, the traditional Big Three economies will likelygrow by 2.4 percent (US), 1.3 percent (Germany) and 1.0 percent (Japan). Alejandro J. delCorro, "Brazil General Report 02/2011", GTSA Gateway South America, 30 January 2011,http://www.gatewaytosouthamerica-newsblog.com/2011/01/30/brazil-general-report-022011/ ,accessed February 2011

2 Klaus Schwab, "The Global Competitiveness Report 20102011", World Economic Forum, Geneva,Switzerland 2010. In this benchmarking study, competitiveness is defined as the set of institu-

tions, policies, and factors that determine the level of productivity of a country.


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mental layers (federal, state and municipal) and in the public agencies. Some

quotes: More than 50 certificates are needed to establish a company, costing in time

and money more than 200% of what was previously and reasonably planned. To change the registered office address of a company it is required to make

more than a dozen official registries and spend an amount of money in excess

of R$ 2,000 (or about EUR 900). Bureaucracy is a major drawback especially in areas where regulatory agen-

cies, such as ANVISA (the Brazilian Agency for Health Protection) or IBAMA(the Brazilian Environmental Protection Agency), must be consulted. EU com-panies are mentally unprepared to deal with this amount of bureaucracy andmany give up trying.

Huge bureaucracy in Brazil is due to overregulation and an excessive numberof organizations overlapping each other.

The GCI ranks "inefficient government bureaucracy" as the 5th of the most prob-

lematic factors for doing business in Brazil1.

Complexity of regulations

As a major contributor to the bureaucratic hurdles of Braz il, the complexity ofexisting regulations is quite exuberant and affects all important transactions (in-

formational, financial, and otherwise) companies must have with their stake-

holders. Complexity exists, inter alia in tax codes and regulations, in labour laws,

external trade rules, company law, industrial licensing, and foreign worker per-

mits. Quotes: To start importing goods, a firm needs to obtain a document named "Radar";

a pre-requisite for issuing such document is the submission of balance sheetsand income statements from previous fiscal years of the applying firm; start-ing-up firms cannot comply with this requirement because they don't have afinancial past; then, a bottleneck arises.

Work permits to foreign individuals can only be issued for specialised jobs that

no Brazilian citizen possess; as it is always possible to find Brazilians holdingpractically all specialisations, this creates barriers to contracting expatriatestaff, making it a lengthy and cumbersome process.

Labour law is complicated, outdated (approved in 1943) and paternalistic. Forinstance: once a benefit has been implemented by a f irm, it will be impossibleto change or eliminate it.

Trade unions are too strong and authoritarian: initiatives on the part of theemployers are often turned away, such as compensation programmes basedon performance and competence. Trade unions prefer not engaging in collec-tive negotiations at industry level favouring direct negotiations on a companyby company basis, thus undermining the power of the employers.

There is a multiplicity of taxes, contributions and other mandatory dues

(which are, actually taxes in disguise). They are sometimes cumulative anddifficult to comply with. The tax system comprises many different authorities levying taxes and entail-

ing many and complex procedures which are burdening enterprises2. Severalstates don't want to collaborate to resolve differences in tax regulations fear-ing to lose tax receipts.

1 Klaus Schwab, ibid., p. 106.

2 Reportedly, the existing i nefficient tax system is preferred to a "streamli ned and more efficientsystem" because it is capabl e of generating high levels of revenue". Carlos Pereira and MarcusAndre Melo, Tax Policy in Brazil: The Reform That Never Was, The Brookings Institution, 2011,http://www.brookings.edu/opinions/2010/0908_tax_policy_pereira.aspx , accessed February,

2011.


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tions, most of them sectoral employer's organisations, such as agriculture

(SENAR), industry (SENAI and SESI), wholesale and retail trade (SENAC and

SESC), transport (SEST and SENAT), co-operatives (SESCOOP), or autonomous

private organisation, such as SEBRAE (the Brazilian small business institute), as

well as federal agencies such as INCRA (Institute for the Agrarian Reform), DCP

(Federal Directorate of Coast and Ports of the Ministry of Maritime Affairs) and

FA - Fundo Aerovirio (a fund managed by the M inistry of Aeronautics).

High interest rates and difficult access to debt financing

Bank financing is very expensive and difficult to obtain, notably for a foreign firm

entering into the Brazilian market, as compared to bank financing in the EU. The

Brazil banks are more conservative, charging interest rates of 3% or more per

month dependent upon the type of collateral. Special financing programmes at

lower interest rates (e.g.: investment financing for acquiring machinery and

equipment of Brazilian origin) are not available for foreign SMEs in the starting-

up phase, because typically the financial institutions require that the applying

firm shows a financial track record of at least 3 years so they can perform an as-sessment of the credit risk1. Quotes:

The interest rates are very high. Short term loans cost around 18/20% per

year.

Bank financing is difficult and very expensive. Banks require substantial col-

laterals and interest rates for short term loans are of 20% or more. The refer-

ence interest rate (SELIC) is currently 10.75%.

Investment financing by bank credit for SMEs is virtually non-existent.

Bank credit is not available to foreign firms.

Bank financing for SMEs is very difficult to obtain and very expensive.

Also the GCI report acknowledges the "access to financing" factor as one of the

most problematic for doing business in Brazil, ranking it 7th in the listing2.

BNDES, the Brazilian Development Bank is the main development financing agent

in Brazil established on 1952 as a government agency. Subsequently it was con-

verted into a federal public company associated with the Ministry of Develop-

ment, Industry and Foreign Trade. BNDES is the second largest development

bank in the world. In July 2009 BNDES launched PIS, or the Investment Sustain-

ing Programme (Programa de Sustentao do Invest imento), to fight the finan-

cial crisis. This programme, which started w ith a budget of R$ 134 billion (Euro

66.5 billion) and is now being expanded, is dedicated to provide medium/long

term loans to Brazilian companies, at reduced interest rates (5.5% to 8.5% per

year), to finance the acquisition of machinery and transport equipment, as well

1 These constraints are reportedly made mandatory by the regulator, the Central Bank of Brazil(Banco Central do Brasil). To circumvent them, some suggest that an entrant foreign SME, will-ing to benefit from some special credit line from a Brazilian development institution, may buyoutan existing Brazilian company and conduct the financing negotiations through that local com-pany. The credit risk analysis wi ll take into account the past financial performance of the localcompany, as well as the expected performance of the new project (the former may be entirelyirrelevant as the new project may concern an industry that is completely different from the in-dustry of the local company). No success stories of such awkward approach were reported duringthe interviewing programme or the workshop.

2

Klaus Schwab, ibid., p. 106.


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to cut this type of investment than current expenditures with public salaries and

pensions, and acknowledging that the idea that the private sector could step in

and fill the financing gap d id not fully materialise, the report points out that the

"infrastructure development in the region has lagged behind that of the East

Asian tigers or even China over the last two decades, with severe implications in

terms of economic growth and poverty reduction". This is "particularly relevant

for large emerging markets such as Brazil, wh ich are increasingly playing a key

role in the global economy and for which poor infrastructure quality results in

higher logistics costs and inefficient patterns of interregional and international

trade."

Insufficient protection of IP

In Brazil the protection of intellectual and industrial property is weak due to a

legislation that does not conform to OECD standards. Some quotes:

Protection of intellectual or industrial property is more difficult than in Europe.

Legislation is not adequate and the intervention of INPI (the IP protection of-

fice) is not effective.

The poor protection of IP is a manifestation of the fact that Brazil practically

does not have international treaties, and, from a European perspective, the

possibility of making new treaties for IP protection is hindered by the obliga-

tion Brazil has to extend all facilities and privileges conceded to EU to the

other members of Mercosul.

The GCI report does not list this weakness of Brazil as a major problematic factor

for doing business in the country.

Lack of skilled labour

Some references were made to the lack of skilled labour, particularly in high

technology areas such as engineering, and to the fact that Brazilian workforce

has a low qualification. This is corroborated by the assessment made by the GCIreport, which ranks the "inadequately educated workforce" as the 8 th most prob-

lematic factor for doing business in Brazil1.

This deficiency is directly linked to the quality of the Brazilian educational system

at all levels (ranked in the GCI report 106th for primary education and 97th for

the higher education) and to disparities in educational access and attainment.

Brazil ranked 52nd out of 57 countries in the 2006 OECD PISA test, which is an

indicator of the relative performance of the educational systems2. In the 2009

test Brazil did not improve significantly (53rd out of 67)3. Some respondents also

pointed out that many government officials are not well prepared to deal with

their responsibilities, which may be a consequence of their insufficient skills.

Cultural differences

This encompasses a set of beliefs, attitudes and behaviours supposed to be

shared by the Brazilian population that are usually mentioned in national and in-

1 Klaus Schwab, ibid., p. 106.

2 Irene Mia et al., "The Brazil Competitiveness Report 2009", World Economic Forum and FundaoDom Cabral, 2009, pp. 59-60.

3 OECD, "PISA 2009 Results", http://www.pisa.oecd.org/dataoecd/54/12/46643496.pdf, accessed

February 2011.


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administration, aiming at making the functioning of public services and agencies

more friendly to companies and entrepreneurs. Besides calling for advancements

in the qualification of public officials, these reforms should reduce the routine

administrative burdens, minimise start-up requirements, improve the quality of

regulations, simplify the tax system, and increase the efficiency of the legal sys-

tem in general. Furthermore, the other 2 major bottlenecks, h igh taxes (includ-

ing import duties) and high int erest rat es and access to f inance (particularly by

foreign SMEs), entail also complex economic governance problems, notably re-

ducing domestic protectionism, fighting the decline of the manufacturing indus-

try's contribution to GDP threaten by cheap China imports, managing the budget

deficit, and keeping inflation at bay.

Resolving deficiencies ofpubl ic inf ras t ructure calls for complex projects and sub-

stantial financial resources; the international sports events planned to 2014 and

2016 (World Cup and Summer Olympics) offer good opportunities to open the

economy internationally, by selecting the most effective suppliers, increasing the

efficiency of public spending at the same pace. Insufficient protection ofindus-

t r ia l and inte l lec tual proper ty , which, together with the underdevelopment ofstandardisat ion and cer t i f icat ion policies in the country, are main hurdles to eco-

nomic progress, are also in need of public reforms. Still plagued by many defi-

ciencies and social and regional disparities, the Brazilian educat ional system has

a long way to go before it arrives where it needs to be, to improve the competi-

tive qualification of future generations.

Depending on many demanding reforms to improve the currently existing hur-

dles, it is not likely that the situation will get better significantly in the short and

medium term. Thus, meanwhile, what can be done is to help EU SMEs to antici-

pate and be prepared to deal with the bottlenecks and to influence and help Bra-

zilian authorities to take the necessary steps to introduce the reforms needed to

change the status quo.

Some of the interviewees emphasised the obvious recognition of the binding re-

sponsibility of the Brazilian authorities in solving most of the existing hurdles

that are obstructing foreign investment in Brazil, particularly by SMEs, and spe-

cifically by the European ones. Some quotes:

The federal government is making some efforts to better some of the bottle-

necks. There are some legislation in the Congress geared towards making ad-

ministrative procedures more flexible and swift, notably through the use of in-

formation technologies and internet. So far, its results are insufficient.

It will never be resolved without the attention and cooperation of the Brazilian

Government. Only possible with firm determination of the Government to implement admin-

istrative reforms.

Government should undertake programmes to overcome the bottlenecks. Fur-

thermore, employer's trade associations should be strengthened.

When questioned about what should be done to this respect, respondents offered

some solutions or ways to better deal w ith the obstructions and hurdles. These

recommendations can be categorised into 2 broader classes, according to the

addressees: SMEs and EU institutions.


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2 . 5 . 1 R ec o m m e n d a t i o n s t o S M EsThe recommendations to SMEs were basically of 3 types.

Get local help from trustworthy professionals

This type of advice was put forward by more than a third of the interviewees.

Some quotes:

Any SME aiming at developing its business dealings in Brazil should get the

appropriate local expertise by engaging lawyers, auditors and other Brazilian

professionals.

To resort to trustworthy professional support in the country (lawyers, ac-

countants, auditors, etc.).

Companies should select and engage good lawyers, accountants, and other

local professionals.

Contact free local supporting bodies

The respondents mentioned also the support of existing chambers of commerce,

consulates, trade offices and other home country representations in Brazil. Such

sources of help were cited with the same frequency as the first one ( local profes-sionals), sometimes with the proviso that these bodies are not as well prepared

as the private professionals to provide the required support. In some interviews,

local public agencies and/or industry associations were also recommended, as

sources of vital information for EU SMEs prepare thei r business plans.

In some circles (notably, federal and state agencies) it was expressed the belief

that Brazilian government became recently more aware of difficulties that foreign

SMEs face in entering in the market, which, combined with the perceived need of

attracting foreign investment in specific sectors where domestic technology and

experience are more faulty, induced some efforts to ease the requirements or to

help in overcoming them, notably through the informative functions. One of such

examples is the federal agency APEX that, after starting focused solely in the

promotion of exports, recently developed capabilities in the FDI promotion area.

Some states (e.g.: So Paulo, Rio) are also developing investment promotion

agencies and trying to extend more favourable development loans to SMEs,

through state economic development financial institutions.

Some excerpts of the recommendations from interviewees:

With the help of the Chambers of Commerce and Industry1.

Consulates and Chambers of Commerce may provide valuable support to EU

SMEs by promoting direct contacts and investment missions to Brazil.

A platform such as the incubator currently run by the Danish consulate in So

Paulo should be considered as an ideal measure, offering space, facilities andcustomised advice to SMEs willing to enter the Brazilian market.

Brazilian organizations are all fragmented2. For this reason the large industry

federations (e.g.: FIESP, at So Paulo, and FIRJAN, at Rio) work together with

SEBRAE and some CCIs combining efforts to offer more consistent and fo-

cused sources of information and networking. CIN, the federal confederation

1 European CCIs active in Brazil banded in the local branch of Eurochambres, the Association ofEuropean CCIs, are from the following 9 member states: Belgium, France, Italy, Germany, Lux-embourg, the Netherlands, Portugal, Spain, and Sweden.

2

This is one of the expressions of Brazilian excessive "federalism".


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The EU should provide direct support to existing Brazilian companies (which

includes local operations and joint ventures of EU SMEs) helping them to deal

with the above bottlenecks.

It was mentioned an institutional co-operation between the Ministry of P lan-

ning (Ministr io do Planejament o) aiming at helping Brazil dealing with public

administration red tape. It is the "Euro Brazil 2000"1 project that seems to be

already closed. It aimed at developing the capabilities and skills of public ser-

vants via video courses and distance learning. This approach could be re-

enacted.

To expand the existing co-operation platform between the European Commis-

sion and the Brazilian government dedicated to improve administrative proce-

dures and to reduce governmental red tape and the regulation burden over

private businesses.

The European Commission might also help in developing the national system

for protecting intellectual and industrial property, as well as the standardisa-

tion and certifications systems, capitalising in the vast experience Europe has

on these matters.

2.6 Policy support offered to EU SMEs

There is no programme sponsored by the EU offering support to SMEs specifically

targeted to the Brazilian market. Direct support to EU SMEs provided by the EU

Delegation is very limited. Most visible initiatives concern the promotion of inter-

national co-operation in technology areas through the Enterprise Europe Net-

work2 and in some promotional activities within the context of its general re-

sponsibilities of nurturing and enhancing bilateral relations.

There are a few support services funded by EU Member States3, focused in Brazil

and deployed in its territory. These services are offered exclusively to homecountry SMEs by consulates, export and investment promotion agencies of vari-

ous European countries. During the interviewing programme 3 institutions offer-

ing such types of programme were contacted (the incubator of the Consulate

General of Denmark, the United Kingdom Trade and Investment, and the Spanish

ICEX). Typically these organisations make available to individual SMEs general

market information, signpost to further sources of information, recommend on

local professional services, counselling & guidance, among other services. They

1 This project provided support to the modernization of the federal public service in Brazil in theareas of training, planning, human resource management, ethics and public participation. It was

implemented by an international consortium of European public administration organisations.

2 The Enterprise Europe Network is an information and consultancy network aiming at assistingSMEs in developing their innovative potential and to raise awareness for the policies of the Euro-pean Commission. It is a focal point network consisting of 600 organizations - chambers of com-merce, regional development agencies, university technology centres, where about 3 000 profes-sionals are working in over 40 countries worldwide.

3 Some of these programmes are co-funded by EU structural funds, such as the ERDF. This is thecase of ICEX that offers, besides in kind support or subsidised professional services, a widerange of financial support to Spanish SMEs willing to export or start direct investment projects inBrazil. The latter include concessionaire loans and grants, as well as equity fi nance by means ofventure capital operations. Some of this financial assistance is also available from other Spanishinstitutions, such as COFIDES (which also handles export credit insurance) and ICO (Centralstate owned institution) and other organisations, including financial institutions of the autonomic

regions of Spain.


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AD Diper - Pernambuco Economic Development Agency (Agncia de

Desenvolv iment o Econmi co de Pernambuco)

APEX Brazil (Exports and Investment Promotion Agency (Agncia de Promoo

de Export aes e Inv est imentos)

Banco do Nordeste

CODIN Industril Development Corporation of the State of Rio de Janeiro

(Comp anhia de Desenvolv iment o Ind ust r ia l do Estado do Rio de Janei ro)

INDI Industrial Development Institute of Minas Gerais (I ns t i t u to de

Desenvolv iment o I ndust r ia l de Minas Gerais)

SUFRAMA Manaus Free Trade Zone Authority (Super intendnc ia da Zona

Franca de Manau s)

Invest So Paulo.

This list includes quite different institutions as regards their statuary purposes

(one is a development bank, a few are state investment promotion agencies, one

is a federal promotion agency), territorial reach (federal, multi-state, state), dy-

namics (some have a proactive stance trying to recruit foreign investment and

offering special tracks to get financial and fiscal incentives at state and municipallevel, other are more conservative bureaucratic institutions).

One example of other type of public institutions that are seeking FDI is CIATEC,

a technology incubator. Majority owned by the Campinas Town Council (99%),

and specialising in NTBFs, this company operates 2 technology parks in the

Campinas1 municipality. CIATEC is actively seeking new technology foreign firms

(notably in Europe) that may be willing to locate their operations in one of their

science and technology parks.

2.7 Policy support used by EU SMEsDespite the fact that the number of interviews does not give a sufficient basis for

quantitative inferences, it seems that the support most used by European SMEs

when starting their business in Brazil are from trade & investment offices, consu-

lates, and CCIs of their home country. This is because such support services are

considered more trustworthy, more culturally familiar to the SMEs and are free of

charge in most cases. In th is context, incubators from home country organisa-

tions seem to be in h igh demand lately.

Professional services from local firms and specialised government agencies are

seemingly the next sources of support and specialised information.

Investment agencies, either federal (APEX), or state owned, tend to look for lar-

ger projects than SMEs can assure, thus directing their contacts to larger com-

panies. It is not clear whether these institutions can offer the type of integrated

1 Campinas is a city and municipality located in the interior of the state of So Paulo. I t has apopulation of about 1 million (the metropolitan area has some 19 cities and a population of 2.8million). Campinas is also the administrative centre of the meso-region of the same name, with3.8 million inhabitants. It is the third largest city in the state, after So Paulo and Guarulhos.The Viracopos International Airport connects Campinas with many Brazilian cities and also oper-ates some international flights. The city is home to the State University of Campinas or Unicamp,which is responsible for around 15% of all Brazilian research and, according to the Times HigherEducation 2007 World University Rankings, is the 177th best university in the world, and the 2nd

best in Latin America (after the University of So Paulo in 176th place).


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helping Brazilian authorities to reduce or remove the current hurdles that are af-

fecting European investment and trade in Brazil and (2) creating new or

strengthening existing mechanisms that encourage projects in these areas, re-

ducing the risks and costs of preparing and rolling out business development

projects in the country.

Some of the respondents offered ideas to operationalise the 2 above roles:

a) To help removing current hurdles under direct control of the Brazilian public

administration, besides general political influence, EU could consider the fol-

lowing:

To expand bilateral arrangements in the context of the recently resumed

trade negotiations between Brazil and the EU. Some respondents consider

that bilateral arrangements (EU Brazil) are the best way to provide impe-

tus to trade and investment operations between Brazil and Europe (thus fa-

vouring EU SMEs) in a way similar to what is happening with Mexico. In

general they are aware that the major obstacle to such possibility is Brazil

being a member of Mercosul, which implies that any special facilities wouldhave to be extended to the remaining members of this regional association.

The problem resides more with Brazil than with the EU.

To promote and part-finance the setting up of a higher education institute

or university organised in co-operation between Europeans institutions,

such as universities and business schools, and Brazilian organizations, such

as SEBRAE, specialising in re-training public officers and servants in mod-

ern administrative techniques, thus helping in reducing the national bu-

reaucracy.

To review and assess the results of the "Euro-Brazil 2000" programme and,

depending on the results of such assessment, re-enact or redefine a new

co-operation programme aiming at developing the capabilities and skills of

Brazilian public servants. Other respondents worded this recommendation

as follows: "To expand the existing co-operation platform between the

European Commission and the Brazilian government dedicated to improve

administrative procedures and to reduce governmental red tape and the

regulation burden over private businesses."

To enter into negotiations with Brazilian authorities to prepare and imple-

ment a full fledge programme (or programmes) to reform the ex isting

regulations and institutions in the country dealing with IP, standardisation

and certification matters. Such initiative should involve and have the sup-

port of the appropriate European institutions such as EPO, the European

Patent Office, the European Standards Organisations (CEN, CENELEC and

ETSI), ECQA, the European Certification and Qualification Association,among other to allow the transfer of their extensive experience of best

practices and policies.

To increase the co-operation with APEX and state investment promotion

agencies in order to enhance their capabilities to support EU SMEs business

in Brazil and, possibly, to part-finance their operations, provided that such

funds would be earmarked to support EU SMEs and subject to independent

evaluation. This could be materialised through setting up a special depart-

ment to handle, on a preferential fashion, the needs of European SMEs

when establishing in Brazil.


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A n n e x I L i st o f i n t e r v i e w e e s

O r g a n i sa t i o n I n t e r v i e w e e s

ApexBrazil Brazilian Trade and Invest-ment Promotion Agency

Paulo Morais, Investment Manager

Association of the European Chambers ofCommerce and Industry in Brazil

Yves Jadoul, Vice-president

BIOTEE Joo A. Mariano, Commercial and Administration

ManagerGerard van Lieshout, Owner (50%)

British Chamber of Commerce and Indus-try in Brazil

Rodrigo Alberto Correia da Silva, President SoPaulo

Chamber of Commerce and Industry Brazil

Germany

Eckart Michael Pohl, Director of Social Communica-

tion Mercosul

CIATEC Campinas Technopole Develop-

ment Corporation

Dcio Sirbone Jnior, Director

CNI - National Confederation of Industry Thiago Mendes Lima, Coordinator for AL-INVEST ofMercosul, Chile and Venezuela

European Union Delegation to Brazil Jos Mouta, Project Manager (economic co-operation)

FIESP Federation of the Industries of

the So Paulo State

Fabrizio Sardelli Panzini, Analyst, Foreign Trade

Jos Luiz Pimenta Jnior, Coordinator of Interna-tional Negotiations - DEREX

FIRJAN - Federation of the Industries ofthe State of Rio de Janeiro

Claudia Teixeira dos Santos, Foreign Trade AnalystCNI

Fernando Saboia de Castro, Consultant CNILaila Bozza Mendes, Project Manager SEBRAE

Bruno Solis, Consultant SEBRAE

G&E Strategy and BusinessConsultants

Carlos Matavelli, Partner, Strategy and Administra-tionArtur Heitzmann, Director, Quality and Lean Manu-

facturing, Environment

General Consulate of Denmark Nicolai Prytz, Consul General

ICEX - Economic and Foreign TradeOffice of Spain in So Paulo

Ins Menndez de Luarca Bellido, Economic andCommercial Consultant

'Nossa Caixa' So Paulo Deve lopmentBank

Julio Themes Neto, SuperintendentFlavio de Almeida Marques, Superintendent Busi-

ness and Operations

PP&C Paulo Jos de Carvalho, PartnerE. Camilo Pachikoski, Partner

Renz of Brazil Mario R. Hinrichsen, General Manager

So Paulo State Investment PromotionAgency

Jos Roberto de Arajo Cunha Jr., Director

SEBRAE-SP Service Center for supportto Micro and Small Enterprises in the

State of So Paulo

Ricardo Luiz Tortorella, SuperintendentRose Mary Estcio, Consultant International Affairs

Gilberto Alvaro Campio, Consultant InternationalAffairs

UK Trade and Investment Martin Whalley, Head of Trade for the State So

Paulo


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3 China

3.1 Profile of China

3 . 1 . 1 K e y d a t a

1. Number of inhabitants 1,336 ,718 ,015 (Ju ly 2011 est. ); rank 1 in the

world

2. Size (square kilometres) 9,596,961 sq km; rank 4 in the world

3. GDP (at official exchange

rate in 2010 USD) and

GDP/cap (PPP, in 2010

USD)

$5.745 trillion (no te : because China's exchange

rate is determine by fiat, rather than by market

forces, the official exchange rate measure of GDP

is not an accurate measure of China's output; GDPat the official exchange rate substantially under-

states the actual level of China's output vis--vis

the rest of the world; in China's s ituation, GDP at

purchasing power parity provides the best meas-

ure for comparing output across countries (2010

est.)).

$7,400 (2010 est.)

4. Total imports and share

of EU in total imports

$ 1,307,000,000,000 2010 est., rank 3 in the world

Goods: electrical and other machinery, oil and

mineral fuels, optical and medical equipment,

metal ores, plastics, organic chemicals

Partners: Japan 12.27%, Hong Kong 10.06%,

South Korea 9.04%, US 7.66%, Taiwan 6.84%,

Germany 5.54% (2009)

5. Major imports from EU

6. Total exports and share

of EU in total exports

$1.506 trillion (2010 est.); rank 2 in the world.

Goods: electrical and other machinery, including

data processing equipment, apparel, textiles, iron

and steel, optical and medical equipment

Partners: US 20.03%, Hong Kong 12.03%, Japan

8.32%, South Korea 4.55%, Germany 4.27%

(2009)Source: World fact book CIA (//www.c ia.gov/lib rary/publ icat ions/the-world -factbook/geos/ks.htm l; 28-5-11)

3 . 1 . 2 E c o n o m y 1For centuries China stood as a leading civilization, outpacing the rest of

the world in the arts and sciences, but in the 19th and early 20th centu-

ries, the country was beset by civil unrest, major famines, military de-

feats, and foreign occupation. After World War II, the Communists under

MAO Zedong established an autocratic socialist system that, while ensur-

1 World fact book CIA (//www.cia.gov/library/publications/the-world-factbook/geos/ks.html; 28-5-

11)


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Figure 3.2 The percentage of internationalised EU SMEs that have business activities in

the 7 target countries

0% 2% 4% 6% 8% 10% 12% 14%

China

Russia

Ukraine

Japan

Brazil

India

South Korea

Source: Survey 20 09- 2010, Opport unit ies In ternat ional isat ion SMEs, EIM/GDCC (EU27,

N=6649 ) .

The barriers reported for China (Figure 3.3) are rather similar to the average for

the 7 key target markets. Major differences:

- China is a very competitive market, price of products is more important

than elsewhere.

- Also different business culture is somewhat more important.

- Tariff, quota and lack of qualified personal are less important with regard

to the Chinese market.

Figure 3.3 Major barriers for China, percentage of SMEs

0% 5% 10% 15% 20% 25% 30% 35%

Knowledge o f foreign languages

Transport costs

Lack of adequate market information

Difficult paperwork, bureaucratic procedures

Different business cultures in foreign markets

Lack of financing

Other laws and regulations in foreign countries

Payment risks

Lack of sufficiently qualified personnel

Tariffs or quota for foreign markets

Lack of adequate public support

Price of our products and/or services

Political risks

Quality of our products and/or services

Conformity of prod./serv. to national standards

China Average 7 key markets


N=6649 ) .


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Figure 3.4 shows that there are no support services that are in the perception

of European SMEs much more effective for China than in the other key target

markets. Information on market opportunities scores a bit higher and is the ser-

vice with the highest score. Support in dealing with national technical standards

in China scores lower than average

Figure 3.4 Anticipated effect of possible public support measures for China, percentage

of SMEs expecting the instrument to be effective or very effective, ranked by

average

0% 10% 20% 30% 40% 50% 60% 70%

Assis tance with identifying partners

Information on market opportunities

Information on rules and regulations

Business cooperation and networking

One-to-one meetings with partners

Exhibiting in international trade fairs

Business or professional advice

Auxiliary services in target market

Dealing with national technical s tandards

Trade missions

Staff training

Dealing with Intellectual Property Rights

Temporary office facilities in target market

Other non financial services

China Average 7 key target markets


N=6649 ) .

3.2 China as a trading partner

3 . 2 . 1 I n t r o d u c t i o nChina is the fourth largest country in the wor ld with an administrative organisa-

tion based on three-levels, dividing the nation into provinces, counties, and

townships. At present, China has 23 provinces, 5 autonomous regions, 4 munici-

palities directly under the Central Government, and 2 special administrative re-

gions.

This is a relevant issue for the present study as shown in the chapters to follow:

European SMEs tend to under-estimate regional differences on the Chinese mar-

ket, both with regard to general market conditions as with regard to interpreta-

tion and enforcement of rules and regulations at local and provincial levels.

As already mentioned in Section 3.1, China's economy has changed since the

1970s from a closed, centrally planned system to a more market-oriented one


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that plays a major role in the global economy. In 2009, the global economic

downturn reduced foreign demand for Chinese exports for the first time in many

years, but China rebounded quickly, outperforming all other major economies in

2010 with GDP growth around 10% (in 2008 and 2009 still about 9%). But the

Inflation rate (consumer prices) is now 5% (2010 est.) surpassing the govern-

ment's target of 3%

The total imports and exports in 2010 increased by 35% compared with 2009

making China in 2010 the world's largest exporter ($1.506 trillion, 2010 esti-

mate).

In 2010 more than 27000 new foreign companies were established (a 17% in-

crease compared to 2009) in China with FDI of about $11 billion (both figures

about 17% in creased compared to 2009).

China has already concluded a lot of Free Trade Agreements (with a.o. Asean

countries, Pakistan, Chilli, New Zealand, Singapore, Peru, Costa Rica etc), but

there is not yet a FTA signed with the EU or EU Member States.(See: http://fta.mofcom.gov.cn/topic/enperu.shtml)

On the website of DG Trade (http://ec.europa.eu/trade/creating-

opportunities/bilateral-relations/countries/china/, as of 23-2-2011) it reads:

China is the single most important challenge for EU trade policy. China has re-

emerged as the world's third economy (recently overtaken Japan, and now the

second largest economy) and the biggest exporter in the global economy, but

also an increasingly important political power. EU-China trade has increased

dramatically in recent years. China is now the EU's 2nd trading partner behind

the USA and the b iggest source of imports. The EU is China's biggest trading

partner. The EU's open market has been a large contributor to China's export-led

growth. The EU has a lso benefited from the growth of the Chinese market and

the EU is committed to open trading relations with China. However the EU wants

to ensure that China trades fairly, respects intellectual property rights and meets

its WTO obligations.

3 . 2 . 2 T h e i m a g e o f C h i n a i n E u r o p eThe development of China in the last decade is impressive by any standards,

with the business press emphasising China's:

huge market;

very high growth rates;

and unlimited business opportunities

Moreover, large scale European car makers, such as Mercedes Benz and Volks-wagen report very large annual sale increases, even in 2010 compared with

20091, when trading conditions in many other markets were difficult. Whilst

these are very large corporations, such developments also provide opportunities

for SMEs as subcontractors.

1 News release on http://www.emercedesbenz.com dated 10-2-2010 reports: Deliveries for 2010in China totalled 148,400 passenger cars, more than double the number of units sold in 2009(70,100 units). And on http://www.volkswagenag.com , Volkswagen reports Record year 2010:

1,923,500 cars delivered with a solid growth of 37 percent.


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The coverage given to the experience of Europe's leading companies has a posi-

tive effect on making the wider business community in Europe, including the SME

sector, more aware of the changes in the world economy and the need to see

whether their business strategies need adaptation to reflect these developments.

At the same time, several people have drawn attention to negative side effects.

For example, some enterprises come to China with a rather vague and nave idea

(' huge marke t , I shou ld be there ') without studying whether or not their business

proposition is likely to be successful in China. The market is indeed very large,

but so is the competition on Chinese markets both from local and from intern a-

tional suppliers. One needs a serious unique selling point (USP) to have a rea-

sonable chance of a successful business development.

A second issue is that some SME are too optimistic about the extent to which

quick gains are possible. Nearly all the people that were interviewed stressed

that one needs several years to build up relations with business partners and

government agencies before business will really take off and can become profit-

able. As a consequence, it is necessary to take a long-term view and be willingto invest time and other resources for a few years.

It is important to invest in the initial years in obtaining an understanding of the

(business) culture in China and of the specific province in which one would like

to make a start. Th is does not only refer to issues, such as language, personal

attitudes and relations, how business relations are established and developed

and how to organise communication with local staff in China but also to more

structural issues.

Europeans tend to believe, for example, that knowing and understanding the

rules and regulations are the key to understanding the local business environ-

ment (investment laws, financial and fiscal arrangements, employment laws,

etc.), but many tend to overlook that in China power and re lationship are much

more important than most Europeans assume1. One needs not just to find good

local staff and build up re lations with local business partners but also to invest in

building good relations with local governments and government agencies, such

as customs, environmental inspection, and tax offices.

3 . 2 . 3 W T O m e m b e r s h i pIn 2001 China accessed to the WTO. The EU uses also the regular Trade Policy

Review of China in the WTO to raise a number of concerns regarding China's

trade policy. These include inadequate protection of intellectual property rights,the maintenance of industrial policies which may discriminate against foreign

companies especially in sectors like automobiles and barriers to market access in

a number of services sectors including construction, banking, telecommunica-

tions, and express postal services). Access to raw materials has also been identi-

fied as a major trade obstacle as well.

1 This may also be related to corruption practices that also in China have to be dealt with occa-

sionally.


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Table 3.1 Total EU-27 export of goods and exports to China, by type of product, 2009

(EUR million)

Type of product

Total EU27

expor ts

EU export s

to China

Dis t r ibu t ion

(% )

Share

China (% )

0: food and live animals 44746 2035 2% 5%

1: beverages and tobacco 17971 893 1% 5%

2: crude materials, inedible, except fuels 25168 6722 7% 27%

3: mineral fuels, lubricants and related mat. 57157 237 0% 0%

4: animal and vegetable oils, fats and waxes 2585 61 0% 2%

5: chemicals and related products, n.e.c. 195613 12660 13% 6%

6: manufactured goods classified chiefly by material 139512 12485 12% 9%

7: machinery and transport equipment 455799 54736 55% 12%

8: miscellaneous manufactured articles 119006 9273 9% 8%

9: commodities and transactions n.e.c. 38143 1177 1% 3%

Total 1095700 100279 100% 9%

Source: Euros tat , s ta t is t ics in focus, 48/ 2010 (17/ 9 / 2010) .

S e r v i c e s

(i) EU services exports to China 2009: 18 billion

(ii) EU services imports from China 2009: 13 billion

Eurostat1, reports that in 2009, EU27 external trade in services slowed down

compared with 2007 and 2008. EU27 exports of services to the rest of the word

fell by 10 and EU27 imports by 8. As a result, EU27 trade in services recorded areduced surplus. In 2009, the EU27 recorded relatively stable surpluses in trade

in services with all its main partners, except for the USA. Among the other main

partners, the highest surpluses were observed with the EFTA countries3 (23 bn),

Russia (7 bn), China and Japan (both 5 bn). The shares of China in these provi-

sional data on 2009 are: export of services (4%), import of services (3%) and in

the trade balance of services (9%).

D e v e l op m e n t s 2 0 1 0

In October 2010 Eurostat 2 reported that in 2010 the EU27 trade with all its major

partners grew again (January-July 2010 compared with January-July 2009), ex-

cept for imports from the USA which remained nearly stable. The most notable

increases were recorded for exports to Brazil (+57%), China (+41%) and Turkey(+38%), and for imports from Russia (+43%), China and India (both +25%).

The EU27 trade deficit with China increased China (-86.4 bn compared w ith -75.2

bn).

1 Newsrelease, euroindicators, STAT/10/177, 25/11/2010.

2

Eurostat, newsrelease, euroindicators, 152/2010, 15/10/2010.


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in-house lawyers, making it necessary for them to use externals that are

not always easy to find. A potentially important point is the commonly re-

ported view that perceived IPR problems dissuades some European SMEs

from entering China.

(ii) Firms entering new markets require various types of information about: forexample, market opportunities, potential distributors, laws and regulations,

and the availability of business services. However, for firms seeking to enter

China, access to g ood qual i ty inform at ion is reported to represent a higher

cost than in other markets. Once again this can be a particular problem for

SMEs faced with more limited internal resources than larger enterprises.

(iii)Similarly, when entering new markets businesses need to understand theregulat ions governing those markets, in order to identify the implications

for their (planned) activities. However, achieving this in China requires

more than just information about the relevant regulations; it a lso requires

knowledge of how these regulations are likely to be applied. This is a par-

ticular challenge because of frequently changing laws and uncertainties

about how laws and regulations will be interpreted and implemented, not

least because some laws can be conflicting. One informant gave the exam-ple of changes in tax laws in 2010, where it is unclear what the implications

will be for businesses. Local variations in regulations add to the difficulties,

with variations in interpretation and implementation additional issues. The

pattern was reported to be that in the more developed regions, interpreta-

tion of laws is re latively strict whilst in the less developed regions interpre-

tation is less predictable, because of lower competence levels on the part of

regulators. However, some informants also suggested there is a difference

in enforcement practice by the courts in China with respect to indigenous

and foreign companies.

(iv)Market access issues: non-tariff barriers exist in several industries, as partof the government's attempt to protect Chinese enterprises. One example is

the banking sector, which not only makes it difficult for European financial

service providers, but also for European enterprises in other sectors to deal

with financial (investment) issues in China. Another example mentioned

was China's Indigenous Innovation Policy which makes it difficult for non-

Chinese owned companies to access to public procurement contracts. Chi-

nese companies are favoured because the government believes innovation

needs to come from within China.

(v) Cultural di f ferences: Culture affects business practices, etiquette, interper-sonal habits, which mean that cultural differences can lead to misunder-

standings. For example, a Chinese business service provider referred to a

meeting involving himself, a European customer and two Chinese clients.

He reported that his European customers were well-dressed in summer,contrasting with Chinese clients who were only dressed in T-shirt and

shorts, and spitting on the ground. Being well dressed in business meetings

may be an unspoken rule in Europe, but not in China. It was reported that a

promising sale was prevented because of the culture clash. Of course, lan-

guage barriers can contribute to the cu ltural misunderstandings although

most are more deep rooted, because the approach of some European busi-

ness people is too strongly influenced by the experience they have gained

in more familiar markets. One example is an underestimation of the impor-

tance of building strong relationships with local government. Another ex-

ample mentioned is the attitude towards corruption, which as it was pointed

out is not unique to China.


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Additional barriers mentioned by some informants included:

Recruit ing the right local employees can be a major issue. Training is obvi-

ously one of the possible solutions to this and a number of Chambers and

support organisations are involved in cooperating with the Chinese govern-

ment to set-up more advanced technical training.

What one informant described as the big is beaut i fu l issue, which refers to the

widespread perception in China than large enterprises are more competitive

and competent than small firms. This represents a challenge for European

SMEs who need to overcome the view. Business support organisations can

help to change this attitude over time by organising meetings in their offices

where Chinese business people are invited to meet European SMEs.

Some SMEs are said to face f inancing const ra int s, when entering China, where

the thresholds for minimum investment are relatively high.

It is important to keep in mind that entering China is only the first stage in

successful market exploitation. As a consequence, SMEs may have different

support needs at different stages of market development. In this regard, oneinformant referred to growth const ra ints, which firms experience once they

become established. These include recruiting staff, ongoing regulatory issues

and relocation, which is often needed to accommodate expansion.

Fear can be a key bottleneck, according to informants representing two of the

EU's smaller Member States. This is fuelled by reports of national counterpart

firms having bad experiences in China. When asked for examples, they de-

scribed attempts on the part of their enterprises to do business with Chinese

partners who kept raising the level of investment required. They also referred

to cases of business partners disappearing, stating that bad experiences are

more than just isolated cases. Problems reported with Chinese suppliers in-

cluded orders placed but no delivery and some quality issues. As a result, one

of the messages promoted to companies is don't go to China w ithout a reliable

Chinese partner. Fear is also fuelled by a lack of any real success stories of

national companies in China.

The distance from Europe can also be a barrier to entry, particularly when in-

tervening market opportunities exist, such as Russia and Ukraine, which some

East European businessmen feel more comfortable in for h istorical reasons. A

similar argument applies to suppliers.

Ant i dumping disputes. As the Chinese side is sometimes accused of engaging

in dumping (supplying below cost price), and foreign government take action,

the Chinese government retaliates by banning some European products from

the market

It is important to recognise that the issues European businesses face in China

vary according to what's a company is trying to do. Informants often distin-

guished between firms looking for agents to sell into China and those wishing to

establish a physical presence in China. Whilst these two groups share some sup-

port needs, there are also important differences. Firms looking to establish a

physical presence need help in overcoming some of the basic entry requirements

such as legal registration, but they can also benefit from being part of an estab-

lished national business community in China, which increases the comfort factor

for them. Although China is a large market with many business opportunities,

most key informants reported that entering China represents a bigger challenge

for SMEs than entering many other markets.


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3.6 Overcoming bottlenecks

Although the informants offered a variety of detailed responses when asked how

European SMEs overcome the barriers and challenges faced, three interrelated

messages shone through. None of these are unique to China, but the idiosyncra-

sies of the Chinese market underline their importance.

(i) Thorough preparat ion before entering China. Whilst good preparation maybe recommended before entering any new market, it is doubly important in

the case of China because of the challenges and potential pitfalls described

above and the widely accepted importance of taking a long-term view. As

one informant put it 'do your home work' (better) and do not overlook re-

gional differences!' The initial investigation of the China market should ad-

dress the question 'is China right for my business?' This may lead to some

adaptation of products and services to the local market, where too much hi

tech can quickly price a good out of the market compared with "just-good-

enough-versions" which are able to survive price competition.

Concerning the popular perception by European businesses of the IPR prob-

lems that exist in China, most informants emphasised that insufficient atten-tion to due diligence on the part of European companies was at least partly

to blame for this. Early, pre-entry registration of trademarks is recom-

mended. Public relations and advertising material needs to be translated into

Chinese and adapted to local conditions. Thorough preparation requires an

investment of time and other resources, which are required to seek out good

Chinese partners and invest time in bu ilding relations with them and with

government officials. A reliable Chinese partner can help to bridge cultural

gaps1 and provide local market knowledge. One spokesperson stated 'it is

better to find local people with European experience to run your local ven-

ture than Europeans with some China knowledge'. Speaking to other Euro-

pean businesses that already have experience in China was recommended bysome informants.

(ii) Be wi l l ing to seek out exper t adv ice and support f rom organisat ions wi thpract ical exper ience of t he Chinese m arket . Clearly, accessing external ad-

vice is one of the ways businesses can overcome barriers. As far as IPR i s-

sues are concerned, 500 enquiries have been received by the EU IPR Help-

desk over a three-year period, although 50% of these were in 2010. Both

the level of demand and the fact that it appears to be g rowing, suggests

that advice with respect to IPR is an important support need of European

SMEs. In addition, as described in the following section a wide variety of

support is available from national and EU sources. This includes incubator

services, which involve not only an office and other facilities, but an envi-ronment with the possibility of learning from others.

(iii)Be sensit ive to Chinese business et iquette and pract ices. European firmsmust be willing to adjust to the business etiquette in China. This includes

sending out documentation about the company and its products ideally be-

fore visit is made; following up on visits; entertaining potential business

partners and government officials with lunch or dinner to build develop net-

1 Even overseas Chinese that set up a company in China after having been abroad for 10 years or

more experience such a cultural gap (huge changes last 10 years).


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works. Even details such as seating arrangements Chinese and European

guests spaced evenly are important in China. It is also necessary to be

careful when expressing criticism, since people should not be put in a posi-

tion where they 'lose face'. It is better to discuss such issues in private, and

consider using an intermediary to convey criticism for example to a person

of high social status.

3.7 Policy support for EU SMEs

A variety of business support is available from national and EU sources, both at

home and within China for EU SMEs interested in entering the China market.

Most service providers, such as bi lateral chambers, consulates and other service

providers, in the larger Member States, have a similar package of services, which

includes:

Information provision

Advice and consultancy

Visits to events in home country to inform business community on 'how to do

business in China'

Undertake market research and deliver market reports

Event management: trade missions, trade fair participation, matchmaking

events etc.

Overseas market introduction service

Help in setting up representative offices

Offering temporary office facilities (sometimes also temporary staff)

Being an intermediary where disputes develop between European and Chinese

business partners

Helping with sourcing on the Chinese market

Undertaking a legality check of a potential Chinese partner

Identifying potential distributors and/or suppliers in China

Helping with language, organising business meetings and accompanying to the

meeting (in some cases)

Helping companies find other business services such as interpretation, con-

sulting companies and will make recommendations (in some cases).

In the larger and more established Member States, the support offered appears

comprehensive, at least in Beijing and Shanghai. Whilst there is considerable

similarity in the types of support offered by national governments, not surpris-

ingly, the extent and intensity of support varies between Member States of dif-

ferent sizes, as well as between the more established and new EU members.However, not all of the new member countries are necessarily targeting China.

For example, one informant in an Embassy of one of the smaller Member States,

referred to better market opportunities for their SMEs existing in markets closer

to home, specifically Russia where for historical reasons their businessmen feel

more comfortable. With only one enquiry per week on average, and only 25% of

the Consuls time spent on commercial issues, the Chinese market is clearly not a

priority either for the country's businessmen or for the government.

Differences also exists between countries in the way business support is ac-

cessed at home, with potential implications for the system of linkage and referral

between support offered in Europe and that offered in China. This has potential

implications for the effectiveness of the channels used to disseminate informa-


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visory and networking services are not charged for but rather casted into the

rental charge. The complementary nature of the Centre's activities is reflected in

their cooperation with other organisations, such as the German Chamber, who

refer clients to them. The demand for space in the German Centre is high. Since

its establishment in 2000, it has increased its presence in the building which it

now occupies 100% (10,000 sq m). It was reported that all space is now occu-

pied by tenants and has been for two or three years.

The UK model also involves inter-agency cooperation. Led by UKTI , who have of-

fices in Shanghai, Chongqing, Guangzhou, as well as Beijing and a total of 100

staff, support for UK companies appears well resourced in China. The delivery of

business support offered by UKTI is through a service level agreement with the

British China Business Council, which has 13 offices in China and a geographical

coverage that complements the UKTI offices. A comprehensive range of business

support is offered including a general enquiry service, market research including

UKTI's Overseas Market Introduction Service (OMIS), help in researching mar-

kets and finding joint venture partners. Business support services are chargeable

as is lobbying on company specific issues, but sector level activities are not d i-rectly charged for.

In addition, UKTI have a lobbying, advocacy role with respect to access to mar-

kets, such as railways, where they work closely with the EU Chamber and the EU

Delegation. UKTI also develop market access strategies for specific sectors. They

have sector teams within the UK, which in the case of agriculture is contracted

out to an organisation in the West Midlands, who are responsible for arranging

an annual programme. Organising visits by ministers and the Prime Minister is

also part of UKTI service. These visits are used to lobby the Chinese government

for market access.

Businesses come to UKTI through a variety of routes: a website, international

trade advisers in Business Link in the UK, trade associations, the CBI and some

direct contacts. Compared with Germany, there are many stakeholders in the UK

whereas in Germany the Chambers and trade associations are the main source.

This has implications for how information about support services in China is dis-

seminated.

As in the case of Germany, complementary business support services for UK

companies involve partnerships between a number of organisations. The China

British Business Council (CBBC) , for example, with a membership of 900 busi-

nesses, offers a range of support in addition to that delivered as part of the con-

tract with UKTI. This includes organising events in China, some of which areopen to non-members, but also member focused events in di fferent parts of the

UK, which may lead to forming a delegation to visit China. Products offered to

members only include LAUNCHPAD It is aimed at its new entrants to China, spe-

cifically businesses that are interested in the Chinese market but are uncertain

as to whether or not they require offices, perhaps because of limited resources

as in the case of a SME. Members buying Launchpad hire a project manager from

CBBC. This represents low risk for the UK company who are avoiding the cost of

investing in property or to incorporate in China. Launchpad supports companies

for 1 to 2 years after which some pull out of China but most go on to establish

their own offices. The activities of the project manager are limited by legal stat-


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viewed mainly as training activities; they also work with business associations

throughout Europe on an ongoing basis. Other partners include IP Europe who

organised events offering general information about IPR, to which the he lpdesk

adds a China Day.

One IPR expert is employed in-house, offering one-to-one advice SMEs. Over the

three years since the Helpdesk was established, a total of 500 enquiries have

been received but 50% of these were in 2010. Approximately 70% of these were

described as simple queries which can be answered by e-mail using a template.

Of the remaining 30%, some involve referral to a Chinese organisation; some in-

volve tapping into a pool of experts. When asked about sustainability, our infor-

mant reported that the need to maintain the service was demonstrated by the

level of demand which was increasing. She also stated that it needs to be pro-

vided free of charge.

3.8 What support is missing?

(i) Recognising that market entry is only the first stage of successful marketexploitation, more explicit attention needs to be played to the support

needs of European SMEs at different stages of market development in

China. For example, one informant referred to the needs of companies af-

ter distributors have been identified and met face-to-face. He reported that

in 99% of cases contact with d istributors will need to be followed up once

EU companies visiting China are back in Europe. SMEs often lack the inter-

nal resources to manage this effectively.

(ii) Existing support for European SMEs in China is concentrated in Beijing and

Shanghai, with some countries having a presence in other large provincialcities such as Guangzhou. The geography of existing European business

support in China has been reinforced with the location of the IPR Helpdesk

and the new EU SME Centre in Beijing. A high priority for the future devel-

opment of business support in China is to pay explicit attention to increas-

ing access to support services outside these large centres.

(iii) SMEs in some Member States have little if any access to financial supportfor marketing activities for state budgetary reasons. This can affect finan-

cial support for individual companies for visits and other activities but also

exhibitions and networking activities organised by Embassies. This should

be part of basic provision across the EU.

(iv) Gaps exist