Small Business Lending Environment in Emerging Economies: A Comparison of Brazil and Russia
Volpe, Ronald P., Schenck, Natalya A., Journal of International Business Research
Over the next 50 years, the economies of Brazil, Russia, India and China (BRIC) have a potential to become a leading force in the global economy, according to the Economic Research report presented in 2003 by Goldman Sachs. While India and China can become the dominant global suppliers of the manufactured goods, Brazil and Russia can develop into the dominant global suppliers of natural resources and raw materials. However, this development is possible only if BRIC countries maintain and support policies conducive to growth and economic development (O'Neill, 2003 and Cheng, et al, 2007). The creation and development of small and medium size enterprises (SME) is one of the main elements of successful economic development. It in turn requires access to borrowed capital for start-up and growth. This paper gives an overview of the small business lending environment in two of the BRIC countries, Brazil and Russia, and compares the recent trends in business credit granting practices. Due to the variations in lending policies in commercial lending across the countries and regions, this review concentrates on the credit granting practices to SME by the government sponsored financial institutions in Brazil and Russia. The U.S. Small Business Administration (SBA) lending policies and credit granting practices were used for comparison purposes in this review.
WHY BRAZIL AND RUSSIA?
Despite vastly different geo-political, economic, historical and cultural backgrounds, Brazil and Russia have similarities in some aspects of their recent economic development. Both countries were isolated from the rest of the world in the course of several decades in the 20th century. During the last two decades both Russia and Brazil went through political unrest, periods of high inflation and economic decline. The political changes in both countries in the mid-1980s eventually led to economic reforms (White, 2005). Presently, both Brazil's and Russia's economies are on the path of recovery and growth. The International Monetary Fund (IMF) ranks the economies of Brazil and Russia as the world's 9th and 10th largest (Figure 1).
According to the 2007 Doing Business Survey conducted by the World Bank, Russia ranks 112th and Brazil ranks 113th on ease of doing business out of 178 countries included in the survey. The United States is ranked 3rd, after Singapore and New Zealand. This ranking is a simple average of the percentile rankings on each of the ten topics which include the ease of starting and closing a business, getting business credit, dealing with licenses, employing workers, protecting investors, registering property, enforcing contracts, and trading across the borders.
[FIGURE 1 OMITTED]
Some of these rankings will be discussed in more detail throughout this paper. Such proximity in overall "ease of doing business" rankings for Brazil and Russia suggests that there is a basis for comparison of the small business lending and credit granting practices in these two countries.
BRAZIL AND RUSSIA: ECONOMIC AND DEMOGRAPHIC DATA
After a long history of hyperinflation and fiscal indebtedness, Brazil now follows tight fiscal policies with strong economic growth and real wage increases. Current political reforms in Brazil emphasize building a more welcoming climate for domestic and foreign investment. Agriculture remains a major sector of the Brazilian economy accounting for 30% of GDP. Likewise, the Russian economy weathered the shock of the transition from a socialist to market economy in the 1990s following the collapse of the Soviet Union. The Russian economy was and remains mostly industrial with manufacturing as the prevalent sector. It still depends largely on oil and gas revenues. Russian exports consist mostly of petroleum and petroleum products, natural gas, chemicals, wood and wood products.
Brazil and Russia have similar size populations. …