The challenges and opportunities in innovation for the new Brazilian government

Issue NO. 26

By Heloisa Menezes*Three months out from the Brazilian presidential inauguration, the explicit priorities, made evident by the proposals sent to the Congress in the first forty days, are security and fiscal adjustment. As investors warned, the brutal fiscal crisis is expected to prompt massive cuts in public expenditures and a deepening of liberalizing reforms, already underway by previous president Temer. The pension reform (“mother of all the reforms”), privatizations and tax reform are the purported gambit for fighting government debt, which reached 76,7% of GDP in 2018. Meanwhile, a broad inter-ministerial agenda for simplification and cutting red tape is being reinforced to improve the business environment in Brazil, the 109th country among 190 in the 2018 World Bank Doing Business Report.

These priorities are at odds with the existing subsidies, discharges and equalized credits, important anchors of the growth and anti-cyclic–oriented economic and innovation policies put into practice by PT`s (Work Party), the left-wing coalition that led the country from 2003 to 2016. The growth was leveraged primarily by consumption and public stimulus but faced the impasse of an unsustainable fiscal deficit. After four years alternating between stagnation and recession, the Brazilian government now looks to public deficit control as a condition for sustainable growth. Labor productivity is less than one-fourth that of the US, a tremendous structural gap that has yet to be overcome despite some private and public attempts.

To date, innovation policies have not been a priority for the new Brazilian government. However, without productivity and innovation, growth is only illusory or transitory. Sustainable growth based on the creation of value demands targets for the short to medium term. The new innovation policy could serve as an instrument to tackle the productivity gap. However, it cannot be restricted to this objective, but to broader and deeper ends.

According to the Global Innovation Index 2018, developed by Cornell, INSEAD and WIPO, Brazil ranks 64th out of 126, at a moment when the world has already appreciated the need to accelerate the path to innovation. Brazil does not perform well in the GII Innovation Efficiency Ratio (innovation output as a proportion of total outputs). Without results (knowledge, technological products, and creative products), Brazil’s investments in education, R&D, and infrastructure, credit and other Innovation Inputs prove inefficient. A cursory analysis of the above conclusions could erroneously disincentivize such investments in the face of fiscal constraints.

Rather, the moment necessitates a revamping of the R&D budget, without neglecting other GII Inputs. Even the most mature and complete innovation systems shoulder a strong and consistent Input innovation system, of which Brazil cannot renounce. According to GII, “the role of government is central to implementing strong incentives and regulations to drive the transition (…) a role of a risk taker by promoting mechanisms that stimulate investment and the diffusion of technologies with disruptive potential (…) at the same time, the role of the effect of subsidies on innovation is currently underappreciated” (38).

The good news is that Brazil has the bases for a more effective path towards innovation: the renewal of tools and funds, the strategic use of the new innovation law, and the bottom-up entrepreneurship based on the digital economy.

Tools and Opportunities

Brazil is a country with a comparatively immature and incomplete innovation system. The most used tools date to 1) the late-80’s, the Informatics Law; and 2) the early 2000s, the “Lei do Bem” (Law of Good). Anchored in non-refundable public resources, tax waivers, and subsidies, these tools share risks and stimulate both public and private investments in R&D. While the Law of Good leverages private R&D projects (R$ 5 for each R$ 1 invested, in 2017), the Informatics Law failed to boost manufacturing (mainly in Zona Franca de Manaus, in the heart of the Amazon forest) towards IT innovation.

After 2013, with a looming fiscal crisis, subsidized credits have been the most important sources for financing private investments in R&D. Conversely, the budget for non-refundable resources has been continuously and severely sequestered. Public investments and stimulus in venture capital and other modern financial mechanisms are incipient, timid and dependent on international investors, although ascendant since 2007, according to Insper, Spectra and ABVCAP Analysis (September 2018).
Brazilian private sector invests little compared to the best global practices, It requires new attractive funding models, the removal of tax constraints, and venture capital, as well as incentives for improving industry/university partnerships.

This route finds legal and institutional support in the new Innovation Law, regulated in February 2018, which opens avenues for improvements in innovation outputs with no or little fiscal impact. Putting into practice the strategic use of the new innovation law permits: a better and safer enterprises-universities relationship; new financial engineering solutions, such as the use of Information Law and Law of Good funds to invest in startups; the permission for research institutes to invest in startups; better and safer conditions for public and private purchase of technologies developed in companies, public universities and research institutes.

The most efficient path for recovering and boosting private expenditures would build on the expansion of Embrapii’s model for public research institutes and universities. This low cost and flexible demand-driven structure, inspired by the Fraunhofer Institute, espouses a private-public-academia governance framework, which manages and audits accredited highly qualified private and public research institutes. The results are encouraged to go to market, partnering with private companies (including startups), under penalty of being de-accredited. To date, this arrangement has raised R$ 3 from private companies for every R$ 1 applied by public funds.

Finally, at a time when the new government stipulates “less Brasilia, more Brazil” (a reference to an intended decrease of the centralized political and economic power of the country’s capital), an innovative, costless and independent entrepreneurship ecosystem should be reinforced around the country.

Real-Time Developments:

• Regional governments and municipalities are creating their new innovation laws, with technological procurements for promoting local innovation ecosystems;
• Effervescent, autonomous and independent digital and ecosystems are scaling-up around the country. Despite only five confirmed Brazilian unicorns (Nubank, 99 Taxis, Stone, PagSeguro, Movile), the sixth to be confirmed (Gympass), twenty thousand startups exist in Brazil, at different levels of maturity and fields. Dozens of initiatives are being promoted by important traditional institutions, national, regional and local governments, as well as by universities, to offer training and support for the connections among startups, mentors, investors. However, the most relevant role comes from big companies, banks, philanthropic foundations, incubators/accelerators, corporate venture programs, venture capital, impact investment, crowdfunding, hackathons, and open innovation hubs initiatives.
• Flourishing bottom-up digital initiatives (Inova Gov , Open Innovation, Lean Startups). Under-the-radar initiatives are being championed by both youth public and private employees, to share information and ideas about open innovation best practices. Such initiatives are expected to create the basis for a non-return growth agenda, aiming to scale-up companies to solve governmental inefficiencies.

Looking Ahead

Innovation inputs are at the disposal of universities and companies. Redesigned financial tools, startups, and digital companies can swiftly improve innovation outputs in terms of productivity, creation, diffusion of knowledge, and creative products. A digital economy demands a firm commitment by both the private and public sector, empowering startups to fuel the innovation ecosystem.

Brazil must consolidate venture capital, crowdfunding, crowdsourcing, and competition to expand sources of funding for innovation. Resources should be directed towards efforts underway around digital infrastructure (especially assuring connectivity for all). More coordination in digital strategy with and for innovation policy will play a significant role in overcoming fiscal and political issues in Brazil.

*Heloisa Menezez has a master`s degree in Sciences of Agricultural Development from Universidade Federal Rural do Rio de Janeiro and a bachelor in Economics from Pontificia Universidade Catolica de Minas Gerais. She is a visiting scholar at the Emerging Markets Institute at S.C. Johnson School of Management at Cornell University.

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