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The Brazilian System of Innovation:

policy challenges

José Eduardo Cassiolato1

Position Paper prepared for the InterAmerican Development Bank

February 2008

1. Background

The Term of Reference for this paper asked me to:

analyze and present a general panorama of science, technology and innovation in Brazil, themain programs targeting the growth of science and technology evaluating their strengthsand weaknesses, trends and opportunities for improvement and areas not covered or newneeds to maintain the country at competitive levels in a global context. Given the diversity

of States, the focus of the analysis should be both at federal and state level, incorporatingspecificities of more dynamic local innovation systems with greater potential of development.

Right from the start, it should be stated that all aspects of that TR are impossible to respondwithin the limits of a single paper. In particular, only some of these points will beelaborated in the paper that is structured as follows. I outline in Section 2 the basicreasoning of the innovation systems framework that will guide the paper as a whole.Section 3 includes brief historical comments on the evolution of the Brazilian NationalInnovation System, particularly the relatively late establishment of the institutional base of the system as compared to other Latin American countries. Section 4 summarizes some

main aspects of the advancement of the Brazilian NIS from the 1950s to the 1980s, the period of import substitution industrialization. Section 5 turns briefly to the 1980s and early1990s and section 6 makes a more in-depth analysis of the period starting in the late 1990s both in what refers to policy developments and results. Section 7 concludes the paper withsome potential suggestions for IDB involvement.

1 (Ph.D, SPRU, University of Sussex, UK) Senior Researcher and Coordinator of the Research Network for LocalProductive and Innovative Systems, Institute of Economics, Federal University of Rio de Janeiro. [email protected] .




2. The idea of National Innovation System

The concept of national innovation systems - NIS - was introduced by Christopher Freeman(1982, 1987) and Bengt-Ake Lundvall (1985, 1988). This concept emphasizes the interactivecharacter of production and innovation, the importance of (and complementarities between)incremental and radical, technical and organizational innovations, as well as their differentand simultaneous sources. Firms are seen as organization embedded within specific socio-economic–political environments that reflect particular historical and cultural trajectories.

Since the beginning of the nineties this concept has been used as an analytical tool and as aframework for policy analysis in both developed and underdeveloped countries. As a result,

(i) research and policy activities explicitly focusing on systems of innovation can be foundin most countries and a rapidly growing number of studies of specific national systems of innovation has been produced; (ii) most countries, have been discussing and implementing public and private policies that focus on innovation, learning and capacity building(Arocena and Sutz, 2003; Cassiolato et al., 2003; Chairatana and Tan Sinh, 2003; Johnsonand Lundvall, 2003; Joseph and Intarakumnerd, 2004; Muchie et al., 2003; Mytelka, 2000;Oyelaran-oyeyinka, 2004; Reinert and Reinert, 2003; Reza Razavi and Maleky, 2004;Segura, 1999).

Underlying the system of innovation approach is a:2

resurgence of the interest in historical and national development trajectories and in

the role of technical change; recognition that incremental and radical, technical and organizational innovations are

simultaneous and complementary;

emphasis on innovation and learning, which are characterized as interactive processeswith multiple directions and sources (internal and external to firms and national boundaries);

re-conceptualization of firms as organizations embedded within socio-economic- political environments, reflecting specific historical and cultural trajectories;

emphasis on the need of taking into account the productive, financial, social,institutional and political spheres in their micro, meso and macro contexts.

Among the main advantages of this approach, we point that it deals with the complexity of different cases; and that it targets groups of different agents (firms of different sizes and performing various types of activities, as well as other organizations dealing witheducation, training, R&D, promotion, financing, etc.) and connected activities that usuallycharacterize any production and innovation structure. Therefore, it surpasses the restrictionsof traditional focus on sectors, individual organizations and space (municipalities and

2 For details see Cassiolato et al, 2003.




micro-regions) both as analytical and intervention units. By establishing a bridge between

the territory and economic activities, it covers economic, social and political contexts, aswell as the cognitive environments where the main processes of learning, capacity buildingand innovation takes place and where tacit knowledge flows.

From the point of view of less developed countries (LDCs), the usefulness of the IS perspective resides in the fact that it:

• offers a broader understanding about the possibilities of acquiring and usingknowledge and technologies;

• understands innovation as a cumulative, context specific and socially determined process and emphasizes the importance of innovation as a source of dynamiccompetitiveness, instead of the stress on the so-called traditional comparativeadvantages or spurious competitiveness (based on low labor costs, the exploitationof natural resources without a long-term perspective and the manipulation of theexchange rates);

• links micro, meso and macro dimensions of competitiveness and does not ignore therole of ‘implicit’ policies as important constraints to technological and industrialdevelopment in these countries have included: macro-economic instabilities, hyper-inflation, high external debt and high interest rates;

• helps to avoid the trap of dissociating economic, environmental and socialdevelopment

• does not dismiss the possibility of using innovation policies to reduce regional andsocial inequalities.

The NIS framework is understood in the literature in two different manners. Figure 1 belowis an schematic attempt to show these two approaches, the narrow and the broad. Someauthors tend to focus on the innovation system in the narrow sense. In this vision, the NISconcept is a follow up to earlier analyses of national science systems and nationaltechnology policies.3 To authors that follow this approach, the key issue is to mapindicators of national specialization and performance regarding innovation, research anddevelopment - R&D - efforts and science and technology - S&T - organizations. The policyissues raised are typically related almost exclusively to explicit S&T policy focusing onR&D. The analysis may include markets for knowledge – intellectual property rights and

the venture capital aspects of financial markets, but hardly the broader set of institutionsaffecting the innovation system (such as macro-economic implicit policies for innovationand the financial system) and shaping competence building in the economy (such aseducation, training, industrial relations and labor market dynamics) (Lundvall 2006).

3 Nelson (1993), Mowery & Oxley (1995).




Figure 1 - The broad, narrow and very narrow versions of the national system of

innovation approach

Subsystem

Production/InnovationSubsystem

Capacity-Building,

Research & Technology Services

Demand

(segmented)

Narrow

Wide

Geo-Political, Social, Political, Economic,

Cultural & Local Context

Subsystem

Policy, Promotion, Representation &

Financing

Very Narrow

Although it brings important information regarding the national innovation system, thenarrow version provides only an incomplete account of its structure and evolution. The

broad approach is inclusive, incorporating the narrow dimension and going beyond it(Freeman 1987; Lundvall 1992). It takes into account the role of firms, education andresearch organizations, government (as a whole and not only in terms of science andtechnology policies), financing organizations, and other actors and elements that influencethe acquisition, use and diffusion of innovations. Also important are specific conditionssuch as natural resource endowments, historical patterns of development (including, for example colonial heritage), culture and geo-political structures. These characteristics of the broad view reflect the understanding since the1980s that the innovation paths differedsignificantly across countries and that these differences could not be explained only by policies.

A broader and systemic understanding of the innovation process is instrumental to avoid anoveremphasis on R&D, encouraging policy-makers to take a far-reaching perspective onthe opportunities for learning and innovation. Emphasis is put on interactions and on therole of historical processes - which account for differences in socio-economic capabilitiesand for different development trajectories and institutional evolution - creating systems of innovation with very specific local features and dynamics. Therefore, the stress on theimportance of the national character of systems of innovation.

One main argument here is that to explain economic performance it is necessary to consider how new technological systems come forward and how existing national patterns of




institutions and organizations evolve. This co-evolution is shaped by history and the social,

political and cultural dimensions that are specific to each reality.

4

In the approach used in this paper, innovation systems include:

• the production (from raw materials to the commercialization of goods and services)and innovation subsystem;

• the capacity-building sub-system including the education, research and technologyinfrastructure

• the policies, representation & financing subsystem;• the role of demand (including income distribution, structure of consumption, social

organization, social demand - basic infra-structure, health, education.

It is precisely the production-centered approach to NSI which, in our view, makes itrelevant for understanding it in the context of developing countries and it is in this way thatit will be used for a brief analysis of the Brazilian innovation system during the last fewdecades.

3. The Origins of the Brazilian Innovation System

The period when Brazil was ruled by the Portuguese crown – from 1500 to the early 1800s

– was characterized by some specific facts that influence significantly the scientific andtechnological capabilities of this country. The Portuguese not only forbade the setting up of all production activities that could be either performed in Portugal or subjected to exchangewith Portuguese commercial partners, but also impeded the establishment of any academicor research institution in its colonies. This was totally different from what happened inSpanish America. In fact, the first Spanish university in Latin America was founded inSanto Domingo, in 1538, soon after the conquest of the new world to train religious and political leaders. In less than one century, 12 universities were founded by the Spanish,from the North to the South of the continent (as, for example the University of Cordoba(Argentina), in 1613 (Buarque 2003). In Brazil, all training in law, medicine or technicalareas of locals up to 1808 should be made in Portuguese institutions.

It was only when the Portuguese crown, evading French threats of invasion, moved toBrazil in 1808 that the Portuguese Regent signed a bill allowing for the first MedicalSchool to be organized in Salvador, Bahia, the first capital of the colony. Even after independence from Portugal was acquired in 1822, institutionalization of higher educationand S&T in Brazil progressed very slowly. The predominantly commercial class thatcontrolled the power during the Monarchy Period (1822-1899) was not interested in such

4 In this line, both Freeman and Lundvall point out the limitation of quantitative analysis based on abstract models and callfor a method that they characterize as ‘reasoned history’ (Freeman 1982; Lundvall 2006.




activities and more than 20 bills proposing the creation of a Brazilian university. Only in

the second half of XIX, century, with the setting up of the Rio de Janeiro PolithecnicSchool (1874), the first graduation school in engineering, and technical centers in naturalsciences, such as the Emílio Goeldi Museum, in Para in 1885, agricultural research, withthe setting up of the Campinas Agronomics Institute in 1987 and health and hygiene, withthe establishment of the São Paulo Bacteriology Institute in 1893 and the Butantã Institutein 1899, in São Paulo and the Federal Seropathy Institute (later on the Oswaldo CruzInstitute) in 1908 in Rio de Janeiro, which was set up to produce serums and vaccinesagainst the yellow fever that plagued Rio and endangered its position as the main port of Brazil.

In fact the need to set up the Oswaldo Cruz Institute and all the other research institutesduring the late 1800s-early 1900s in the areas of health and agriculture was basicallyeconomic. As the economy of Brazil was anchored in the production of two basic crops for export (coffee and sugar cane) there was a need to control agricultural plagues and toimprove planting and harvesting methods. The same is true for health as tropical diseases asinternational vessels threatened not to moor in Rio as long as the yellow fever plaguesubsided. With an economy with hardly any manufacturing industry and heavilyconcentrated on the exploitation of some agricultural products and on commerce and trade,there was hardly any need for scientific and technological knowledge.

During the 1920 decade, universities started to be created simply by a process of

incorporation of isolated undergraduate professional schools existing in a given state, to beadministratively management by the respective state, and jointly funded by the union andthe state. Six public state universities, typically agglomeration of isolated professionalschools, were created during that decade.

The first university that was set up in Brazil as a complete project happened in the 1930s.The São Paulo state, that lost in 1932 an internal war to separate from the union, decided to bring in modernization and the establishment of the University of São Paulo was perceivedas one important step on that direction. High level teaching and research in areas such as physics, biology and chemistry were accomplished with the “importation” of senior European researchers running from nazi Germany and fascist Italy. The São Paulo project

ignited similar efforts at the Federal level.

4. The Brazilian Innovation System from the 1950s to the late 1970

However a full institutionalization of the system only unfolded after the second world war.It is only when internal production of manufactured goods became a key variable in theBrazilian development process that makes sense to speak about a National InnovationSystem. The Brazilian NIS evolved from 1950s to 1970s as the country was changed from




traditional supplier of raw materials and some crops such as coffee to an economy based on

manufacturing industry.

Significant initiatives regarding S&T were pursued in Brazil in the early 1950s. Some of these regarded institutional development for organizing and supporting S&T at federallevel. On this respect CNPq – the National Research Council – and Capes (theCoordination for the Enhancement of Higher Education Personnel - Committee for Postgraduate Courses in Higher Education were set up to organize and fund research andgraduate studies.

CNPq, was created in 1951, as the National Council for Research, and its mission was to promote scientific research: its main assignment the coordination and promotion of scientific research in Brazil.5 In the same year, CAPES was founded with the aims of Improving Higher Education and guaranteeing the existence of specialized personnel for the economic transformation of the country.

The setting up of CNPq and CAPES represented the first steps for Brazil to establish aresearch and post-grad infrastructure. However it was only in the late 1960s that thisendeavor gained momentum as we will see below. In fact in 1960 Brazil had only oneMSC course and no Phd programs at all. In 2004 there were 1,912 MSc courses and 988PhD programs (Figure 2).

Figure 2 - Brazil – Number of MSc and PhD courses – 1960-2005

Source: Ministry of S&T

5 (CNPq Site - http://www.memoria.cnpq.br/english/aboutcnpq/legal_inst.htm).




The other important institutional development of the post-war period in Brazil regarding

S&T were the setting up of some sectoral R&D organizations by the federal government inareas that were deemed important for the Brazilian future. One has to remember that Brazilentered in the 1950s in the well known import substitution industrialization. For the firsttime research organizations in other areas than agriculture and biomedicals were planned.

The most vital of these efforts was the creation of the Technical Centre of Aeronautics(CTA), founded in 1954, and the National Institute of Space Research (INPE), set up in1961. The CTA consisted of two institutions: the Technological Institute of Aeronautics(ITA) and the Research and Development Institute (IPD). ITA was inspired by USAtechnological universities such as MIT and Caltech. Its main objective was undergraduateteaching for aeronautics’ engineers. IPD was the research arm of CTA. INPE´s objectives

were mirrored in the USA experience concentrating on activities, initially, wasconcentrated on the use of meteorological, and communication satellites latter and spaceTechnology. One could hardly dispute the long run effectiveness of this model as Brazil hasgot nowadays the fourth largest aircraft company, Embraer, whose origins are precisely onITA and INPE programs. Similar models, with some variations, were attempted in other sectors. Some of these succeeded in the long run as it is the case of Petrobrás (which wascreated as a public company in 1953) and oil technology, and mining and iron and steellocal firms. Some of these attempts failed as in the case of Fábrica Nacional de Motoreswhich was created in the mid 1950s to produce a national car but was quickly absorbed byauto multinationals that changes significantly the technology projects.

In fact import substitutions industrialization as it was planned in the 1950s – based onforeign investment and technology – marked significantly the Brazilian prospects in S&Tduring this period. The understanding of how the NIS evolved during this period should,then, be made by brieflydiscussing the industrialisation process of the period. In fact, Brazilhas taken a striking path towards industrial transformation from the 1950s to the 1970s. Astable 1 shows, Brazilian performance was impressive when compared with other developing countries. Brazil had an average growth rate of value added in themanufacturing sector of 9.5 per cent per year during the period 1965-1980. This was onlyexceeded by three East Asian NICs, South Korea (18.99 per cent), Singapore (11.41 per cent) and Indonesia (10.20 per cent).

At the end of the 1970s, the Brazilian economy had acquired an almost complete industrialstructure. The final phases of import substitution policies were carried out throughout the1970s. Through the II PND (National Development Plan - 1975-79)6

- whose objective wasto complete the industrial structure and create export capacity for basic intermediate goods- the government coordinated a new phase of public and private investment in industries producing intermediate goods (such as petrochemicals, ferrous and non-ferrous metals,

6 Even if difficulties in financing were observed and the targets were not totally fulfilled it is doubtless that the II PND'sinvestments represented 'an effort of capital accumulation and a diversification of the industrial structure towards heavyindustry, without precedent in the history of Brazilian industrialization' (Tavares and Lessa 1984: 6).




fertilisers, paper and pulp) and capital goods and public investment in the infrastructure

(energy, transport and telecommunications).

The industrial structure which evolved within a wide and permanent strategy of protection, promotion and regulation had, by 1980, a high degree of intersectoral integration and product diversification. According to the 1980 Brazilian industrial census, chemical andmetal-mechanical (including capital goods, consumer durables and the auto industry)industries which represented 47.5 per cent of the total industrial production in 1970, were in1980 responsible for 58.8 per cent of industrial output (Furtado 1990). The resultingindustrial structure was not so different from that of most OECD economies. In fact, in1980, the three most developed economies had roughly two/thirds of their industrial production originating from these sectors: 64.4 per cent for the U.S., 64.5 per cent for Japan

and 69.8 per cent for West Germany (OECD 1984a).

The import substitution process was responsible for the rapid changes in Brazilian production structure that were accompanied by social changes which were not negligible.The most important feature was, doubtless, the increase in social inequalities accompanied by high levels of absolute poverty. Another important macroeconomic feature worthmentioning is the accumulation of an external debt, which in 1980 representedapproximately 25 per cent of GDP and two and a half times the value of exports. The twofeatures would have a tremendous impact in the Brazilian economy and society after the1980s.

From the point of view of S&T development, it was only in the late 1960s that Brazilstarted again to include in its policy agenda the issue of scientific and technologicaldevelopment. As part of a series of policy measures that deeply transformed the FederalGovernment (such as the setting up of a Central Bank).

Brazil implemented a strategy that consisted primarily of really providing a good S&Tinfrastructure. The first serious attempt to mobilise financial resources for scientific andtechnological development in Brazil was made at the National Development Bank – BNDE- in 1964 when FUNTEC (National Techno-scientific Fund) was created. The basic aim of

FUNTEC was to provide financial resources for up-grading the scientific-technologicalinfrastructure.7 This was to be achieved primarily through the establishment of joint postgraduate and research programs in (not exclusively, but almost entirely) publicuniversities and research institutes. As table 2 shows, the bulk of FUNTEC's support for scientific and technological development in its earliest period (1964-1971) was directedtowards the R&D infrastructure: 76 per cent of financial resources was addressed to humanresources (postgraduate programs) and 19 per cent to the research projects of publicresearch institutes.

7 FUNTEC's source of revenue was a fixed (3 per cent) share of BNDES' profits. The fund was abolished in the late1970s.




Table 1 - Structural Changes and Industrialisation - Selected Countries - 1965-1980

Countries Index of Structural Change in

Manufac. *

Average Growth Rate of Value

Added in Manufac.

European NICs

Spain 24.73 6.78

Yugoslavia 12.01 6.94

Portugal 21.61 7.18

Greece 13.56 7.00

Asian NICs

India 20.89 2.59South Korea 31.37 18.99

Hong Kong 9.87 6.05

Singapore 48.32 11.41

Next-tier NICs

Philippines 10.95 5.45

Thailand 17.69 7.98

Malaysia 15.86 8.12

Colombia 10.90 6.36

Natural Resources NICs

Brazil 30.03 9.50

Mexico 14.83 7.09

Argentina 15.90 3.12

Indonesia 19.52 10.20

Global Averages

Developed Countries 10.90 4.66

Developing Countries 13.83 6.55

World 10.60 4.85* The index of structural change is derived from sixteen manufacturing branches. It is a measure of the degree of correlation between the value-added shares in 1965 and 1980. If the correlation is high, then there is little structuralchange and the index is low. But if the correlation is low then there is a lot of structural change and the index is high(UNIDO 1985: 39).Source: UNIDO (1985)




Table 2 - FUNTEC - Number and Percentage Value of Approved Operations

According to the Type of Activities - 1964-1978

* Applied Research in Public Research Institutes+ Applied Research in Firms

Source: Ferreira (1980)

The second important institutional change in S&T in Brazil was the creation of FINEP(Agency for Financing Studies and Projects) in 1969 as a separate agency of the PlanningMinistry. FINEP, which might be roughly characterised as a development bank for scienceand technology, started operating mainly in financing feasibility studies, but in 1971 had its

functions greatly expanded. A new fund, FNDCT (National Fund for Scientific andTechnological Development), was created using federal budget resources with the aim of fostering scientific and technological capabilities.8 FNDCT is still nowadays the mostimportant program of FINEP aiming at supporting the Brazilian S&T infrastructure.

A mention should be made to the transformation of the old National Research Council(CNPq) into an institution responsible for the coordination of all scientific andtechnological activities at federal level in 1973 and the subsequent two science andtechnology plans which were designed and implemented by CNPq during the 1970s.

These can be broadly described as comprising, first, a statement of the main points of thestrategy for S&T, as envisaged by the federal government and, secondly, a brief descriptionof the projects and programs of the institutions subordinated to the central government. Asregards technological development the main political message was the need to increase theabsorption of technology from abroad and the capacity for self-reliance, particularly of Brazilian enterprises. There is no explicit mechanism proposed in either plan regarding how

8 FINEP was nominated as the executive secretariat of FNDCT, with responsibility for channeling its financial resources.The fund was the main financial instrument of the newly established Basic Plan for Science and Technology. It graduallytook over FUNTEC's commitments and became the most important source of funds for scientific and technologicaldevelopment.




to achieve these goals apart from the budgets of state institutions and enterprises and

FINEP's financing programs

Another crucial institutional innovation was the setting up in 1973 of the BrazilianAgricultural Research Corporation (EMBRAPA) aiming to provide feasible solutions for sustainable development of Brazilian agribusiness through knowledge and technologygeneration and transfer. EMBRAPA established the biggest network for the agriculturalresearch, which has 37 Research Centers, 3 Service Centers and 11 Central Divisions, inalmost all the states of the country. Embrapa coordinates the National AgriculturalResearch System, which includes most public and private entities involved in agriculturalresearch in the country.

In short what can be said about this period is that differently from the first attempt of theearly 1950s, the abundance of budgetary resources (Brazil was growing at an average of 8.5% per year in the late 1960s and early 1970s) that were channeled to the setting up of good post-graduation courses and research in practically all scientific areas changed totallythe landscape. The results can be seen in Figures 2 above (number of MSc and PhDcourses).

However, apart from the issue of technological infrastructure and despite all the planningeffort, very limited results regarding fostering innovation and R&D activities by firms wereachieved (Erber 1980, Cassiolato et al. 1981, Cassiolato 1982).9 It is true that some

important policy mechanisms were set into motion in the early 1970s to promote suchactivities. In fact as early as in 1974, FINEP established the first program to link firms withthe S&T infrastructure and about the same time it launched programs such as ADTEN(Program to Support Technological Development in National Industry)10

Low levels of internal R&D activities were accompanied by very weak linkages withgovernment-owned industrial research institutes and universities, as documented by studieswhich analyzed the technological behavior of firms in the 1970s (Biato et al. 1973,Figueiredo 1972, Erber et al. 1974). The general impression was that

industrial entrepreneurs … were … 'satisfied' with a low level of local technologicalactivities and a strong reliance on imported technology … and … such 'satisfaction' can be

9 Several empirical evaluations confirm this assertion. M. Cassiolato (1981) using data from income tax forms(technology expenditure was subjected to tax rebates) estimated that in 1976, the Brazilian manufacturing sector as awhole devoted only 0.1 per cent of sales to R&D. Ferraz (1989) concluded that in 1982 the technology expenditure of theBrazilian manufacturing sector represented 0.15 per cent of the operational revenues of industry and compared withsimilar figures of 1.5 per cent for the U.S and 2.5 per cent for Japan. 10 The number of operations of ADTEN ranged from two in 1973 to 81 in 1977 (Bielchowsky and Nunes 1978) and thetotal value of loans granted grew from US$ 1.8 million in 1973 to US$ 45.4 million in 1978 (Cassiolato et al. 1981).Although most borrowers (almost 90 per cent) were private firms, the reaction of entrepreneurs was, as Erber (1980: 420)

pointed out, even if positive, cautious. State-owned enterprises, particularly in electric power projects, accounted for abouthalf the total value of loans to firms and over 70 per cent of the total value of projects




understood in the light of the pattern of development followed in Brazil since the mid-fifties… which reduced the importance of some of the reasons for a policy of more technological

self-reliance (Erber 1980: 422).

Although many industrial firms are engaged in technical change and incremental technicalchange is present, general data on R&D expenditure suggest that firms are committing avery limited amount of resources to R&D. Also, the estimated number of firms which wereengaged in explicit R&D was very low. In addition, a result of the import substitutionindustrialization was a very high level of technical heterogeneity in the industry. Thisheterogeneity was not only among different sectors, but most importantly inside the sameindustrial sector and some times even inside the same industrial plant.11 Among other reasons such heterogeneity was associated to different levels of income in a very unequal

society and the related different patterns of consumption.

Government behavior in supporting technological development did not help very much. Itis worth pointing out that the two most important mechanisms which supported theBrazilian industrialization process never contemplated technological development.12 Thefirst was subsidies and tax exemptions granted by CDI (the Industrial Development Councilof the Ministry of Industry and Trade) to stimulate the setting up of new import-substitutingindustries. The second was the long term financing provided by BNDES (the NationalBank for Economic and Social Development of the Planning Ministry) for new industrialinvestments. Investment in technology were never a pre-requisite for the approval of projects submitted to both agencies. In the end FINEP's funds were the only source of R&D

financing. These policies proved to be very limited: government expenditures on R&Dinfrastructure collapsed in the 1980s and long term finance for R&D deteriorated.

State-owned public utilities found it necessary to create their own engineering and R&Ddepartments in order to study the specificity of local demand and better to understand thenature of the locally available natural resources. These engineering departments fulfilled avital role in designing and maintaining the new production facilities brought on stream by public sector firms such as, Petrobras, etc. in oil, Usiminas in the Iron and Steel industry,etc. Within a short period of time, a large number of public R&D and engineering centersemerged, representing the core of the National System of Innovation of that period.

Foreign TNCs, brought with them new product, process and organizational technologiesthat were often unknown in the domestic production environment. These firms did notcome with the idea of developing a local technological infrastructure, but many of them

11 See Ferraz (1989) for a detailed discussion about this issue. In another work I found evidence about significant degreesof technological heterogeneity and differences in production costs and productivity levels with prices and rates of profitsdictated by the least efficient firms for the Brazilian production of sugar and alcohol during the 1970s (Cassiolato 1980).12 For a review of the Brazilian industrial policies from the 1950s to the 1970s, particularly with reference to the lack of mechanisms for technological development, see Suzigan (1988) who explicitly concluded: 'the inefficiency and lack of competitiveness of Brazilian industry resulted from the absence of a strategy for scientific and technological developmentas part of the industrialization policies implemented from the 1950s'.




found that they needed to do so in order to operate in a highly idiosyncratic production and

institutional environment. Their technological efforts were generally aimed at "adapting" product designs, as well as process and organization technologies to local conditions.

Large, locally owned, conglomerates concentrated mostly in the raw material processingindustries producing highly standardized ´commodities´ as pulp and paper, iron and steel,vegetable oil, cooper, petrochemicals etc. Unlike large industrial commodity producers indeveloped countries (pulp and paper in Sweden and Finland, cooper in Canada or Australia,etc.), these conglomerates engaged in raw material processing industries did not undertakesignificant efforts developing `in house' engineering and R&D capabilities with the aim of increasing domestic value added moving into more complex products and specialties'.Quite on the contrary, they normally remained at the most elementary stages of the processing sequence of the locally available raw materials, making very little effort inmoving toward a more sophisticated product mix.

In short, one may conclude that in this period some important institutional developmenttook place that would have significant positive impact in the long run. In the long run isable to profit from an ample, sophisticated and efficient infrastructure. From the point of view of technological development at firm level, policies did not show a remarkablesuccess but the roots for successes in the agro-industry (especially thorough the work of EMBRAPA), airspace (Embraer, CTA, INPE, etc), oil (where Brazil is the world leader intechnology for deep water extraction), telecommunications (which was later lost) energy(including biomass) - were established.

Explicit S&T policy instruments linked to projects to develop local production capacitytook place in these strategic sectors. In airspace and oil these measures were put into practice in the early 1950s. In energy and telecommunications they got momentum in the1970s. In all these sectors the State decided to have control of production, instead of lettingthe private sector to take the lead.

5. The 1980s and early 1990s

The external debt crisis, which emerged at the beginning of the decade of the 1980s and

blossomed after the Mexican Moratorium of 1982, blocked Brazilian development andinterrupted the brilliant growth pattern that had been observed in the previous decades.Under the external financing constraints, prevalent during the 1980s, the economy began tocome apart as a result of the inevitable collapse of public finances and state companies.Brazil began to experience growing inflation, a forced compression of imports and had toaccumulate a foreign exchange surplus required to service the foreign debt under precariousconditions. The prolonged foreign exchange hardship, combined with wide-ranging andclever mechanisms of indexation, pushed the economy toward an unprecedented regimen of super-inflation.




The debt crisis impacted the entire private sector as well as the large State enterprises

holding dollar denominated debts in the offshore euro market. The Federal Governmentabsorbed most of the impact by assuming the dollar obligations of the private sector through various mechanisms, and ended up compromising its fiscal health and underminingits ability to continue fostering the development process. Fiscal weakness and a severeshortage of foreign exchange, coupled with the assumption of private debt by the treasuryas mentioned above led Brazil to rampant inflation, along with the rest of Latin America.From the point of view of the productive structure and its degree of competitiveness, potential problems that would affect the Brazilian economy - insufficient technologicaldevelopment, low level of specialization and low degree of integration with theinternational economy - were already detected in the early 1980s (Cassiolato 1981, Serra1982).

Obviously, this crisis period (and the consequent short run stabilization measures) had asignificant impact on government S&T expenditures. Total expenditures of FUNTEC (themost important S&T fund) fell from US$ 1.2 billion (1970-1979) to US$ 754.32 million(1980-1989). The three main sources of funding for public science and technologyinstitutions (the National Fund for Scientific and Technological Development of FINEPand the budgets for basic research of CNPq and Capes) were allocated in 1985 only 40 per cent of the amount they received in 1979 (Bielchowsky 1985).

To counteract the budgetary crisis, in 1984 the Brazilian Government began the negotiationof a Loan Agreement with the World Bank (International Bank for Reconstruction andDevelopment (IBRD). As a result a Science and Technology Reform Support Project(PADCT)13 was signed.. The first PADCT I aimed at increasing and consolidating thenational technical-scientific competence in universities, research centers and enterprises buteventually only contributed to infrastructure with no impact on firms technology strategies.The main areas supported by this project were: Chemistry and Chemical Engineering,Biotechnology, Geosciences and Mineral Technology, Instrumentation, Science Education,and Science Planning and Management. The project supported specific knowledge fields but, also, addressed some general deficiencies of the National Innovation System , such asmetrology, basic industrial technology, information science, chemical reagents and researchconsumables. However, the World Bank loan was not sufficient to restore the funding at thelevel of the 1970s.

Another important institutional development was the setting up of a new Ministry of Science and Technology as part of the new democratic government of 1985. The Ministryintroduced, for the first time the issue of innovation in the policy agenda, set up animportant programs for human resources in the new areas of information technology, biotechnology and advanced material and was able to restore funding to its 1970s levels.However the deepening of the crisis in the late 1980s – when inflation reached three-digitlevels – brought significant institutional instability (the Ministry was down-graded to the

13 This Agreement had three phases: in July of 1985 (Loan 2489/BR), February of 1991 (Loan 3269/BR) and March of 1998 (Loan 4266/BR). See the item related to 1990 decade.




level of a Special Secretariat with less political clout and resources) and the end of the

decade witnessed another crisis for the S&T area in Brazil.

The early 1990s and a new government brought significant changes. From the point of viewof government policies one could argue that although this new government came with anagenda that included support for S&T, the continuation of a budgetary crisis meant thatvery little was done apart from exposing local firms to international competition. In fact, a progressive and rapid liberalisation of the economy was set in motion with the aim of increasing the competitiveness of the productive sector and of inducing the modernisationof local industry. In fact, these reforms - liberalisation (the opening up to foreigncompetition), deregulation of most markets and the privatization of public-sector firms -have been inducing significant changes in the structure of the economy and affecting themicroeconomic behaviour.

Although Brazil did benefit from the abundant inflow of capital to stabilize inflation, thegovernment opted for an onerous or ‘malignant’ macroeconomic regime marked by fiveyears of currency overvaluation and by extremely high interest rates. The high price paidfor this policy included much lower economic growth; a burgeoning public debt; theerosion of several industrial sectors; the persistence of retrograde corporate governance andthe widespread loss of national control of industrial and service enterprises.

Hence, unlike, for example, the Republic of Korea, where abundant funds made available by globalization were used to leverage the expansion of large national business groups, themacroeconomic policy of Brazilian government led to a massive sell-off of important business ownership to foreign capital. Under the pressure of exorbitantly high interest rates, prohibitive capital costs and by the damaging effects of an overvalued currency, localcompanies were purchased, on a large scale, by foreign competitors and newcomers. Thisserious debilitation of national business groups transferred the control of more than 200important firms to foreign corporations. At least 50 of those had been publicly heldcorporations which then became fully owned closed subsidiaries. Corporate governance of those firms was then reduced to an internal matter for a transnational corporation. Amongthese firms there were several which managed to create significant technologicalcapabilities during the previous period, such as Metal Leve and Freios Varga in the auto parts sector.

As a consequence, Coutinho points out that, in the 1990s, the situation of the Brazilian productive sector as a whole become particularly fragile because of the followingmacroeconomic aspects:

weak competitive performance with outstanding trade fragility in all sectors of highadded value and high technological content.;

widespread loss of national ownership in many sectors, weakness and reduced sizeof the remaining Brazilian business groups.

persistent financial vulnerability of Brazilian-owned businesses resulting from veryhigh costs of capital and inexistence of long-term financing mechanisms.




The developments of the 1980s and 1990s had important consequences to the NationalSystems of Innovation. Firstly, liberalization has lowered the cost of imported capitalgoods and therefore encouraged their substitution for domestically-produced machinery andequipment (Katz 1998). In Brazil, the coefficient of import penetration in machinery andelectronics goods jumped from 29% in 1993 to around 70% in 1996. The same coefficientfor some important inputs, such as chemical raw materials, fertilizers and resins, grew from20 to 26%in 1993 to around 33 to 42% in 1996 (Cassiolato et al 1998).

Secondly, some studies have suggested that MNCs subsidiaries have discontinued localengineering activities that they undertake in order to adapt or improve product and processtechnologies provided by their parent companies (Katz 1998, Cassiolato et all 2001). Asthey can operate on the basis of imported parts and components, these firms havereformulated their “adaptive engineering” strategies of the ISI period and have discontinueddomestic technological programmes that were justified in the more closed economies in the past.

Thirdly, private agents are supposed to be playing a more important role in the financingand performance of technological activities at the local level. The fourth important changein the National System of Innovation of Brazil relates to state-owned technologicalinstitutions and universities. Government policy has been promoting the partial privatization of State-run technological institutes by forcing them to obtain an increasingshare of current funding from the private sector. As one consequence, institutes arechanging the mix of activities they conduct reducing the number of research projects theyundertake and increasing the share of consultancy and technical assistance activities, which provide them with the resources they need (Katz 1998).14

Both in the case of the privatization of state enterprises and in the expansion of domestically-owned conglomerates in resource processing industries, the setting up of new production capacity is based on the use of imported machinery and equipment andintermediate products. The final result is that production is becoming less intensive in theuse of local engineering and technical capabilities.

Finally, most of the few local innovative firms have been acquired by subsidiaries of MNEsthat, as part of their strategies, are downgrading the technological activities carried outlocally. The result is that Brazil (and most Latin American countries) seems to bespecialising in sectors and areas of relatively low dynamism. The insertion of Brazil in theinternational market is still characterised by the exports of commodities - intensive innatural resources and/or energy and in low wage. As it is known these commodities haveshown a tendency to low dynamism, excess supply and a consequent price stagnation.

14 Of course, as Freeman (1998) pointed out in is analysis of the East European national innovation systems, some of theweaknesses of these systems should not be attributable to the prevalence of public ownership and control “per se” as to the

particular nature of that public ownership and control.




The progressive erosion of international competitiveness of is associated with the loss of

world market shares as witnessed by the information presented in table 3. Export growthhas been much slower than total world exports: Brazil accounted for 1.31% of worldexports in 1985; in 1990, 1995 and 2000 the same figures were 0.91%, 0.92% and0.87%respectively. However, the situation is even worse if intra-Mercosur trade isexcluded. In this case, Brazil’s share declined from 1.42% in 1984 to 0.79% in 1995(Cassiolato 2000).

It is true that some programs to support technology investments by private firms were previewed in the federal government´s policy proposals in the early 1990s. In fact two programs were created to deal with this. The Brazilian Program of Quality and Productivity(PBQP), presented in November 1990 was basically a program to diffuse the importance of

these issues to industry managers thorough seminars and similar activities. The second wasthe Program to Support Technological Capacity of Industry (PACTI) launched inSeptember 1990 which proposed the increase in expenditures of S&T by the government,use of procurement as a way to foster technological capabilities and fiscal incentives toR&D in firms. Eventually the only part of the program that was implemented was the lastone (fiscal incentives). But the use of fiscal incentives throughout the 1990s was only made by around 100 large firms which, most probably would have invested in R&D without the program. On the whole the 1990-1998 period was one where S&T&I policies weredowngraded and the S&T infrastructure in Brazil struggled to survive.

Table 3 – Selected developing countries: share in world exports and GDP growth,

1980-2000%

Country 1980 1985 1990 1995 2000 GDP 1990-2000

(%yearly growth)

Developing countries 29.1 25.2 23.0 25.3 29.5 -

Asia 15.6 20.7 21.5 25.6 25.9 -

China 0.89 1.40 1.80 2.93 3.92 10.1

South Korea 0.86 1.55 1.89 2.46 2.71 6.2

Malaysia 0.64 0.79 0.85 1.46 1.54 7.0

Singapore 1.0 1.2 1.5 2.3 2.2 7.9

Thailand 0.3 0.4 0.7 1.1 1.1 4.4

India 0.4 0.5 0.5 0.6 0.7 5.4

Indonesia 1.1 1.0 0.7 0.9 1.0 4.2

Ireland 0.41 0.53 0.69 0.88 1.25 7.3

Brazil 0.99 1.31 0.91 0.92 0.87 2.7

Mexico 0.89 1.37 1.18 1.57 2.61 3.5

Source: Coutinho at. Al (2003)




6. The Brazilian NIS nowadays

The first term of the Cardoso government (1995-1998) was characterized by themaintenance of the key aspects of the industrial policy of the previous period: promotingcompetitiveness through the liberalization of the economy and the use, at most, of somehorizontal policies. Even if the government launched in 1995, a new Industrial, Technologyand Foreign Trade Policy, it was basically oriented to diminish import controls and to pursue macroeconomic stabilization. In fact, such policy reflects the views of thegovernment´s economic team, contrary to any industrial policy as stated in a 1996 paper by

Gustavo Franco , director of the international area of the Central Bank:… a lesson was learned as to the effects of market inducements as opposed to heavyregulation or active industrial policies as the ultimate sources of entrepreneurial conductsleading to higher productivity growth. No question that the episode revealed the waste of time and resources involved in most instances of targeted industrial policies still in place inBrazil. Deregulation is surely on the rise and may reach other very sensitive areas, such asthe labor market, in which the supply side implications of deregulation may be veryimportant.

Not by chance, the only legislation, related to innovation, published in the 1995-1998 period was Law 9,532 of 1997 that altered the legislation on fiscal incentives, reducingthem to around 50%. However, starting in the second term of Cardoso, in 1999, significant

changes have been observed in the Brazilian policy environment regarding S,T&I whichsignificantly affected the evolution of the Brazilian National Innovation System. This itemwill attempt at describing and analyzing them. Item 6.1 will concentrate on the role of government by giving a synthesis of policy changes at federal level and discuss theincreasing role of State policies. Item 6.2 will present some of the most important trends of the Brazilian NIS.

6.1. The policy dimension

6.1.1. Changes in the policy regime at the federal level after 1999

There are two significant features of this period, in terms of policy worth discussing. Thefirst is an inflection, at least partial, in the policy regime at federal level. The second is animportant trend concerning the appearance of sub-national policy proposals, particularly byState governments.

The 1999-2007 period started with a deep economic crisis. At the end of 1998, after successive international crises (Mexican, Asian, Russian, etc.), the Brazilian externalsituation becomes unsustainable.. The fragility of the trade balance and of the balance of




payments raised the awareness of the international financial community that Brazil would

not be capable of fulfilling its commitments..

As a result of this the government, immediately after the re-election, changed the foreignexchange regime in January 1999, from fixed exchange rates to a floating exchange ratesregime, with the support of the IMF and of the World Bank. The adoption of this newregime aimed precisely at avoiding the successive deficits in the Balance of Payments.IMF´s support to the program required the adoption of rigorous fiscal and inflation targetsand the adoption of high real interest rates.

It was within this framework of economic policies – a floating exchange rate regime,inflation targeting and high real interest rates – and in a crisis condition that was translatedin a steep rise in unemployment, increase in informality and reductions in investment rateand rate of growth of GDP, that innovation policies were – after more than 10 years – introduced again in the government’s agenda.

Although the re-discovery of innovation policies by the Cardoso government meant animportant change in policy direction, one should not forget that their basic aims were verysimilar to those of the previous period. Under the premises that policies should target“market failures”.

According to the government’s evaluation of the Brazilian National Innovation System the

roots of the innovation problems were found in the lack of interaction between S&Torganizations and firms. Suck lack of interactions impeded that the success in the setting upof the S&T infrastructure would result in innovations in the productive sector. Thecharacteristics of the innovative process involving high risks, high costs and longmaturation periods would justify the government’s intervention to overcome such marketfailure. All policy design was marked by this vision and policy mechanisms and tools weredeveloped in order to stimulate first, the interaction between academia and the productivesector, and second, to reduce costs and (mostly financial) risks of private investment ininnovation activities. These are the two pillars of the innovation policy that was put intomotion in 1999 that – with some important changes – still remains nowadays.

It is interesting to point out that implicitly behind this policy strategy are both anunderstanding of the National Innovation System in its narrow sense (see Figure 1) and alinear model of innovation that has been discredited by the evolutionary approach toinnovation for at least 20 years.15

15 See Dosi et all (1988) for the basic version of the evolutionary approach and Mowery and Rosenberg (1974) for anearly criticism of the linear vision.




Changes that took place in the second Cardoso government took place practically only at

the Ministry of Science and Technology. Based on the two above mentioned pillars thenew innovation policy tried to foster innovation in firms, increase the support for the S&Tinfrastructure after almost a decade of diminishing budgetary resources and stimulate thesetting up of new technology-based firms.

What made possible the implementation of this policy is that the Ministry of S&T was ableto convince the Ministry of Finance about a new source of financial resources to pay for thecosts of the program. MS&T created the so-called Sectoral Funds (Funds to Support S&TDevelopment) with the objective of recovering the capacity to fund R&D and innovation.Between 1999 and 2002 12 sectoral funds16 and two “horizontal” funds the Green-YellowFund and the Infrastructure Fund),specifically targeting the S&T infrastructure were

created. The funds have to allocate at least 30% of their resources to projects in the North, North-east and Center-west regions (the oil fund, CT-Petro, is an exception as it is requiredto allocate 40% of its resources to these regions). The novelty regarding the funds is that itsresources come from small taxes on firms´ sales and/or from profits from the exploration of natural resources belonging to the State and from other sources such as royalties, licenses,etc. It is interesting to note that the law that created the funds (Law 10.168, of December 2000) explicitly mentions that the resources were directed to fund a Program to Foster theInteraction University-Enterprise to Support Innovation.

From the point of view of its administration, the sectoral funds were to be supervised by aManagement Committee with representatives of the government, academia and productivesector. Regarding its implementation it finances research projects that necessarily involvefirms and S&T organizations. This emphasis in financing projects and U-I interactionsremains the most significant liability of the Sectoral Funds Program.

It is true, however that the Sectoral Funds Program has been instrumental in restoring thelevel of (federal) public support for the Brazilian S&T infrastructure. Figure 3 belowshows, according to FINEP´s estimate, the evolution, in real terms of all disbursements of the National Fund for S&T Development from 1970 – 2006. It includes the resources of theSectoral Funds after 200o From this figure one may observe that after the dark years of the1990s, when disbursements came to their minimum, the sectoral funds helped to restablish

resources allocated to S&T to its previous peak of 1979.

16 The sectoral funds are Oil and Gas, Energy, Water Resources, Transport, Mineral Resources, Airspace,Telecommunications, Health, Aeronautics, Biotechnology and Agribusiness.




Figure 3 – Brazil - Disbursements of the National Fund for S&T Development

(including the Sectoral Funds) – 1970 - 2006

Source: FINEP

Another key measure marks the 1999 – 2002 period: Law 10,332, of December 2001, thatreinforces Law 8.661/93, that created the Programs of Industrial/Agro TechnologicalDevelopment (PDTI/ PDTA) which introduced fiscal incentives to R&D by firms.17 Besides bringing back fiscal incentives that were reduced by Law 9,532 of 1997 (see above) thisnew legislation introduced new mechanisms to support innovation activities by firms: the possibility of FINEP´ss participation in the capital of small technology-based firms, the possibility of giving grants directly to innovative firms (up to 50% of expenditures) and the possibility of giving extra incentives, such as reduction of interest rates for innovative firmsthat participate in cooperative projects with S&T organizations.

A series of programs were launched at the Ministry of S&T and its main agencies, CNPqand FINEP, mostly financed with resources from the Sectoral Funds, in order to promotethose two main policy objectives singled out above. Some were re-launching of older programs such as the Program for Human Resources for Strategic Areas (RHAE) (whichwas originally designed in the 1980s) and the Bsic Industrial technology (TIB) (whichdatec back in the 1970s). New programs were also designed such as the Program toStimulate the Settlement of Humam Resources, (PROSET) that aimed at stimulating the

absortion of qualified human resources in S&T organizations and firms and a Program toSupport Incubators and Technology Parks. a set of programs targetting micro and smallfirms were also set into motion with the objectives of supporting, diffusion of technologies,technology services to exporting firms, etc. A specific program to support local innovationsytems was also launched, that emphasised, however, only university-indsustry linkages.Finally FINEP launched with vigor a new program to stimulate venture capital.

17 It is worth mentioning that another Law was published (Law 10,176 of January 20060 which gives fiscal incentives toIT innovative firms. An analysis of this Law is beyond the scope of this paper.




At the end of its term (December 2002) the government sends to Congress a project of a

new Innovation Law which basically imitated the French law and was directed to – onceagain – stimulate the interaction of S&T organizations.

The government of President Lula (2003-2006) from the point of view of S,T&I policieswas characterized by continuity with small changes as regards the previous government.Perhaps because of pressure by key members and institutions of the so-called “ScientificCommunity”, the basic pillars of the policy did not change significantly. The newgovernment bought the idea of the Innovation Law and continued most of the programsdesigned in the previous period. The main changes relate to the fact that, first theinnovation agenda was captured by other government ministries and agencies, particularlythe Presidency itself.

Besides the Sectoral Funds, policies are now base don the implementation of two new pieces of legislation that were passed by Congress: the Innovation law, eventually signed inDecember 2004 and the “Lei do Bem” (“Goodwill” Law) , signed in November 2005. TheInnovation Law maintained the basic characteristics of the original project sent by the previous government but included a series of incentives for innovation in firms, in particular the grants to innovative firms. The “Goodwill” Law established more fiscalincentives to innovation in firms, now to be automatically used (i.e. to get incentives firmsdo not need to propose projects to the Ministry of S&T).

Another important development of the Lula government regarding S&T&I is that planningwas restored. The new Plan recently launched proposes that policy has four main strategic priorities: (i) to expand and consolidate the National system of S&T&I; (ii) to promotetechnological innovation in firms; (iii) to strengthen R&D activities in strategic areas -ICT, biotechnology and drugs, inputs to health, nanotechnology, bio-fuels, electric andrenewable energy, oil and gas, space program, nuclear program, biodiversity and naturalresources, sea and Antarctic; sustainable development of Amazon and Semi-arid regions,meteorology - and (iv) to promote S&T for social development.

The promotion of technological innovation in firms has three main objectives: supportingtechnological innovation in firms; technologies for innovation in firms and incentives to the

setting up technology intensive firms. is to be attained thorough financial support to R&Dactivities and hiring of researchers by firms; support to cooperation between firms andR&D institutions; human resources for innovation and support to the setting up of R*Dcenters in firms. The second objective is to be attained by a series of activities such assupport for Basic Industrial Technology, technology “extensionism”, support to local productive arrangements, etc. Finally, the implementation of the third objective is to bemade through old programs such as support to incubators and technology parks, the“Inovar” program that support venture capital and the use of procurement as a way tostimulate new technology intensive firms.




These priorities are supposed to be dealt with through a series of programs that are mostly

of the “supply” type, i.e. programs that foster R&D activities in public institutions. Themechanisms to support innovation, however, continue to be those that attempt to decreasecosts of R&D in firms through fiscal and credit incentives and those that attempt to promote interaction – through joint R&D projects – between firms and R&D institutions.

In short, in a relatively short period the Brazilian government introduced a complex andextensive set of legislation regarding innovation. Table 4 below summarizes these legalchanges. What could be said about them, at this moment is that they are totally based in thenarrow vision of the National Innovation System and target almost exclusive therelationship between S&T organizations and firms through joint R&D projects and attemptto decrease the costs, via a series of financial incentives, of R&D by firms. The logic that

presided over such movement totally disregarded the systemic character of innovation andthe broad vision of the National Innovation system.

With policy emphases combining a focus on R&D (rather than other innovation-relatedactivities and capabilities) and public S&T organisations, (rather than the innovativecapabilities and activities of all actors of the innovation system), the practice of policy inBrazil (as in other developing countries) has diverged away from the kind of balance onemight expect to have been derived from efforts to bring innovation system ideas to bear on policy. It is perhaps not surprising that policy makers in Brazil pay attention to measuresfor strengthening links between firms and especially links between firms and organisationsin the S&T infrastructure. However, there is growing evidence that it is the depth of innovative capabilities of all actors – individually and collectively, in a systemic way, - thatstrengthens knowledge-centred links, rather than vice-versa.




Table 4 - Brazil – Legal Framework of the Innovation Policy – 1993 -2006

Acts Main objectives

1993, Law 8.661 Stimulate the innovation process and research and development - This law created somefiscal incentives to stimulate the technological capabilities in manufacturing and farmingenterprises that made the Program of Manufacturing Technological Development (PDTI)or the Program of Farming Technological Development (PDTA).

1997 - Law 9.532 Related to tax legislation - reduced the tax incentives established by the law 8.661/93, inapproximately 50%.

2000 - Law 10.168 Determined a contribution to finance the Program of interaction between Universities andEnterprises to support innovation process.

2001 - Law 10.332 Reestablished the tax incentives established by the law 8.661/93 - this law created alsothe economic subvention to the enterprises which were participating of the PDTI or thePDTA, and the equalization mechanism for the interest rates.

2002 - Law 10.637 Created some new tax incentives.

During the 1999-2002 periods were launched 12sector funds and two of them were not sector specific

Support partnership in innovation projects between enterprises and scientific andtechnological organizations. The specific funds were the fund to finance the Universitiesand Enterprises Interaction Program, and the infrastructure fund, to finance themodernization of scientific and technological organizations. The other funds were relatedto: energy; space technology; information technology; biotechnology; health;agribusiness technology; mineral technology; hidrotechnology; oil and natural gas;automobilist technology; and telecommunication technology.

2001 - Law 10.176 Related to information technology sector – it replaced the law 8.243 of 1991 and itsobjective was to stimulate research and development using the tax incentives.

2004 – The Innovation

Law– the Law 10.973

Promote interactions between Scientific and Technological Organizations of Federal

Government and enterprises considering the intellectual properties rights, and the role of researches of those organizations in a context of partnership with enterprises. This lawalso created new tax incentives to innovation process within enterprises, and created theeconomic subvention to enterprises that participated of some project of National Fund toScientific and Technological Development.

2003 – Law 10.664 2004 – Law 11.077

Related to information technology – Law 11.077 was known as the ‘New informaticsAct’. This law replaced the laws no 8.248/01, no 8.387/91 and no 10.176/01. The maindifference between the new act and the others was the tax incentives became automatic.

2004 were created more twosector funds

Related to Navy Sector and aquatic technology, and to the Amazonian Area, aiming todevelop new technologies and stimulate the innovation process.

2005 - Law 11.196 Also connected to tax incentives to the technological innovation. This law replaced thelaw nº 10.637(2002) and the main instruments were: exemption of income tax,accelerated depreciation, accelerated amortization and the possibility of subvention toresearchers, masters and PhDs. The difference between the new law and the old one wasthat the mechanisms for tax incentives became automatic – before it was necessary to

participate of the Program of Manufacturing Technological Development (PDTI) or theProgram of Farming Technological Development (PDTA).

Source: own elaboration




6.1.2. The decentralization of the policy: the increasing role of State (and local)

governments.

According to any figure available one of the worst characteristics of the BrazilianInnovation System refers to the huge concentration of resources both in terms of humancapabilities and infrastructure in its most developed regions. Figure 4 below shows thenumber of graduates (MSC and PhD) per region from 1988 to 2002 and Table 5 shows thenumber of higher education institutions, lecturers and students per region in 2001. They both show an extreme concentration in the richest South-east.

The recognition about the importance of innovation and science and technology and thelack of government policies observed in the 1990s led most State government to set upsignificant changes in the institutional base for S&T and implement a series of policyactions in the last 10 years. Although not intending to cover all aspects of this key trend inBrazil, this item will attempt to single out its most important characteristics.

It is worth beginning by pointing out that this is a part of a more general trend of increasing policy actions of different types at sub-national levels. International organizations have played a major part of this general trend. According to information released by theCommission of Foreign Financing of the Brazilian Ministry of Planning in 28-01-2008,State government are not only responsible for the bulk of loans made by multilateral

agencies, but they are also responsible for the huge increase in such loans which grew346.8% from 2006 to 2007 (from US$ 1.47 billion in 2006 to US$ 6.6 billion in 2007).18

Figure 4 - Brazil - Number of Graduates (MSC and PhD) per Region - 1988 to 2002.

18 “Financiamento de organismos externos para estados crescem 347%, O Globo, 28-01-2008, p. 17.




Source: Ministry of S&T

Table 5 – Brazil – Number of Higher Education Institutions, Lecturers and Students

per region – 2001

The need for States to organize policies for S&T started to unfold in the mid-1980s with thereturn of government to civil control. In fact, even though the State of São Paulo set up aFoundation to Support Research (with 1% of all Sate taxes as a source of funding) in theearly 1960s, its is just with the re-democratization of the 1980s that similar actions startedto be seriously considered by the other States of the Federation. The Ministry of Scienceand Technology , created in 1985, had as one of its first policy actions the setting up the´Forum of State Secretaries of S&T´ with the basic aim of discussing the decentralization of S&T. After the economic crisis of the late 1980s, the forum lost its political clout as S&T(and innovation) was left behind of the political agenda..

It is interesting to note that it was precisely in the 1990s (when the Federal governmentignores industrial and technology policies that States started to take seriously the issue of policies for S&T. Although the institutionalization of S&T policies differed in differentStates they, more or less, followed some basic general rules. A first point to be noted in thisdirection is the fact, that in all cases there was an initial effort to coordinate policy actionsfor S&T 9and later for innovation). In most cases this has been achieved through the settingup of a special Secretary for S&T; in other cases, S&T actions are subordinated to aSecretary for Economic Development and in some cases a Secretary for S&T andEconomic Development was created. In most cases a State Council for S&T, withrepresentatives of the academia and the productive sector in charge of the policy




discussions. .

The second general characteristic is the setting up of special State programs to organizeS&T&I activities. Strategies varied widely but it is important to single out that in almost allcases a basic policy framework was put into motion and this has been more or lessmaintained ever since, independently of political changes. But its most interesting aspects is by and large the diversity of policy actions, obviously reflecting the enormous social,cultural and institutional variety of the Brazilian society. Given budget limitations and nothaving succeeded in terms of redistributing the federal resources for S&T in a moreegalitarian way, the strategies pursued have been characterized by the existence of prioritiesand targeting of strategic areas.

So, for example, the southern State of Rio Grande do Sul, created in the early 1990s, the´Regional Councils for Development´ (the CRDs), together with a program to support polesof technological modernization, with local universities playing the key role on it. This is astate with a long tradition of local universities historically linked to local communities thatwere even organized in accordance with local needs. On the other hand, the northeast Stateof Pernambuco set up, about the same period a Program of Incubation, as its key priority, perhaps because, although a poor State with no significant local universities, it has one of the strongest research groups in IT of Brazil.

Another general feature to be pointed out is the widespread use of the `Fapesp Model`. Asalready mentioned São Paulo State created in the 1960s a foundation to support research – Fapesp. Almost all states created their own foundation and in most cases left if – as in SãoPaulo – to the control of key members of the academia, assuming their `neutrality` toconduct the research policies. Although there is an obvious positive point in such a trend – control of policy and resources by main stake holders, the also obvious criticism is that insome cases policies became captured by communities with some vested interests that mostof the times are not the same as the majority of population of (particularly) poorest states.As a counterpart to this institutionalization, most States decided (also following the SaoPaulo example) to create funds (from 0.5 to 2.5 of the State revenues) to support S&Tactivities and to pass State laws guaranteeing the existence of such funds.

Finally, some States also decided to create specific programs to support R&D by the productive sector. This, most of the times has been funded by rebates of some State taxes,such as the ICMS. As a result, there are nowadays 25 of such foundations that mobilize around R$1 billion annually only with budgetary resources.

More recently, State policies for S&T&I have gradually discovered the importance of asystemic view of innovation and are targeting ´Local Productive and Innovation Systems`.This experience is rich, with big differences on how States organize and implement themand a more detailed analysis of the diverse cases is behind the scope of this position paper.




Box 1 below takes the recent experience of the State of Bahia as one example.

In order to deal with the complexity of innovation some States area already changinggovernment policy agencies and adapting older programs to cope with it. The Ceará Statecreated an Agency for Innovation and a Program of `Interiorization` of S&T to promotelocal development through programs of education, setting up of local infrastructure, programs of digital inclusion, etc. The Pará State has put S&T&I and environment together in a single secretariat.

BOX 1 The Program for Local Production and Innovation Systems of the The Secretariat for Science and Technology of Bahia

The Program is running for more than 4 years and has policy actions in 10 local systems (morethan a hundred cities): Apparel, Auto industry, Plastics, Ornamental Stones, Fruits, InformationTechnology, Tourism, Sugar Cane Products, Fishery and Goat and Sheep;.

Results already obtained include

1. Improvement in the relations between FORD and its suppliers of the State of Bahia; 22local suppliers were accredited by FORD.

2. In the Ornamental Stones system, legalizing informal firms, setting up of environmentaltargets.

3. A design center for the Apparel system .4. More than a 100 firms participating in actions of the IT system .

5. Setting up of 27 associative networks.

6.2. The NIS of Brazil nowadays: a brief evaluation

6.2.1. The infrastructure

One of the main strengths of the Brazilian NIS refers to the number, level and quality of itsS&T infrastructure. In particular the organization of research has evolved very positively.Even during the budgetary crisis of the late 1980s – 1990s, the infrastructure of S&Tmanaged to survive and even grow quantitatively and qualitatively. Research activities, thatwere restricted to a small number of groups in the early 1980s expanded significantlyduring this period. Data from CNPq’s Directory of research groups suggest that in 2002there were 15,158 research groups with approximately 59 thousand researchers working in268 research institutions (the vast majority public universities and research institutes). Thisinfrastructure is directly responsible for the increase in competitiveness of some key




sectors, in particularly all the agro-industry (were the role of EMBRAPA has been crucial),

aerospace (with Embraer) and oil extraction and refining (were a research network headed by CENPES – Petrobrás R&D center – led Brazil to become the world leader of technologyfor deep water oil extraction.

As a corollary of this increase in S&T general capabilities, Brazilian scientific productionhas significantly augmented. According to data from the Ministry of Science andTechnology Brazil which in 1991, occupied the 28º position in terms of production of indexed scientific and technical articles, got the 17ª place in 2000. Figure 5 shows totalnumber of articles by Brazilians published in international and the percentage of total world production from 1980 to 2004. From the figure we get that the number of articles originatedin Brazil and published in international journals in 1980 was 1,891 (or 0.44% of the of

world production) increased seven-fold to reach 13,328 in 2004 (or 1.73% of world production). Such positive evolution of the Brazilian S&T infrastructure has beencontrasted with enormous instability in public support for the area as we showed before.The major problem with the infrastructure is its abnormal concentration in the richest partof the country as also shown above.

Figure 5 - Brazil – Articles published in international journals (indexed at ISI) Total

and World percentage – 1981-2004




6.2.2. Innovation in the productive sector

Regarding innovation in the productive sector, some important remarks should be pointedout. could be made. The first refers to the high level of heterogeneity of production thatcharacterizes the Brazilian productive structure. This heterogeneity, that is not dissociatedfrom the huge income disparity found in the country, brings some caution when analystswant to make general statements. Secondly, one has to point out that most analyses andevaluations of the innovativeness of the Brazilian productive sector that are available (andthat invariably conclude for a poor innovative performance of the Brazilian productivesector) concentrate in the manufacturing sector. There are only few scattered evidenceregarding services and the agro-industry, even if these are sectors that are responsible for almost 80& of internal production and where, arguably, the innovativeness of the Brazilianeconomy is the highest.

The Brazilian agriculture has evolved dramatically in the last twenty years. Brazil is nowthe leading world export of items such as soy and meat and among the leaders of other agricultural commodities. Although normally associated with lower technological intensivethese arguments, it is argued here are in fact very innovative and high technology incontent. This is so not only in terms of production itself – where in Brazil precisionagriculture is applied extensively – but also in terms of organization of production,distribution, etc. The same is true of the services sector. It is well known the technologicaland innovative capabilities Brazil developed on banking automation as early as in the

1980s. But a series of other key services sector, such as consulting, for example are amongthe highest innovative.

One of the few pieces of evidence that point out to the higher innovativeness of servicesand agro-industry compared to manufacturing in Brazil could be taken from informationavailable at the Directory of Research Groups of CNPq. It comprises detailed informationabout research activities in Brazil using the ´Research group’ as the unity of analysis. Thedirectory provides an excellent proxy for studying research activities in Brazil. Althoughthere are limitations intrinsic to information collection, the database is the only generalsource providing detailed evidence from university-industry interactions in Brazil and is notconfined to manufacturing, but also includes services and agriculture

The data base allows for gathering detailed information linking sectors of activity of interacting firms to areas of knowledge that are subjected to joint activities. An analysis of the 2002 data-base comprising more than 15000 research groups and 718 firms that hadany interaction with them (Rapini 2004; Cassiolato and Rapini 2005) showed that the threeleading sectors demanding knowledge are all in services industries. Particularly importantwere the sectors of ‘trade’ and ‘services to firms’. These firms in the services sector interacted mostly with research groups in the areas of knowledge of ‘agronomy’ and geo-sciences. This is an indication of the innovativeness of services linked to the whole export-intensive sector of agribusiness and to oil extraction, where the role of Petrobrás is of




paramount importance. As known these sectors are among those recognized as important

areas of Brazil´s technological specialization.

It is for the manufacturing sector that more information and analysis is available. Theresults of three innovation surveys (PINTEC) published by the Brazilian Geography andStatistics since 2002 is perhaps responsible for this even though there is a long tradition of studying technology and innovation in the Brazilian manufacturing sector since the 1970s.An analysis based on PINTEC´s data should be carefully interpreted for at least two mainreasons. First, because the already mentioned heterogeneity of the Brazilian productivestructure means that a high variance in all technology variables and indicators should beexpected and such variation is hardly captures by this type of statistics. Second because theindicators and statistics obtained from such data base are not independent from the pattern

of specialization of the Brazilian productive structure. In fact, this paper sides with thosethat suggest that most of the low indicators that will be shown below are expected sincethey reflect Brazil´s specialization. With these points in mind we may synthesize some of the main general findings obtained with PINTEC´s data.

a) Brazilian manufacturing firms are, in average, relatively less innovators than most

countries

Although problematic in many respects, the innovation rate (percentage of firms that

introduced in the market new or improved products and/or processes in the 3 years prior tothe survey) is the most widely used indicator of innovativeness of any economy. Theinnovation of Brazilian firms ranged from 31.5 in 2000 to 34.4 in 2005. These are figureswell below most European countries (such as Sweden, Austria, Denmark, Switzerland,Ireland, Holland and Germany) and roughly similar to Portugal, Turkey and Spain.

If we single out innovation that represent only new products to the market the situationworsens, as suggested by figure 6 below. From there we see that the innovation rate goesdown to 3-4% only, it shows a slightly downwards trend.




Figure 6 – Brazil – Innovation Rate (new products to the market) – Manufacturing

Sector and Selected Sectors - 2000-2003-2005

b) Innovation expenditures of Brazilian manufacturing firms are relatively high but are

concentrated on acquisition of capital goods

To this general pattern it is surprisingly associated a relatively high levels of innovationexpenditures. PINTEC’s data suggest that Brazilian manufacturing firms spent in 20003.7% of sales in innovation. This is equivalent to the average of the European Union andhigher than 11 OECD countries, including the U.K (3.2 %), Italy (2.6 %) and Australia(1.9%).

The explanation for this paradox is uncovered when innovation expenditures are unbundledinto different categories. Basically firms perform two types of innovation activities: thoseassociated to R&D– Basic or applied research, experimental development – and other notrelated to R&D involving mostly the acquisition of external goods, services andknowledge. Innovation surveys try to capture the resources allocated to these activities,

More than 50% of innovation expenditures of Brazilian manufacturing firms refer to theacquisition of tangibles (basically machinery). In most OECD countries this share is

between 10 and 20%. In those countries internal R&D is responsible for the majority of innovation expenditures (30 to 60% of total innovation expenditures), while in Brazil thisshare is below 20%.

c) R&D expenditures of Brazilian manufacturing firms are relatively small but there areimportant differences related to sector and control of capital

Although a huge program giving fiscal incentives to firms to invest in R&D was set upduring the 1990s and one of the pillars of the innovation policy of the last 10 yearsconcentrate on support to R&D expenditures by private firms remain very small. According




to PINTEC’s data the relation R&D expenditures over sales was 0.6% in 2000, which was

approximately the same as in the mid-1970s, and has not changed very much since them.This compares, for example, with 1.1% in the UK, 2.6% in France and 2.3% in the US, inthe mid-1990s. In the same year, R&D expenditures of Brazilian manufacturing firmsrepresented 0.4% of GDP, while in most OECD countries this relationship was around 2%.If we break-down by sector of activity we see that levels of R&D expenditure, compared towhat is found in countries with higher innovative activity, are always very low (figure 7 ).

Zucoloto and Toneto Junior (2005) compared the relation “internal R&D/ industrial output”in 2000 between Brazil and three groups of OECD countries.19 Table 6 below presents the percentage of this relation for Brazil over the average for OECD countries of the samerelation by sector. The same table presents in another column the percentage of foreign

control of net revenues by sector. What the data on table suggests are: (1) the higher theforeign control in any particular sector, the lower the relative technological effort(measured by the relation “internal R&D/ industrial output”); (2) in some sectors therelative technological effort is roughly similar and in one case (“wood products”) higher than the OECD average.

Figure 7 – Brazil – Innovative Firms – R&D/Sales in Selected Manufacturing Sectors

– 2000-2003-2005

19 Group 1 includes countrie that had in 2000 the relation “internal R&D/ industrial output” above 2.4% (USA, Japan,Germany, Finland, France and Sweden). Group 2 comprises countries for which the same relation ranged from 1.2% and2.4% (Australia, Belgium, South Korea, DFenmark, Holland and UK). Gropu 3 contains the countries for which the samerelation is below 1.2% (Canada, Spain, Ireland, Italy, Norway and Poland. The figure for Brazil was 0.6%.




Table 6 – Brazil – Manufacturing industry and some selected sectors -Foreign

Control and Relative (to the OCDE) technological effort – 2000

Sectors Foreign Control(% of Net Turnover

RelativeTechnological

Effort*

Manufacturing Industry 35.0 37.1

Manufacturing Industry less Oil 23.5 78.1

Textiles, apparel and shoes 9.0 61.0

Wood products 9.0 116.2

Pa er and ul 21.0 84.7

Chemicals 48.0 17.7

Rubber and lastics 29.0 38.0

Non metallic minerals29.0 47.3

Metallur 15.0 57.9

Metal products 29.0 76.3

Machinary 42.0 60.3

Informsatics 45.0 31.2

Electric materials 54.0 81.6

Electronic and communication 59.0 22.8

Instrumentation 58.0 37.4

Car industry 83.0 44.4

Other transport equipment 34.0 67.0

Furniture and other manuf. 21.0 65.9

* Relative technological effort is the relation (%) between the relation of Brazil´s “internal R&D/ industrialoutput” and the average “internal R&D/ industrial output” of OECD countries

Source: Zucoloto and Toneto Júnior (2005)

d) Brazilian manufacturing firms tend not cooperate with universities and researchinstitutes

Only less than three per cent of Brazilian innovative firms cooperate with universities andresearch institutes, while in most OCED countries such share is around 10%. 20 Thischaracteristic is similar according to different sectors (figure 8) and confirm a pattern of low linkages even if we have more than 30 of S&T policy addressing this issue.

20 Scandinavian countries (Norway, Finland and Sweden) are those which present the higher rate of cooperation betweenfirms and universities and research institutes (19%, 38.2% e 44.5%, respectively) (Data for 2000 obtained at Eurostat).




Figure 9 – Brazil – Innovative Firms – Expenditures on Training/Sales in Selected

Manufacturing Sectors – 2000-2003-2005

f) Policy programs for innovation are used only by a small percentage of innovative firms

Finally it is worth mentioning that, according to data revealed by the last PINTEC´smanufacturing firms makes little use of the wide array of public incentives offered to them.Figure 10 tries to capture the importance of government policies for innovation with twoindicators. First is the relation of firms that received any public support to the total number of innovators. From the figure one may gather that less than 20 per cent of innovatorsreceived any support from government in the two recent periods studied. This is more or less similar independently of sector of activity (with the single exception of “telecomequipment”. The bottom part of the figure, which tries to capture the importance of R&Dincentives which has been the cornerstone of the innovation policy for firms in the last 15

years. From PINTEC´s data we infer that less than 1% of innovators make any use of thefiscal incentives and only in “telecom equipment” the indicator is above 3% for 2005.

This coincides with several analyses of the role of fiscal incentives in fostering innovativeactivities by firms that suggest that this is a very inefficient way of dealing with the problem. For example, a recent Australian evaluation of her innovation policy concluded,in relation to this point that “R&D tax concession do not screen out R&D that would havehappened anyway — the bulk of business R&D” and that firms do not take tax incentivesto R&D when deciding about their innovation strategy (Australian Government, 2007). OneAustralian R&D manager even suggested that . “… firms should be barely receptive to




subsidies directed at R&D alone, any more than people buying cars would respond to a

reasonable subsidy on the tyres”. (Australian Government, 2007, p. 35).

Figure 10 – Brazil – Importance of Government Policies for Innovation – 2003-2005

6.2.3.The local innovation systems

What the recognition of the relevance of the systemic view both to understand and to orientindustrial and technological development and of the need to understand local process of innovativeness in a country so diversified and heterogeneous such as Brazil, a researchnetwork – RedeSist - was formally set up in 1997, aiming at investigating andunderstanding local processes of learning and capability creation and accumulation, as wellas putting forward propositions for their promotion. Our first step was to try to derive fromthe national system of innovation approach an operational tool. This effort led to thedevelopment of the concepts of local innovation and production systems (Cassiolato andLastres, 1999) which is reproduced in Box 2.




This concept was subsequently adopted and been used by Brazilian policy-makers. Now,

in Brazil, most agencies at federal and state level in charge of industrial and technological policies have applied the focus on production and innovation systems mobilized, since theend of the 1990s. The Ministry of S&T and SEBRAE pioneered the use of this focusingdevice as a policy tool and in May 2003, a Permanent Working Group for LIPSs (PWG-LIPSs) was set up with the objective of integrating and articulating all government and non-government agencies using this normative approach at federal level. This working group ischaired by the Ministry of Industry and its members come from more than 40 policyagencies. The working group identified policy actions by at least four policy agencies, inmore than 400 LIPS all over Brazil, in all states, covering activities ranging from aerospaceto clothing, from tourism to music, etc.

RedeSist developed a specific methodology to gather information about the strengths andvulnerabilities of Brazilian production, innovation and learning processes. Thismethodological framework aims at covering micro, meso and macro elements influencingthe evolution of local systems. The methodology chosen focuses mainly on the analysis of how productive and innovative capabilities of selected systems are acquired anddeveloped21. This includes the investigation of:

• how knowledge is assimilated and used by firms and diffused within the systems;• the form and level of interactions among agents, the competence and coordination

structure, as well as the level of embeddedness of the system;• how policies and other incentives influence the mobilization of these capabilities.

In these 10 years of RedeSist existence, almost 90 case studies were produced in differentindustries and regions of Brazil.22 Among the main findings of the detailed study of localsystems in Brazil one can single out:

• a wide variety of situations regarding different aspects of innovation is found in allactivities studied; this variety of results confirm the difficulty in dealing withinnovation in a systemic way in countries such as Brazil

• such variety refers mostly to cases that normally could be associated with low levels of innovativeness but in fact present intensive entrepreneurship and search for informationand knowledge: this is the case, for example of several LIPS in shoe production in poor areas, metal-mechanic activities that produce goods for lower income people in poor states, etc;

• in most cases some of the main obstacles to innovation refer to low level of educationof local workers and lack of good infrastructure for some basic technological servicesand activities;

21 see Lastres et al (2003); Lastres and Cassiolato (2005).22 RedeSist's methodology - including sample plan, questionnaires developed to base the interviews with the differentagents and an analytical structure – case studies, as well as other results of the work developed by the research network are available in www.ie.ufrj.br/redesist/.




• an impressive level of cooperative activities characterizes most of these local systems ;

the type of cooperation, of course, is not of the “firm and R&D institution” type, butconcentrate on simpler things such as problem-solving activities, etc..

BOX 2 The concept of Local Productive and Innovative Systems

Local productive and innovative systems involve groups of economic, politicaland social agents localized in the same area, performing related economicactivities, in which formal and informal interdependence and consistentlinkages usually result in cooperation and learning processes, with a potential to

generate the increase of productive and innovative capabilities. They generallyinclude firms - designing, producing and commercializing final goods andservices, suppliers of inputs (raw materials, equipment and implements, service providers, etc.) - and their different forms of representation and association.They also include other public and private organizations specialized ineducating and training human resources, R&D, engineering, promotion,financing, etc.

Source: RedeSist, 2006: Glossary of local innovation and production systems

6.2.4. A brief note in the Private/Equity/Venture Capital (PE/VC) industry

As briefly mentioned above, since 1999 the setting up of a vigorous venture capital industryhas been one of key strategic actions by FINEP. Although BNDES initiated policy actionsfor the sector in the early 1990s, it was only after FINEP started to promote the industrythat the issue became politically relevant in Brazil. Despite its importance there are veryfew comprehensive evaluations of the sector. In fact, up to 2004, data about the sector comprehended only scattered, inaccurate and invariably incomplete estimates. The onlycomprehensive evaluation, based on in-depth interviews with key actors of the industry and proper statistics dates from 2005 (Ribeiro 2005).

What can be said about the PE/VC industry is, first, that it is, relatively to the size of theeconomy, very small. In countries where the PE/VC market is well developed, the amountinvested in one year is around 1% of GDP (OECD, 2002). In Brazil the best estimateavailable suggests that from 1999 to 2004 – the period when most policy actions were pursed (particularly by FINEP) in average only 0.06% of GDP was invested in the industry.




In spite of that most analysts predict a bright future for the sector. A brief evaluation

suggests that: (i) the sector is basically composed of independent organizations that manageresources from pension funds and other institutional investors; (ii) the industry is highlyconcentrated geographically and the majority of resources is controlled by few managers;(iii) investments are generally made in firms that are physically close to the managingorganizations; (iv) software and IT firms receive the bulk of the resources; and (v) localmanagers are as qualified as they international peers.

According to Ribeiro (2005), 90% of the PE/VC industry managers intend to keepinvesting in the Brazilian PE/VC. The same study synthesizes the conditions needed for theactivity to be sustained and some recent trends that confirm the optimistic view. In 2004-2005 there was a significant number of successful exits through the stock market (the

possibility of exit through the stock market encourages new PE/VC investment). A second positive trend relates to the growing participation of private pension funds in PE/VC; incase this experience proves to be successful the tendency is for managers of private pensionfunds to use PE/VC assets as effective tools for the diversification of their portfolios. Third,a new regulation of private funds does not bring any impeding measure for funds to invest ashare of their assets in this type of asset. Fourth, the national legislation and regulation of PE/VC investment is considered modern and gives insurance to institutional and individualinvestors. Since 2001 the judicial system recognizes mediation and arbitrage as ways tosolve conflicts between investors, managers and entrepreneurs (this alternative tends todiminish the negative effect of a judicial environment less efficient). Finally, there is now anew market segment especially designed to facilitate exit of smaller firms via IPO. Insofar

as this market diminishes Access costs, it makes viable IPO of firms that otherwise wouldfind difficulties in accessing the traditional market.

7. A general proposal for IDB´s intervention

This position paper starting by arguing that national innovation systems may be understoodin two totally different manners, a narrow and a broad one. The paper also argues that bothin analytical and normative terms the broad version presents key advantages.

An identification of the contrasts between conventional economic analyses of technologyand economic growth on the one hand and innovation system perspectives on the other hasimportant policy implications. Metcalfe’s (1994 and 1995) elaborated more clearly thefundamental incompatibility between inherent characteristics of innovation and the basiceconomic concepts of equilibrium and optimality. Consequently, policy concerned withtechnology and innovation cannot be identified simply with measures to offset ‘marketfailures’. It has to be much broader:

“… the evolutionary policy maker adapts rather than optimises, and his/her centralconcern is the innovation process, the operation of the set of institutions within whichtechnological capabilities are accumulated.” (p. 31)




“Hence policy to support technology should address the diversity of learningmechanisms and the conditions which enhance the learning capabilities of firms, and

should reflect the fact that successful innovation requires learning about markets anduser needs as well as learning about technology.” (p.32)

In short the systemic view of innovation is incompatible with “general broad policymeasures that could be used across the board. This certainly poses difficulties for policymakers but in countries like Brazil characterized by huge spatial and functional differencesit is essential that a decentralized perspective should be central to any fruitful policydiscussion.

However as pointed out by Bell (2007) “despite the increasingly common existence of

innovation system terminology in the policy arena, policy practice often appears to havefollowed along relatively narrow and imbalanced lines that are at odds with the mainfeatures of the innovation system framework. This is evident in developed countries, but isalso important in developing country contexts”.

In Brazil, the national policy agenda for S&T&I has recognized the importance of innovation and has significantly introduced the innovation dimension in practically all policy circles. This policy agenda has some significant programs that are having and willhave a significant impact in the Brazilian competitiveness. The emphasis in increasinginfrastructure capabilities is certainly well-placed and Brazil has got research capacity in

practically all areas of knowledge.

However, one could argue that the introduction of innovation in the policy agenda in thelate 1990s meant almost exclusively attaching “and innovation” to existing policy mandatesfor ‘science and technology’. The lack of understanding of innovation as a systemic processhas resulted in little change on the long-established preoccupation with R&D as the centraland almost exclusive innovation activity.

On the other hand, the existence of so many different situations regarding capabilities, production and innovation structures, etc in different parts of Brazil calls for adecentralization that has already started but needs to go much further. In particular,although there has been an effort by the Ministry of S&T to help poorer regions, thedefinition of the public agenda for S&T&I and of nation wide common programs implicitlytends to favor the richest regions since they follow the research needs and agenda of the so-called” leadership” of the “scientific community”. As explicitly expressed in a recentdocument signed by all state secretaries of S&T (Ação de Descentralização dos Recursosdo MCT, Forum dos Secretários de C&T (2007):

most available statistics show that poorest regions are receiving financial resources (for S&T) less proportionally than their participation in terms of population and income.The reason for this is evident: the public tender process that base the use of resources




privilege the regions that are better endowed in S&T infrastructure, what constitutes a process of circular and cumulative causation, the reversion of which demanding a

deliberate action by the public sector …(p. 2).23

A suggestion is made to tackle the two main problems with an otherwise reasonablysuccessful S&T&I policy agenda: (1) the high concentration of resources, policymechanisms, etc in the most advanced part of the country; (2) the emphasis of policy programs and mechanisms on the R&D dimension of innovation and on fosteringcooperation between firms and the R&D infrastructure via joint R&D projects.

Two general points are worth related to the focus of action:

- Non-manufacturing areas of industry (services, agro-industrial, etc.) have beenlargely ignored in innovation policy. However, they are most important in countrieslike Brazil, also in respect with infrastructure

- As noted above, policy preoccupation with R&D is leaving other important kinds of innovative activity and capability largely neglected – in particular, design andengineering activities and capabilities. In relative terms these are of particular significance in the poorest regions of Brazil and in the non-manufacturing segmentsof industrial development.

With this in mind four main topics to IDB´s policy action in Brazil are singled out below:

(i) The innovative capabilities of firms

With the recognition that the ‘depth’ of innovative capabilities in firms is highly variableand with most firms having minor innovative capabilities, it is suggested the developmentof innovation programs, at a sub-national (state) level tackling other than R&D firmscapabilities. In that direction particular attention should be given to training, design,capacity building and to the setting up of non-traditional ways of establishing industrial property (such as trade-marks, “label Brazil, “label Amazon”, etc.)

(ii) The fostering of connections and relations among actors, beyond the “university-industry” linkages

23 In Portuguese: a maior parte das estatísticas regionais disponíveis demonstra que as regiões mais pobres têm captadorecursos de maneira menos do que proporcional à sua representatividade em termos de população e renda. A razão paraisso parece bastante evidente: os editais que norteiam a aplicação de recursos privilegiam as regiões mais dotadas de infra-estrutura de CT&I, configurando um processo de causação circular e acumulativa cuja reversão requer uma açãodeliberada do poder público.




Although it is recognized that the linkages among actors in innovation systems indeveloping countries are often very weak – both among firms and between firms and other organizations such as universities (Lastres and Cassiolato, 2005, 2007) our empiricalresearch has shown that cooperative behavior is well established in most of our localinnovation systems. However, there are plenty of areas, where connections betweendifferent actors – firms, R&D infrastructure and other local actors - should be improved.This includes many other things than only R&D, such as training, joint technical missions,etc.

(iii) Advance the support to the PE/VC industry to areas that are specific to solve local

problems

As above suggested the Brazilian PE/VC industry is both very small and concentrated insome sectors such as software. However, there are plenty of opportunities in other areas inBrazil. For example, Brazil needs large investments in infrastructure and the government isincapable of dealing with it alone. Such insufficiencies in areas such as transport, energy,telecom point to the need of new investment in local specific solutions using the mostadvanced technologies. There are however some other local specific problems that could betacked also by the use of the PE/VC industry: crime problems in major cities that generate

investment opportunities in security and anti-fraud solutions, commercialization and exportservices to specific goods that are produced in an “environment friendly” way in theAmazon, etc.

(iv) Negotiate support to State governments using the innovation systems´ approach

One of the main contents of this paper refers to the urgent need to really include poorestBrazilian regions in the (systemic) innovation agenda. Although most of them have, asshown above, developed some novel and more appropriate ways of dealing with the issue,the fact is that lack of funding and a biased federal policy agenda have impeded the

implementation of most locally significant policies. IDB could take the opportunity and tryto define some sub-national projects in the systemic manner. Such programs could target:(a) deepening the institutional context of IS at State level, supporting new R&D institutionsthat connect with local needs and articulates with local actors (here it is most important notto leave room for “older” institutions to sell old wines in new bottles); (b) creating humanresources capabilities in areas that are need local (one issue here is the relative lack of engineering and other technical capabilities) innovative activities.




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