The following OECD assessment and recommendations summarise Chapter 3 of the Economic survey of Brazil 2006, published on 24 November 2006.
The business sector needs to invest more in productivity enhancing innovation
Fostering productivity-enhancing innovation in the business sector is an important challenge for economic policy. At 1% of GDP, spending on R&D (public and private) – a key input into the innovation process – is not only less than one half of the OECD average, but it is also carried out predominantly by the government and public universities. Process, rather than product, innovations account for the bulk of innovative activities in the business sector. In addition, output indicators, such as the number of patents filed abroad, suggest a relatively weak performance by international comparison, a fact that reflects to a large extent Brazil’s inward oriented growth strategy until the 1980s, which was based on import substitution. Although Brazil already fulfils a few key framework conditions for innovation, such as reasonably pro-competition product market regulations and an FDI regime that is favourable to investors, average import tariffs are high in comparison with the OECD area. Therefore, there is scope for reducing tariff barriers to trade to facilitate access by the business sector to imported intermediate inputs and capital goods embodying more modern technologies, which is conducive to sustained productivity growth. This is important because, according to the Innovation Survey (PINTEC), the acquisition of the latest machinery and equipment is the main source of innovation in the business sector. An important remaining obstacle for improving innovation performance is the cost of capital, which will probably come down with the consolidation of macroeconomic stabilisation and the consequent reduction in real interest rates. The liberalisation of existing directed credit requirements, discussed above, would contribute to strengthening the market environment for risky ventures, ultimately reducing the cost of capital.
Brazil's R&D instensity remains comparatively low
2003, in % of GDP(1)
1. The dots identify the R&D intensity levels in 1995.
Source: Ministry of Science and Technology, Conicyt (for Chile), Ricyt (for Argentina and Mexico), OECD and STI database.
The policy framework for innovation is well thought out
The current set of policies, which has been in place since late 2003, focuses on the potential policy synergies among science and technology promotion, R&D support in the business sector and trade competitiveness. Such a framework is a considerable step forward in a country where innovation policies have traditionally been inward-looking and based on the protection of selected industrial sectors from foreign competition, rather than the promotion of trade competitiveness. In addition, a new law, enacted in 2005, facilitates the sharing of intellectual property rights proceeds between businesses and public universities and research institutions. To be successful in boosting business innovation, these policies will need to be complemented by measures to continue to foster coordination within the National Innovation System, particularly across the different levels of government, and to clarify the assignment of long-term planning functions at the federal level.
Government support for innovation should give priority to cross sectoral initiatives
Direct government support is financed predominantly by earmarked revenue allocated to a variety of “sectoral funds”. Tax incentives have traditionally benefited the ICT industry, although recent measures have introduced across-the-board incentives for innovation as part of a broader package for reducing the tax burden on the business sector. They also include the exemption of initial public offerings from the bank debit tax (CPMF) and the elimination of taxation on capital gains accruing from venture capital investment. These steps are appropriate. However, reliance on revenue earmarking aggravates budgetary rigidity, while failing to create a stable source of funding. Ensuring stable financing for innovation support should therefore be pursued through the prioritisation of programmes, rather than increasing budgetary rigidity. The cost-effectiveness of current policies should be strengthened through greater emphasis on cross-sectoral initiatives, including joint ventures between firms and higher-education institutions, especially with counterpart financing by businesses. In addition, the option of diversifying the range of support instruments currently available by introducing alternative modalities, such as risk sharing, matching grants and loan subsidies, could be considered.
Low human capital weighs on innovation performance
To improve innovation outcomes, the attainment gap – at all levels of education – in relation to the OECD area will need to be narrowed, particularly at the higher-education level, where the performance shortfall is worsening. To this end, enrolment will need to rise and quality improve. Most of the recent expansion in the supply of higher education is accounted for by private institutions, whose students tend to perform less well on the basis of standardised tests than those enrolled in public universities, controlling for individual characteristics. In addition, private institutions tend to specialise in low-cost career streams in management and humanities, which does little to tackle the skill imbalance that currently exists to the detriment of engineering and science. Enrolment in higher education-level technological institutes is low, and, to remedy this situation, the government intends to open more such establishments in the near term. Efforts should be stepped up to monitor the quality and market-orientation of the training offered by the technological institutes on a regular basis before new ones are set up. At the same time, increasing the supply of shorter tertiary-education programmes should also be considered as a means of meeting the demand for higher-education qualifications with a more practical, less academic focus. A related unresolved policy consideration is cost-recovery in tertiary education. A move from direct public financing for institutions towards the introduction of tuition fees could be considered on both equity and efficiency grounds, given that, as discussed in the 2005 Survey, public spending on tertiary education is estimated to be among the most regressive expenditure items in Brazil. This should be complemented by the expansion of student loans and/or means-tested support to ensure that the introduction of tuition fees does not work as an obstacle to the participation of students from disadvantaged backgrounds.
Read also ECO Working Paper 532 Boosting innovation performance in Brazil
How to obtain this publication
The Policy Brief (pdf format) can be downloaded. It contains the OECD assessment and recommendations but not all of the charts included on the above pages.
The complete edition of the Economic survey of Brazil 2006 is available from:
For further information please contact the Brazil Desk at the OECD Economics Department at email@example.com. The OECD Secretariat's report was prepared by Luiz De Mello and Diego Moccero under the supervision of Peter Jarrett.
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