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A rocky path

Lack of information jeopardizes firms' investments in innovation

BrazCompanies’ lack of information about the supply of credit and technological incentive mechanisms is a barrier to the progress of innovation in Brazil. The results of a study conducted by Decomtec (the Department of Technology and Competitiveness) at Fiesp (the São Paulo Federation of Industries) in 2007 showed that only 30% of innovative companies are aware of the official lines of financing: more than half the companies consulted (53%, to be precise) were unaware of Finep, the Studies and Projects Financing Entity, the chief provider of support for innovation projects in the country, and only 54% had heard about the FAPESP programs, although most had heard about BNDES, the National Social and Economic Development Bank.

For innovative companies, lack of information has a high cost. “Some 70% of firms’ innovation is carried out with their own funds”, states José Ricardo Roriz, Decomtec director, during a seminar held at Inovatec (the Innovation Business Fair) in early August. The survey, in which 230 firms of various sizes were consulted, showed that public investments account for only 13% of innovation spending among all the companies consulted in Fiesp’s survey.
This situation, according to Roriz, casts some light upon the results of the third Pintec (Research into Technological Innovation), a nationwide survey conducted by IBGE, the Brazilian Geography and Statistics Institute, on a total of 91,000 firms. Released on July 31, Pintec indicates that the number of innovative firms in the country rose by 8.4% between 2003 and 2005, but their share in the total of all industrial firms, roughly 33%, remained virtually unchanged. Innovation progresses slowly in Brazil, among other reasons because official stimulus does not reach the firms, according to Roriz, as a result of communication failures.

The Pintec survey investigated why firms do not invest in innovation and discovered that the chief obstacles stated were high cost, economic risks and the lack of financing. It also found that of the 33 industrial activities researched, 12 had reduced their investments in innovation. Most of these were small firms with 10 to 49 employees. The largest number of innovative firms was found among large and medium-sized companies and mainly in the telecom and IT sectors.

Many businessmen are still unaware of important mechanisms such as economic subvention, for instance, as provided for in the Innovation Law (Lei da Inovação) and the “Lei do Bem”, a set of tax incentives for R&D to boost innovation. This allows the investment of non-refundable public funds in the financing of research, development and innovation activities, noted Reinaldo Dias Ferraz de Souza, general coordinator of Technological Services at the Ministry of Science and Technology (MST), who also attended Inovatec. Another barrier is the difficulty in understanding the legal text. “Given the large number of instruments, public notices, programs and funds, the financing of technology no longer seems to be the chief bottleneck. The problem is the technology of financing”, he stated.

Fiesp is beginning to disseminate the results of its study together with a proposals agenda, called ‘Innovation Policies and Technological Development for Brazil and the State of São Paulo’, through which it intends to encourage increased participation of capital markets in innovation financing. Together with this agenda, it will also carry out a campaign to divulge official financing mechanisms offered by several development agencies.

Human resources
Pintec also brings good news: among innovative companies, according to IBGE, a total of 6,107 were engaged in research and development (R&D) on an ongoing basis. This figure is almost 20% higher than that indicated by the second Pintec wave in 2003. The number of people involved in R&D at companies also grew by 12.5%. In 2005, of the 47.6 thousand people involved in R&D activities at companies, 27.6 thousand were university graduates or had done post-graduate work, most of them employed in the telecommunications and information technology sectors. In 2003, of the 38.5 employees dedicated to technological development, 21.8 had higher education.

Companies’ R&D investments need to be strengthened, in the opinion of Hugo Borelli Resende, head scientist for technological development at Embraer and chairman of Anpei, the National Association of Research, Development and Engineering in Innovative Companies. “It’s necessary to disseminate the stimuli to R&D within firms and to try to promote action favoring in-house teams”, he stated at an Inovatec seminar, pointing out what he feels is the right path for consolidating innovation in the country: corporate R&D.

On the other hand, the relations between companies and universities and research institutions, according to Pintec 2005, had become closer. The participation of academia grew from 8.4% to 12% among the sources of information in innovative companies, and the importance ascribed to its role as privileged partner of firms also grew. However, the main source of technological information continues to be companies’ in-house areas (64.6%), suppliers (63.8%) and clients or consumers (60.9%). Moreover, achieving innovation through the acquisition of licenses, patents and know-how is still low.

The increased closeness of companies and research institutes may be having an impact on the efforts of the Technological Innovation Centers (TICs) and Technology Transfer Offices (TTOs) organized by universities. Between 2001 and 2006, MCT approved the creation of 76 of these. “This figure concerns those institutions that requested government support. The number is certainly greater. This drove the creation of an environment that is favorable to innovation” states Souza, from the Ministry of Science and Technology.

Law of Innovation
This positive sign of cooperation does not yet reflect the results of the Innovation Law, which was passed in December 2004. Although it created a legal framework designed to bring together the different players involved in innovation, the law is not self-applicable, stressed Carlos Américo Pacheco, deputy secretary of the Development Bureau in the State of São Paulo. “It presupposes strong activism from other public policies for the exploitation of its potential”, he stated during a seminar at Inovatec. “There aren’t other kinds of support to foster cooperative initiatives between universities and companies and the law per se won’t solve the problem.”

BrazUniversities, research institutes and companies that tested in practice the benefits of the Innovation and Beneficial Laws identified some incompatible points in the new legal framework relative to other federal laws, especially with regard to Law no. 8666, that deals with auctions for public purchases. Additionally, the control institutions, such as the Federal Audit Court (Tribunal de Contas da União – TCU) and the Federal General Legal Services (Advocacia Geral da União – AGU) appear to be ill-prepared. Before the law was passed, for example, companies found it easier to go around the legal obstacles faced in the licensing agreements for new inventions. “The law, which was meant to make the licensing of patents more flexible, ended up creating greater difficulties. We must reevaluate and update this regulation framework. We need actions that are more inductive, that make the most of the possibilities raised by the legal tools, such as incentives for public-private partnership arrangements, so that innovation can come true among Brazilian companies”, suggested Pacheco.

Anpei’s chairman, who is responsible for the interface between the company and universities at Embraer, recognizes that innovative projects are more valuable when they are conducted under a partnership agreement between the company and research institutes. He cautions, however, that one must differentiate between science and innovation technology. “The science and technology developed at universities appear when one wants to discover new knowledge. Where innovation is concerned, the key word continues to be novelty, not from the point of view of knowledge, but the creation of a new product or process”, he argues. This means that in order to innovate, a company can resort to pre-existing knowledge, whether this was developed “in 1800 or 2007”. He gives as an example the Ipod, one of the most innovative products in the last few years, developed by Apple based on a visor idealized by the United States Defense Bureau, a lithium battery invented by the Mines and Energy Bureau, and software programs developed by an Indian company together with an American firm.

“Research is an activity conducted in order to generate new knowledge and therefore it must be carried out at universities. The objective of companies is different: it is to sell products developed by the engineers, biologists and physicists who came from universities, but who work for companies. Only rarely is a product entirely developed within a university introduced onto the market.” The thesis of Anpei’s chairman, that company innovation does not necessarily need to result from a breakthrough and that, in this case, it can do without the partnership of universities in order to offer new products to the market, is endorsed by Glaco Arbix, former president of Ipea, the Institute for Economic and Applied Research, who is currently at the Advanced Studies Institute of the University of São Paulo (USP).

Arbix coordinates a study for ABDI, the Brazilian Industrial Development Agency of the Ministry of Development, Industry and Foreign Trade. The study analyzes innovation processes in seven countries: the United States, Canada, Finland, Ireland, France, the United Kingdom and Japan. The results will probably be released in November, but Arbix is already drawing some conclusions. “There are innovative economies, such as the Finish and Norwegian ones, where most companies do not engage in R&D, have no agreements with universities or research institutions and yet are innovative”, he states. On the other hand, certain European countries that have been investing heavily in order to raise their R&D expenses above the 3% average, following E.U. recommendations, have found that this effort did not lead to greater economic dynamism. “They have found that dynamism comes from other areas. R&D requires a long period to mature “, Arbix tells us.

These conclusions are leading to two new lines of thought: the first is that “it is necessary to develop not only innovation but also technology” and the second is that it is necessary to distinguish between R&D and innovation.

To support his argument, Arbix mentions the opposite case: China, which grows at a rate of 10% a year. “But when you break down the figures, you realize that research investment has a far slower pace than their investments in engineering”, he tells us. “We have to better analyze the idea that to grow one must invest in R&D”, he recommends.

Pace and Motivation
The conclusion that is starting to emerge from the information gathered in loco by Arbix and his team in the countries that the ABDI study analyzed is that R&D is crucial for development, but that it has a different pace and motivation from what innovation requires. “If the country wants to grow, it has to develop innovation, but not necessarily R&D”, he argues. “When one fosters R&D in order to generate new knowledge, one must mobilize a network of materials and people that are totally different from what one needs in order to engage in innovation.” He illustrates this as follows: the development of a device to activate cancerous cells does not require the ‘same grid’ of resources and experts needed for undertaking research into cancer. “In the first case, you need an engineer, and in the second case, you need a Nobel Prize winner.”

This new approach may call for a re-evaluation of the tools used to assess the progress of innovation in this country. “The chief problem is that economists need palpable measurements, such as companies’ investments in R&D, given that our indicators are a tribute to our industrial tradition, measuring only tangible goods?, he explains. According to this criterion, companies that engage in the ‘tropicalization’ of products or reverse engineering are considered cursed. “We have beaten successive export records that we can’t explain, other than through the argument that the foreign market is buoyant. We need to recognize that our companies nowadays have a capacity that is different from what they had in the past.”