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Changing trend

Science and technology indicators show how the recession affected research and development investment in Brazil in 2016

The year 2016 marked the reversal of a four-year trend of steady and consistent growth in R&D investment in Brazil. National R&D expenditure for the year was 1.27% of gross domestic product (GDP), down from a record high of 1.34% in 2015. When adjusted for inflation, the decrease was 9%—from R$87.1 billion to R$79.2 billion in just one year. Brazilian GDP fell by 3.6% in 2016, with the country suffering a deep recession. This data is part of a comprehensive analysis comprising 164 pages of tables and statistics in the National science, technology, and innovation indicators 2018 report, released by the Brazilian federal government last October.

R&D spending is a way of measuring a country’s efforts to stimulate development. It covers a set of activities performed by businesses, universities, and other scientific institutions, including basic and applied research, the creation of new products, and scientific education and training. The reduction seen in Brazil was reflected in both public and private investment, with the former falling from R$45.5 billion in 2015 to R$41.5 billion in 2016, and the latter from R$41.6 billion to R$37.7 billion (after adjustments for inflation), according to the Ministry of Science, Technology, Innovation, and Communications (MCTIC). “I was actually surprised—with the slowdown in industrial production and the budgetary restrictions faced by the government in 2016, I expected an even sharper drop,” says engineer Álvaro Prata, secretary of technological development and innovation at the MCTIC between 2016 and 2018.

According to the data, federal budget cuts to R&D spending were relatively modest overall: the drop between 2015 and 2016 was just over 9.3 percent in real terms. But the cuts did severely affect the money available to what was then the Ministry of Science, Technology, and Innovation (MCTI), which saw R&D investments fall by 27.5%—from R$6.04 billion to R$4.38 billion, according to the indicators—compromising its ability to fund research projects at universities, scientific institutions, and innovative companies through agencies such as the Brazilian National Council for Scientific and Technological Development (CNPq) and the Brazilian Funding Authority for Studies and Projects (FINEP). “Businesses rely on incentives to invest in R&D and the number of non-reimbursable grants being offered by FINEP has fallen significantly in recent years,” says Luiz Fernando Vianna, president of the Brazilian Association of Technological Research and Innovation Institutes (ABIPTI). In May 2016, the MCTI merged with the Communications Ministry, whose R&D budget had increased by 6.3% that year, to R$229 million.

The Ministry of Education (MEC), which accounts for the largest source of federal R&D expenditure, saw a fall of 9.3% between 2015 and 2016, from R$17.6 billion to R$15.9 billion in real terms. The Agriculture Department, which has links with the Brazilian Agricultural Research Corporation (EMBRAPA), and the Health Department, which also invests in research, increased R&D spending by 2.8% and 32% respectively. “Nobody wants to reduce salaries, so budget cuts had a greater impact on so-called discretionary resources, such as research investments, affecting different government ministries to different extents,” says physicist Luiz Davidovich, president of the Brazilian Academy of Sciences (ABC).

Infographic Ana Paula Campos

This strategy, he notes, may make sense in response to short-term funding issues, as the damage of temporarily postponing a research project is relatively low. “But in Brazil, the cuts have become chronic,” he says. He recalls that the MCTIC faced cuts again in 2017 and 2018, and more still are projected in the 2019 budget. “There is a nominal increase in the budget, but this includes R$1.5 billion for Telebrás and Correios—the Brazilian state telecommunications company and the postal service,” he says. According to calculations by the ABC, funds for CNPq scholarships will drop by 25% this year. FINEP will receive just R$1 billion of the R$4 billion assigned to the National Fund for Scientific and Technological Development (FNDCT). “The rest of the money, which could be used to stimulate innovation in Brazil and help the economy grow, will once again be used as a contingency fund to reduce government debt.”

According to the ABC president, the investment drought is making Brazilian research less competitive. “In agriculture, for example, I have heard stories about obsolete EMBRAPA equipment and a lack of access to advanced technologies that are fundamental for modern agriculture.” Álvaro Prata, from the MCTIC, believes that the ministry has been able to strategically maintain specific projects, such as the new Sirius synchrotron light source in Campinas, and says that between 2016 and 2017, it managed to honor postponed research commitments after receiving R$731 million from a program designed to tax financial assets held overseas by Brazilian citizens. “This has helped ease the budget reduction and has kept the science and technology system running.”

According to the MCTIC indicators, Brazilian R&D expenditure in 2016 was comparable—in terms of purchasing power parity—with that of Russia and was ahead of countries like Italy and Canada, although it represented just a third of the investment made by Germany, 9% of China, and 8% of the USA. In relation to GDP, Brazil invested 1.27%, surpassing Spain, Russia, Mexico, and Argentina, spending roughly the same as Portugal and Italy, and falling behind China (2.11% of GDP), the USA (2.74%), and South Korea (4.23%).

Brazilian R&D expenditure in 2016 was composed of 0.67% of GDP from public resources and 0.6% from private companies. International comparisons show that in developed countries, private participation in R&D is usually significantly higher than public funding. In Brazil, however, investment by businesses is less than 50% of the total, while it accounts for 62% in the USA, 75% in South Korea, 76% in China, and 78% in Japan.

Infographic Ana Paula Campos

Chemical engineer Pedro Wongtschowski, chairman of the board of directors at Ultrapar Participações and president of the Institute for Industrial Development Studies (IEDI), says that the fall in private R&D investment in Brazil is a result of reduced profitability in the country’s industrial sector. In his assessment, understanding this dynamic is fundamental to overcoming the current obstacles. The industrial sector is hoping that the Brazilian tax system will be simplified in the coming years. “Together with infrastructure improvements, this would help businesses to become more competitive and recover their profitability in a positive cycle that would then stimulate R&D investment,” says Wongtschowski, who is also a member of the FAPESP board of trustees. He highlights a problem with the Brazilian science, technology, and innovation system demonstrated by the MCTIC data: the fact that the so-called IT Law accounted for 69% of all federal government tax exemptions designed to incentivize R&D investment by businesses. “The IT Law has a limited effect on stimulating R&D. In fact, it was created as a form of compensation to ensure the survival of the technology industry outside the Free Economic Zone of Manaus,” he says.

Wongtschowski believes that innovative Brazilian companies are performing far below expectations. “Of 117,000 Brazilian companies that conducted R&D activities in 2014, only 4,289 were doing so on a permanent basis. This is a very low number and partly explains the growing technological gap between companies in Brazil and those in other countries, as well as the trade deficit and rise in imports,” Wongtschowski says, citing data from the PINTEC Innovation Survey conducted every three years by the Brazilian Institute of Geography and Statistics (IBGE). He believes the MCTIC data on private R&D expenditure may be overstated. In 2014, the indicators were based on data from the PINTEC survey, which evaluated the innovation efforts of more than 130,000 companies. But in 2015 and 2016, when no PINTEC data is available, the indicators were based on projections. According to the MCTIC, private R&D investment for 2015 and 2016 was estimated based on the financial statements of companies that invested in R&D via the so-called “Lei do Bem,” a set of tax incentives aimed at boosting innovation. “While these recent figures are based on just 1,000 companies, the PINTEC survey covers a much larger and more reliable sample,” he says.

Even in 2014, when PINTEC data was available, there are indications that the MCTIC estimates were higher than real values. “Estimates based on the correlation between private R&D expenditure and gross fixed capital formation [GFCF], one of the components of GDP, suggest that the MCTIC estimates were high from 2014 onward. In 2014, the year of the last PINTEC survey, the MCTIC values exceed the value calculated by PINTEC by 10%, which indicates a 0.05% error in the national R&D expenditure calculated for 2014,” says FAPESP scientific director Carlos Henrique de Brito Cruz. The GFCF is the main indicator of the national accounts for the Brazilian Institute of Geography and Statistics (IBGE) and measures how much companies have increased their capital assets.

According to Renato Pedrosa, a professor at the science and technology policy department of the Institute of Geosciences at the University of Campinas (UNICAMP) and coordinator of the FAPESP Program for Science, Technology, and Innovation Indicators in São Paulo, the estimates calculated by FAPESP for private R&D investment in 2015 and 2016 are more modest. Instead of using the information provided by companies benefiting from the Lei do Bem, the FAPESP indicators are based on the GFCF itself, which worldwide has been shown to be strongly and directly associated with private R&D expenditure. “This methodology has proven highly robust, accurately predicting business expenditure close to the real values identified by the PINTEC survey,” says Pedrosa.

Infographic Ana Paula Campos

According to this methodology, total R&D expenditure by Brazilian companies in 2016 was R$29.8 billion, while the MCTIC indicators suggest a much larger value of R$37.7 billion. “The last PINTEC survey was carried out in 2014, with private investment representing 0.57% of GDP. There is a clear divergence between different estimates for the following years: in the FAPESP results for 2015 and 2016, this indicator fell to 0.52% and 0.48% of GDP respectively, while in the MCTIC calculations, it rose to 0.61% in 2015 and then returned to 0.57% in 2016,” he observes.

There is an even starker discrepancy in public expenditure in the state of São Paulo, where MCTIC estimates for 2016 are about 70% higher than FAPESP’s. According to Pedrosa, the difference started to grow from 2010 onward, reaching more than R$4 billion in 2015 and 2016. According to MCTIC estimates, state expenditure grew from R$5 billion in 2010 to R$10.6 billion in 2016. In the FAPESP indicators, however, it rose from R$4.89billion in 2010 to R$6.3 billion in 2016. “Given that Brazil has been in recession since 2014, we would not expect a growth in state expenditure during that time. FAPESP estimates show that there was a peak in 2013, a decline in 2014, and only slight fluctuations after that. This data is consistent with the budgets of São Paulo universities during the period,” says Pedrosa.

According to the MCTIC, the distribution of R&D investment among Brazilian states was the same in 2016 as in previous years. São Paulo accounted for 71.7% of total expenditure, followed by Rio de Janeiro (7%), Paraná (6.6%), Bahia (2.5%), Minas Gerais (2.2%), and Santa Catarina (1.7%). In 2016, most states increased their investment over the previous year. Among the exceptions were the Federal District (down 50%), Santa Catarina (-17.2%), and Rio de Janeiro (-7.3%).

After consulting with the ABC and the Brazilian Society for the Advancement of Science (SBPC), the new president of Brazil, Jair Bolsonaro, has proposed that R&D expenditure should be raised to 3% of GDP by the end of his term. This is a more ambitious goal than was targeted by the government in 2016 via the National Science and Technology Strategy document, which aimed to reach 2% of GDP by 2019. Promises of increasing this percentage, however, are made frequently. The chapter on Brazil in the 2010 edition of the UNESCO Science Report states that in 2003, then-President Luiz Inácio Lula da Silva promised to increase spending to 2% of GDP by 2006. In 2007, when the rate was 1.07% of GDP, the government announced plans to increase it to 1.5% by 2010. The Brazilian chapter, which was authored by current FAPESP scientific director Carlos Henrique de Brito Cruz and Hernan Chaimovich, who was president of the CNPq between 2015 and 2016, shows that R&D expenditure in Brazil increased by 10% between 2002 and 2008, rising from 0.98% of GDP to 1.09%. Investment in R&D rose slower than GDP in the period, which had a cumulative growth of 27%.

Infographic Ana Paula Campos

In the chapter on Brazil in the 2015 edition of the same UNESCO report, this time written by Renato Pedrosa and Hernan Chaimovich, a new promise is outlined for 2014: for private R&D expenditure to reach 0.9% of GDP. This target, again, was missed. According to the MCTIC, private R&D expenditure, including by private higher education institutions, represented 0.6% of GDP in 2014, and remained at that level in 2016. There was also a fall in investment as measured by GFCF, despite pledges to raise it to 22.4% of GDP. In 2016, it was 15.5%, lower than its 2014 value of 19.9%, adjusted for inflation. In 2018, investment rates recovered, reaching 16.9% of GDP in the third quarter.

In the document sent to the ABC, the new Brazilian president also proposed “more efficient and results-oriented management, not only to achieve the investment target, but also to deliver the results of this investment to the public,” and a greater synergy between the MCTIC and other ministries on projects related to sanitation, health, new energy sources, and the fight against drought in the Northeast. Davidovich, from the ABC, agrees that it is necessary to create a national development agenda that integrates the work of researchers and universities. “Technological innovation is fundamental to raising a country’s GDP and guaranteeing investment. Even during financial crises, it is important to keep innovating, as is seen in nations like China, South Korea, and Germany,” he says. “An agenda for scientific and technological development could favor areas where we have an advantage, such as biotechnology applied to biodiversity, renewable energy, and agriculture. A ministry of science and technology with a broad remit is an interesting idea.”

Economist Fernanda de Negri, a researcher at the Institute for Applied Economic Research (IPEA), recently released a book titled Novos caminhos para a inovação no Brasil (New paths for innovation in Brazil), which describes the steps needed to improve development in the country, such as increasing economic dynamism, strengthening scientific infrastructure, and making research funding more selective. She emphasizes the importance of broadening the impact and reach of Brazilian research and suggests using public R&D funds to solve major societal problems, such as improving urban mobility, managing the public health system, or developing renewable energies. De Negri cites the strategy implemented by the US National Science Foundation, the country’s leading research funding agency for basic science, which identified 10 major topics of interest to society on which to focus investment, such as building the infrastructure needed to support data science, analyzing the impact of technology on jobs in the future, and combining multiple disciplines to help solve research problems. She believes, however, that increasing public investment in science and technology is a prerequisite for initiating change. “While there are a number of changes that need to be made to improve university management, internationalize research, and improve scientific infrastructure, we must first reestablish the necessary level of public funding and the government’s capacity to generate policies that foster innovation,” says the economist.