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Innovation shock

The BNDES launches lines of credit and the government creates a fund to boost companies' technological development

Two initiatives of the federal government propose to boost technological development and innovation inside Brazilian companies. The first: the National Bank for Economic and Social Development (BNDES) has launched two lines of credit for companies, with heavily subsidized interest, the objective of which is to fund  efforts in research for the development of innovative products and to make the construction of industrial plants for this kind of product viable. The second initiative should take shape before the end of this month, and it implies the creation of a fund with US$ 500 million, with resources from the government, from pension funds and from foreign investors, to finance nascent companies, above all in the area of technology. The first step was taken in February, with the publication of a provisional measure which reduced to zero the taxation on the gains of foreign investors in investments in funds specialized in funding nascent companies, the so-called venture capital funds.

The BNDES’ lines to encourage innovation are the flagship of the institution’s new operational policies, which also cover financings – albeit on not so favorable conditions – for infrastructure, the competitiveness of the Brazilian capital goods industry and the development of small and medium companies. “Technological innovation is the way for reaching the world market, and the companies that decide to invest their efforts in this course will have strong support from the BNDES” said the Minister of Development, Industry and Foreign Trade, Luiz Fernando Furlan, in a visit to FAPESP on February 14, the date of the launch of the measures of incentive.

One of the lines of finance, the PDI Innovation, will be intended for projects of companies that represent great leaps in competitiveness by means of efforts in product research and development. It will have a fixed interest rate of 6% a year and zero spread, the rate for risk charged by the banks. Hitherto, projects of this kind with the BNDES were charged the long-term interest rate (TJLP in the Portuguese acronym), currently fixed at 9%, plus remuneration of 2.5%. In the line of finance for the construction of industrial plants, baptized as Production Innovation, the loans will be corrected by the TJLP, but no spread will be charged. Each one of the lines will initially receive resources of R$ 500 million.

A committee will be created, made up directors of various areas of the BNDES,  whose  task will be to evaluate whether the projects really represent efforts in innovation. “But I do not believe that major doubts will arise, since the concept is well defined” said Aluysio Asti, the superintendent of the BNDES’ planning area. According to the bank’s criteria, approval will only be given to projects that boost the companies to a new level of competitiveness, create structures that foster innovation in a permanent way, and make possible efforts in research so bold that they could not be put into effect without assistance. The BNDES was already encouraging innovation in lines of finance for software and drugs. It decided to hoist innovation to a new level in its priorities for two reasons. “On one hand, companies have to generate a permanent effort in innovation to be competitive. On the other one, innovation is essential for protecting the BNDES’ equity: if companies do not modernize, they will not be able to maintain the value that acts as a guarantee for the loans” Asti explained.

The lines of the BNDES have potential for complementing initiatives from Fapesp, like Pipe (the Small Business Innovation Research Program), which encourages companies to invest in research and development. It is common for nascent companies to face difficulties at the time they transform innovation into production. In the visit he paid to FAPESP, Minister Furlan proved to be receptive to partnerships. Superintendent Asti explained how this could happen. “When technology-based companies are founded, but as yet without a defined market, it is common for them to need a not very considerable, though high risk, volume of resources. The venture capital market does not offer shelter to these companies, and many close down, for a hiatus in support at this moment” Asti said. “We can create specializations within the lines of credit that cover these specific demands.”

According to data from the Brazilian Industrial Development Agency, the venture capital market had a turnover of US$ 125 billion in 2005. While China garnered US$ 5 billion and India, US$ 4 billion, Brazil received a modest US$ 100 million. The US$ 500 million fund that the government is creating has the declared target of raising Brazil’s share in this market. It has now been baptized as “the fund of funds” since it resources will be invested in venture capital and equity funds (the latter for larger sized companies). Of the total resources, the federal government will bear a US$ 100 million portion, coming from the Ministry of Science and Technology. Pension funds will invest US$ 150 million, and foreign investors the other US$ 250 million.

The availability of resources for entrepreneur investment is going to increase, but, as FAPESP’s scientific director, Carlos Henrique de Brito Cruz, observed, one obstacle will remain to be overcome. It is not just money that nascent technology based companies lack. Brazil suffers from a deficiency of managers capable of managing these companies and paving their way. “In venture capital, that is a key element. The figure of the entrepreneur manager is indispensable, one who knows how to convert the idea and the scientific capability into business success” Brito Cruz said. “Opening up the fund to foreigners may perhaps help us to bring not only money from abroad, but people as well. Instead of our trying to reinvent the wheel, it would be interesting to bring to Brazil those who have experience and can help these companies to come out right” he said.