Nearshore Americas

Brazil’s Plan to Fire Up Innovation Targets Weak Global Competitiveness

By Edileuza Soares

Tech innovation is the foundation of a new industrial policy that the Brazilian government will deploy to improve the country’s competitiveness in domestic and foreign markets. The program will provide a variety of financial incentives for Brazilian innovators in IT as well as other industry sectors between now and 2014.

The new Competitive Development Policy (CDP) will be presented to entrepreneurs by President Dilma Rousseff at a meeting this week. Adoption of the policy would result in a windfall for IT firms across the country who have been slammed with high labor costs and a spiking currency over the last few years.

Since Dilma took office in January, representatives of the information and communication technology industry and other segments of the economy have pushed for measures to improve production capacity and expand exports, which have been heavily affected by aggressive competition from Asia and overvaluation of the Real. The initiative is coordinated by the Ministry of Development, Industry, and Overseas Commerce (MDIC) and promises to continue the Productive Development Policy (PDP), which prevailed from 2008 to 2010 under former president Luiz Inácio Lula da Silva.

The IT sector, for example, was expected to close 2010 with export revenue of US$3.5 billion but instead ended the year with US$2.4 billion. Antonio Rego Gil, president of Brasscom (the Brazilian Association of Information and Communication Technology Companies), explained that the results were below expectations because of currency issues and the high cost of labor.

Gil said he believes the Brazilian IT industry has what it takes to stand out in the global market. “Brazil is very big and very good at information technology. Our possibilities are fantastic if we can create more favorable conditions and more innovation,” he said. Gil mentioned the world-renowned solutions that Brazilian IT companies have developed for financial services and banking as an example of the industry’s potential.

During a panel discussion at CIAB (the big conference for financial IT) in São Paulo that included the Communications Minister, Paulo Bernardo, Gil asked the federal government to pass measures that would boost the country’s ICT sector. It’s ranked the seventh largest in the world, with sales of US$165 billion (2010) and responsible for 8% of Brazil`s GDP, Gil pointed out. Gil emphasized that the IT industry is one of the keys to the country’s financial success.

IT companies could be a major beneficiary of the new Dilma policy. If businesses are given incentives to invest in innovation, they will in turn need to invest in more technology solutions, including business intelligence, development tools, ERP, supply chain management, security, and cloud computing. The new government measures will certainly boost the domestic software market.

Brazil invested US$24.2 billion in R&D in 2010, equivalent to 1.19% of GDP. The rate is still low compared with the amounts applied in this area in Japan, China, and Germany

Tax Changes Part of the Government Plan

In an interview I conducted earlier for Nearshore Americas, Rafael Moreira, project manager for the MDIC’s Secretary of Innovation, discussed some of the challenges the country faces in becoming a leading global IT center, including doing something about employment taxes.

“Today an IT company with 100 workers each earning R$2,500 per month pays the same taxes as a firm employing 100 dressmakers earning R$800 a month,” Moreira said. “However, the IT firm requires qualified resources and invests heavily in training. I believe that a percentage of revenue would be fair to balance the average payroll expense.”

The new industrial policy promises tax cuts, including an exemption from payroll taxes for some business sectors that invest in innovation. According to the minister of MDIC, Fernando Pimentel, there will be lines of credit for industries that produce advanced or cutting-edge products. The government has already come up with financial incentives to help boost the country’s manufacturing of tablet PCs.

Pimentel commented in a meeting with entrepreneurs that the new industrial policy will help Brazil leap forward in innovation and also help compete with Asian technology companies. “We will bring the challenge to the research laboratories, engineering departments, and the production centers of science and technology,” Pimentel said.

According to the Ministry of Science and Technology (MCT), Brazil invested US$24.2 billion in R&D in 2010, equivalent to 1.19% of GDP. The rate is still low compared with the amounts applied in this area in Japan, China, and Germany. “We need more innovation to stop exporting commodities,” said the minister of MCT, Aloizio Mercadante.

A New Plan of Action

In parallel with the new industrial policy, the MCT is drawing up the second edition of the Plan of Action on Science, Technology, and Innovation (PACT 2) for the period 2011-2014, which includes measures to expand R&D efforts in Brazil.

As a practical matter, the MCT increased by 50% the resources of FINEP (Financier of Studies and Projects), an agency similar to MCT that finances innovation in small companies. Its budget for R&D in 2011 rose from R$4 billion to about R$6 billion.

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MCT also has a plan to transform FINEP into a public bank that has more capacity to finance innovation. This project still requires approval by the Central Bank of Brazil (Bacen).

The change would endow the institution with more money to fund research and innovation in small to medium-size enterprises, which are not as well served by the National Bank for Economic and Social Development (BNDES), a public bank directed more toward working with big companies. The expectation is that by 2014 FINEP will have $50 billion available for funding innovation.

These measures taken by the government can help Brazil improve its role and reputation as an innovator. The country’s ranking climbed 21 positions in the 2011 Global Innovation Index, produced by INSEAD (an international business school): Last year, Brazil’s environment for innovation was rated 68th in the world. This year, Brazil is rated 47th. The Latin American country that scored highest on the list is Chile at 38th. (Switzerland was ranked number 1.)

Going forward, Brazil’s ability to develop innovative products and services, and prosper from exporting its technology skills, will depend greatly on how much the federal government and entrepreneurs are willing to invest in the country.

This article first appeared in Sourcing Brazil. Register here for Sourcing Brazil’s free newsletter

Kirk Laughlin

Kirk Laughlin is an award-winning editor and subject expert in information technology and offshore BPO/ contact center strategies.

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