Letter IEDI n. 1062—Promoting Digital Innovation in Brazil
In the recent publication “Going Digital in Brazil”, the OECD examines the characteristics of the Brazilian system of science, technology and innovation (ST&I), the instruments adopted by the country to promote innovation, especially in information and communication technology (ICT) companies, as well as the latest initiatives to encourage digital innovation.
This Letter IEDI addresses this study, with special attention to the chapter “Unleashing digital innovation”, emphasizing the OECD's policy guidelines and proposes for necessary adjustments to the instruments already in force, with the objective of accelerating digital innovation in Brazil.
According to the OECD, Brazil has made significant progress in modernizing its policies and institutions to support research and development (R&D) and innovation over the past two decades. However, despite reaching the frontier in some areas of excellence, such as oil and gas, aviation, agriculture and health, the national innovation system still shows low performance and does not translate into productivity gains, improved competitiveness or a stronger presence in global value chains.
The study points out that, in Brazil, business spending does not reach half of the total R&D spending, equivalent to 1.26% of GDP in 2017. For the OECD, business decisions on investment in innovation are negatively affected by the following structural conditions in our economy:
• “Custo Brasil” (Brazil Cost), the result of insufficient infrastructure, a complex tax system and limited access to financing, especially for smaller companies, among others.
• Lack of skills of workers and the low quality of the educational system;
• High cost of inputs, including ICT products, due to tariffs on imported goods;
• Hindrances to the reallocation of resources toward more productive uses and low incentives for innovation, due to support for existing industrial structures.
The study, however, highlights yet other factors that create obstacles to a more innovation-friendly trajectory. Among them are the shortcomings of the main tax incentive instruments for business innovation in Brazil: the Informatics Law (Lei da Informática) and the Good Law (Lei do Bem) that, according to the OECD, are not properly accessible to young and smaller companies, which are typical in the digital technology sector.
In addition, the study argues that the scope of the Informatics Law should be expanded to include ICT services and sectors that use ICT and invest in digital solutions and services. A favorable tax treatment could also be considered for investments in innovative startups and could seek to promote links between national companies and subsidiaries of foreign multinational enterprises.
Regarding the Good Law, the OECD argues that its provisions should be extended to more companies, which requires actions to disseminate information among eligible firms. Moreover, three major problems of this instrument would have to be solved: restrictions to companies under the real profit tax regime, which excludes micro and small businesses; the impossibility of deducting R&D expenses in subsequent years, which makes it ineffectual when companies incur losses; and the absence of financial tax credits for these exemptions.
The OECD also indentifies fiscal obstacles to innovation. According to the report, since the approval of the Spending Cap Rule (Lei do teto de gastos) in 2016, all the main federal agencies that finance ST&I in the country (CNPq, CAPES and Finep) had a budgetary reduction, impacting Brazilian research. In addition, since 2017, an increasing share of the National Fund for Scientific and Technological Development (FNDCT) has been used as a contingency reserve for the federal budget.
In the OECD's assessment, all these circumstances make it extremely difficult to achieve the objective of raising R&D spending to 2% of GDP by 2022, as defined in the 2016 National Strategy for Science, Technology and Innovation (ENCTI). Even more coordination will be needed, as well as stronger and more frequent public-private partnerships and securing funding for basic research, building human capital and investing in key technologies.
Despite all these difficulties, which jeopardize Brazil's ability to leverage innovation and participate in the development of digital technologies, the study also points out that the main research agencies in the country have shown, in recent years, dynamism in supporting such technologies, in particular Advanced Manufacturing and Internet of Things (IoT) solutions.
These were the cases, for example, of CNPq's technological bonuses for the adoption of advanced manufacturing by small and medium-sized companies; the BNDES IoT Pilots, which support tests for digital solutions in real time; Finep's initiatives aimed at the development and adoption of IoT and Industry 4.0 solutions; and EMBRAPII's actions to encourage collaborative research on IoT and Advanced Manufacturing.
In addition, in 2018, the federal government launched the Brazilian Strategy for Digital Transformation (E-Digital), identifying priority areas for investment, such as security and defense, health, agribusiness and smart cities. There are also the Centelha program, to foster innovative entrepreneurship, and the accelerator programs Startup Brasil, BNDES Garagem and InovAtiva.
However, in the view of the OECD, the initiatives remain dispersed and without the provision of the necessary resources to ensure scale and greater impact. The coordination of instruments and across institutions must be improved to articulate the innovation ecosystem and increase the linkages among projects and teams.
Finally, the study provides the following policy recommendations to enhance digital innovation in Brazil:
• Strengthen the role of innovation in the country's economic and social agenda;
• Reinforce the human resource base for digital innovation;
• Reform the Computer Law to boost its support for innovation;
• Strengthen tools for the diffusion of digital innovation;
• Adapt instruments and legal provisions to increase the participation of startups in innovative activities.