Below is a draft of the article I'm writing for this semester's issue of Business Sphere magazine based on my interview with Dr. Álvaro Cyrino in December.
The Brazilian economy, represented by the first letter in BRIC, is unmistakably on the rise. The world’s fifth largest nation by both geographical area and population, Brazil is enjoying a period of unprecedented development. According to official estimates published last month by the Central Bank, GDP growth reached 7.8 percent in 2010, highlighting the resilience of its economy even in the wake of the global recession.
A confluence of factors is fueling the economic expansion: a wealth of natural resources, stable government policies, a sophisticated banking sector and a rapidly growing middle class that now comprises half of its 190 million-strong population. The economy is also benefiting from a surge in real estate and infrastructure development leading up to the 2014 FIFA World Cup and the 2016 Summer Olympics, both of which have been awarded to Brazil.
In the coming decades, this remarkable economic progress will propel the country, currently the eighth largest economy in the world, into the ranks of advanced nations; its economy is expected to become the world’s fourth largest by 2040, leapfrogging the economies of Japan, France, Germany and the United Kingdom.
Given this strong track record and rosy outlook, one might expect a national sense of complacence. Indeed, many Brazilian executives, optimistic about future growth, are reportedly in a euphoric mood at the moment. Yet business and political leaders are recognizing that the nation’s current economic model will need to undergo fundamental adjustments in order to ensure Brazil’s continued growth in an increasingly competitive global business environment. The missing ingredient, according to business and political leaders, is innovation.
Much of the economy is dependent on basic commodity exports, such as iron ore, soybeans, coffee and beef. These commodities continue to serve as the base of a tremendously successful development model that has reached deep into the country’s rural interior while also creating global corporate leaders: Vale, ranked the second largest mining company in the world, is the top producer of iron ore and also operates nine hydroelectric plants. Another prominent exemplar is Petrobras, Brazil’s state-run energy company that raised $70 billion last September in the world’s biggest-ever share offering. Thousands of smaller companies have capitalized in recent years on rising food prices in overseas markets, transforming Brazil into a breadbasket for agricultural products ranging from poultry to sugarcane.
Despite these successes, there is a growing concern that the economy lacks sufficient innovation to help it earn the coveted stamp of advanced nation. Brazil ranked 68th in the 2010 Global Innovation Index, an 18 point drop from the previous year. This lackluster ranking reflects, in part, weak government funding for research and development: Brazil currently devotes only 0.9% of its GDP to research and development spending, compared to 1.8% in Canada, 2.7% in the United States, and 3.0% in South Korea. Brazil’s paltry R&D spending trails behind even other developing countries, including all three of its BRIC counterparts, both in terms of net spending and as a percentage of GDP.
The fear is that this innovation deficiency could translate into long-term consequences that would limit the growth potential of the Brazilian economy. There is no denying the effectiveness of the current model, but serving a global appetite for minerals, energy resources and agricultural commodities will not be enough for continued economic expansion on a sustainable scale. Troublingly, Brazil’s ratio of basic-product to manufactured-product exports reached levels not seen since 1978, underscoring the nation’s dependence on commodity goods.
Business Sphere met with Dr. Alvaro Cyrino, Deputy Dean of EBAPE at Fundação Getúlio Vargas, the nation’s leading higher education institution and think tank, to hear his opinion on the matter. “Brazilians are a creative people,” Dr. Cyrino asserts, “but we are not very innovative. Brazil, in general, is not adept at translating creative potential into innovation.”
Much of the reason, according to Cyrino, is cultural. “We are still very much a culture oriented to the formalities of government administration. College graduates value stability and social relationships as guiding principles when making career decisions.” Indeed, young Brazilians overwhelmingly favor employment opportunities at large corporations or in public service over entrepreneurial risks. Cyrino states, “If we want to foster an innovation culture, we have to start by changing these patterns.”
The shortcomings of the national education system are a cause for major concern. Government efforts to improve education have been making some strides – the literacy rate has risen from around 82% two decades ago to 91% – but illiteracy remains more prevalent in Brazil than in most of its Latin American neighbors. Higher education is a further weakness of the current education system: only 13% of Brazilians between the ages of 18 and 24 are enrolled in higher education institutions, raising worries about the skill level of the country’s future workforce. Exacerbating the deficiencies of the education system are problematic social and regional disparities, which are masked in these national figures.
Another challenge to innovation is the lack of institutional support. “Brazil doesn’t have the right institutions to support entrepreneurship,” Cyrino says. “There are creative people with good ideas, but they lack the means to channel their creativity into a pipeline of products and services in the market.” Financing is particularly daunting in a country where, despite the sophistication of the banking sector, large-scale startup capital has remained, until very recently, a relatively underutilized mechanism.
It is not that Brazil is unfamiliar with the potential of innovation. The most famous example is perhaps the country’s successful ethanol economy, which has been hailed as the world’s first sustainable bio-fuel program. Conceived as a response to the global oil crisis of the 1970s, Brazil’s 30-year-old ethanol fuel program has become a policy model for other nations. At a time when the governments of many advanced economies are seeking to subsidize nascent alternative energy sources, 89% of cars sold in Brazil run on a mixture of ethanol and traditional fuel, thanks to domestically developed flex-fuel engine technology. Due to genetic modification and an advanced cultivation system, Brazilian sugarcane-based ethanol is six times more efficient than corn-based ethanol produced in the US and price competitive with standard gasoline.
While the magnitude of innovation that transformed Brazil’s fuel consumption has not yet been emulated by mainstream companies, there are clear signs that change is on the way. The 123 national institutes of science and over 400 incubators scattered across the country are humming with activity in fields ranging from cosmetics to genetics. The fact that many of these startup incubators are associated with universities represents, in itself, a complete reversal in the mindset of Brazilian higher learning institutions. “Universities here are very formal institutions,” explains Cyrino. “They were originally resistant to the idea of entrepreneurship.” Over the past several decades, however, higher learning institutions have increasingly provided support for entrepreneurship, with incubators such as the lab at Fundação Getúlio Vargas leading the way.
A large percentage of the successful projects developed in university incubators have been in the information technology sector. Brazil is widely overlooked as an emerging technology hub, especially when compared to “Asian tiger” economies or fellow BRIC members China and India, but the booming activity in information technology clusters across the country points toward the growing role of technology innovation in the Brazilian economy. IT is a particularly prominent sector in the economy of Florianópolis, the capital of the southern state of Santa Catarina, whose officials aspire to position the city as “a Silicon Valley with beaches.” Another important IT center is Porto Digital, located on an island off the coast of the northeastern city of Recife. Harnessing a ready pool of talent from the Federal University of Pernambuco, the Porto Digital cluster comprises small and medium enterprises specializing in developing software for export to foreign markets.
The country’s innovation potential is attracting the notice of multinationals. For example, Recife’s Porto Digital is home to regional offices of corporations such as Dell, Microsoft and Samsung. In another important vote of confidence, IBM recently announced that Brazil will be the location of its ninth research center; the first new IBM lab in 12 years, it will also be the company’s first research center in Latin America, reflecting the central importance of the Brazilian market. After construction of the new lab is complete, IBM is planning to consolidate its handful of researchers at existing locations in São Paulo and Rio de Janeiro, in addition to hiring scores of new researchers from both Brazil and other regions.
Following the forays of multinational corporations into the country is an influx of new money. Venture capital is still filtering into the public consciousness, and the field is currently dominated by nine major firms, but new players are revolutionizing the capital landscape. By the end of last year, nearly $30 billion in venture and private equity capital had been committed to Brazil, compared to a mere $6 billion in 2004. While these may pale in comparison to figures in more traditional investment target countries, investors interested in geographic diversification are increasingly looking to Brazil, and the nation’s traditionally risk-averse business community is opening its eyes to the possibilities of harnessing the capital of investors seeking a share of profits from the region’s development.
This fresh mentality, backed by a rapidly growing pool of financing options, is fueling a wave of innovation, and not just in the information technology sector; even traditional industries have been transformed by new ideas. Most notably, the 365% expansion of the agricultural sector over the past decade is largely due to the efforts of EMBRAPA, the Brazilian Agricultural Research Corporation, which utilized innovative technology to help farmers convert vast cerrado savanna in the states of Goiás and Minas Gerais into some of the world’s more fertile farmland.
A new initiative in another commodity industry aims to increase the productivity of forests, an especially relevant issue in a country trying to balance economic development with environmental preservation. Financed by international partners, the ambitious project is creating a system that enlists the cooperation of tree growers and landowners in exchange for a greater share of profits. Many of Brazil’s pulp and paper companies are already industry leaders, largely thanks to natural competitive advantages – a eucalyptus tree here can grow to maturity in just seven years, compared to 15 years for similar trees harvested by the industry in the northern hemisphere – and the hope is that, by encouraging a more equitable distribution of gains, these companies will be able to maximize efficiency in a financially and environmentally sustainable manner.
These examples of successful innovation in traditional industries are significant because, as even the most optimistic forecasters understand, Brazil will not become a high-tech hub overnight. A commonly cited obstacle is that the nation lacks an ecosystem that encourages risk taking and creative thinking, due, in part, to the fact that the economy was closed until a couple decades ago, and there was little incentive for product innovation. When the country did begin to open up for trade, skyrocketing interest rates diverted corporate priorities away from meaningful innovation, with the exception of a few pioneers.
In some ways, the continued lack of high-tech innovation is the product of the handsome profits that are available in more traditional industries. Never before have Brazilian coffee, soybeans, beef and paper products been in such high demand; the incentives in these industries are tremendously enticing for jobseekers and investors alike. As a result, the majority of the best new ideas, such as novel business models, remain confined to the agricultural and mineral commodity corporations.
Many native businessmen view this dual-track role of innovation as a national asset rather than a weakness. The long-term goal is to push the country’s exports up the value chain, but this does not require abandoning the industries that have brought the nation to where it stands today. Indeed, there is a growing conviction that Brazil can create its own developmental model by leveraging its natural competitive advantages and maximizing returns in traditional industries while laying the groundwork for a forward-looking economy based on homegrown innovation. And if the currently small but growing role of innovation in the national economy is any sign of what is to come, the future is bright for the Brazilian model.