“South Africa and Brazil have the potential to become important world players in innovative sectors. Both countries are not currently living up to their potential, however. Some constraints to growth are structural and/or external, but many of them can be alleviated by a more favorable policy environment (2013:43).”
With respect to Brazil, these authors note that Brazil has made progress through successive policy reforms, increased government investment, and a measurable increase in the numbers of researchers applying their expertise to research and development. However, the authors note that government authorities are responsible for approximately 60% of all research and development expenditures and that only 26% of scientists are employed in the private sector. Yet, “Innovation and Venture Capital Policy in Brazil and South Africa” does not provide an historical account of precisely how government became responsible for organizing and financing efforts to advance research and technology, rather the authors prefer to focus on those policies that impact the behavior of venture capital in Brazil and South Africa.
Accordingly, the emphasis is upon exactly how the state hinders venture capital formation and its employment for innovation. In the case of Brazil, Tuomi and Castro Neto document that venture capitalism,
“has made significant advances in the country over the past decade growing from eight VC fund managing companies in 1994 to 180 VC fund managing companies today. According to the sector’s Brazilian association, ABVCAP, in vested capital in 2004 was only $5.6 billion. This grew five- fold to $38 billion in 2010(2013:41).”
They attribute this growth to low inflation and economic stability since mid-1990s, but also point to a number of fiscal measures that provide greater incentives for private sector investment in research and development. Certainly, economic stability coupled with tax expenditures to subsidize entrepreneurial activities provide important conditions for investment in high risk and potentially high return economic activities, and the authors document that indeed Brazilian venture capital firms have opted for dynamic start up companies over established corporations. Yet, as the authors note, even Brazil’s venture capital firms required the centralized and often generous hand of government for direction and finance.
If venture capitalism is critical to innovation, then in Brazil’s case, the public sector played a critical role in shaping the evolution of venture capitalism in the national innovation system. Indeed, Tuomi and Castro Neto carefully document how the public company FINEP, supervised by the Ministry of Science and Technology or MCTI, identified and actively responded to the underdevelopment of venture capitalism in Brazil during the past decade. Towards this end,
“FINEP decided to address some of the problems with VC capital formation including: small numbers of domestic fund managers; an unwillingness by pension funds to invest in VC; a disconnect between investors and start-ups; and the fact that few Brazilian companies were familiar with VC. As such, FINEP introduced a number of measures aimed at fostering a Brazilian VC culture. First they instigated a series of panels on VC funds, to assess VC funds and provide advice on how to improve. Second, they organized forums with the intention of educating investors, start-up owners and researchers on VC. Lastly, they held training workshops on due diligence and other topics.”
Herein lies the big takeaway from this worthwhile article, if Brazil is to shift the burden of financing research and development upon the private sector, then government must both develop public policies that reward private sector investment in innovation as well as play an instrumental role in shaping capital markets to finance Brazilian firms with competitive advantages that lead to the production of tradable, high valued goods and services. Will Brazil’s private sector respond to such policies and guidance if the state continues to provide the bulk of research and development financing? And, what happens if Brazil’s private sector continues to shy away from shouldering such a burden and prefers to opt for state subsidies, either through tax expenditures or favorable interest rates and terms from BNDES?