By Sergio Pessoa of Brasscom
In 2011, the Brics accounted for 25 per cent of global GDP, 30 per cent of global land area and 45 per cent of global population. According to the IMF, these economies should account for 56 per cent of the global economic expansion in 2012, up from 19 per cent in 2011. The Brics are no longer merely adapting to the world economy, they are helping to shape it.
They are also breaking with the past and becoming a fertile ground for innovation, which requires a complex ecosystem that includes critical factors such as strong educational systems and human capital, deep and efficient capital markets, and open and free competition.
Take the case of Brazil, the world’s 6th largest economy – and expected to become the 4th in a few decades. Besides its global prominence in commodity trading, the country has also a diversified economy which exports sophisticated products like aircraft, automobiles, and industrial equipment.
Brazil has a very sophisticated information and communications technology market, a key catalyst for innovation and for the creation of new goods, services and business processes. Brazil’s $213bn market for ICT is the 5th largest in the world, and the country is encouraging the establishment of technology parks and business incubators, targeting high tech companies. Some 74 such parks are active across the country.
The public and private sectors are playing important roles to address this challenge. A key tax law, a cornerstone of the “BrasilMaior” economic plan announced in 2011, replaced 20 per cent social security payroll contributions in some labor-intensive sectors, including software and IT services, with a 2 per cent revenue tax, and cut labour costs by 10-12 per cent. Companies can shift these savings to R&D and human capital investments, which will help boost innovation.
R&D spending has risen from 0.96 per cent of GDP in 2003 – right before the 2004 Innovation Law – to 1.16 per cent in 2010. Even though R&D spending as a share of GDP is not significantly different from other emerging countries, an important difference is the source of investments: as an example, in China, Japan, and Korea more than 70 per cent comes from private initiatives versus 45 per cent in Brazil. In the US and Germany, more than 60 per cent is financed by the industry. The role of the private sector and its investments is critical for the development of innovation and competitive industries.
Public policies that foster local production are also a factor. The Brazilian Ministry of Science, Technology and Innovation announced, this month, “TI Maior”, a strategic plan for the national industry of software and IT services. The government, in partnership with the private initiative, will invest in 150 start-ups, develop 50,000 new professionals, stimulate 15 strategic areas of software development around digital ecosystems, and implement four innovation centres between 2012 and 2015.
The corporations can also benefit from tax incentives related to technological research and innovation. The 2004 Innovation Law and the 2005 Goods Law, which introduced further tax incentives for R&D, have, for example, allowed Petrobras to finance R&D programs in many Brazilian universities to enable the exploration of the huge “pre-salt” oil reserves.
The strong economy combined with incentives have also attracted major international companies to build R&D facilities in Brazil, including Schlumberger, Baker Hughes, GE, FMC, IBM, and EMC among others.
But in industrial development policy, fostering the local industry should not be confused with protecting the inefficient. Brazil seems to be heading in the right direction, considering the recent announcement that the Brazilian government will award private firms concession for the construction of needed infrastructure.
The presence of major global venture capital and private equity players has significantly increased over the past years, along with their investments. Although the cost of capital is still high, companies have had access to capital like never before. Brazil attracted a record $67bn in FDI in 2011.
But there is still work to be done. Education and infrastructure still lag behind world-class levels. The average speed of broadband connection in the country is 1.8 Mbps, lower than the global average of 2.3 Mbps, according to Akamai. Moreover, telecom bills in Brazil have the highest tax burden in the world, of more than 40 per cent, including federal and state taxes, as well as contributions to telecom sector development funds like Fistel, Fust, and Funttel.
While 38,000 engineers graduate annually in Brazil, China and India are, each year, putting 400,000 and 250,000 engineers on the market, respectively. The country can benefit from public private partnerships to develop infrastructure in critical areas and a scalable training system to prepare the resources required to keep up with the country’s rapidly-growing economy.
The other Brics face similar challenges, creating opportunities for future collaborative efforts. For example, both Brazil and India have surpassed the $100bn revenue mark in IT, and they can cooperate to create even stronger business models, pooling experiences and talent.
Brazil is not a country of the future anymore. The future has arrived. The opportunity for Brazil to consolidate its growing importance in the global stage is here now, and it’s time to seize it. Innovation may be the answer.
Sergio Pessoa is the Director of Global Market Development for Brasscom (The Brazilian Association of Information Technology and Communication Companies) and will be a speaker at innovaBRICS
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