Despite Economic Growth, Brazil Still Lags In R&D, Education

Low prices aren't China's only advantage over Brazil; Latin America's biggest economy must also foster an innovative spirit in order to keep pace with the Asian giant and other emerging market rivals, according to analysts.

"Brazil needs to find a niche, a competitive advantage," in order to secure its place on the global supply chain, said Gene Huang, chief economist for Fedex, speaking at a conference on long-term growth this month in Sao Paulo. Despite Brazil's economic growth of recent years, the nation continues to lag in important indicators such as patent filings and research and development spending. According to a 2007 report by the World Intellectual Property Organization, or WIPO, patent filings in Brazil decreased by 13.8% between 2004 and 2005, the latest years for which data is available. Filings in China increased by 33% in the same period. And in Thailand, South Korea, Russia and India they increased by 18%, 15%, 7% and 1.3%, respectively. According to the Organization for Economic Development, or OECD, Brazil's R&D spending in 2003 was 1% of gross domestic product, less than one-half the average of the OECD countries. Meanwhile, Brazil's investment rate in 2006 was just 21% of GDP, while India's 2004 investment rate was 30% and China's rate in 2005 was a stunning 44%, according to the Asian Development Bank's most recent data. But macroeconomic stability could provide Brazil the means to reverse its lackluster competitiveness. "This is a special moment in Brazil to discuss long-term growth that it is now possible," said Brazilian Central Bank President Henrique Meirelles, speaking at the conference. "Before, Brazil was always concerned with short-term crises. Now, it can afford to consider the long term."

Inflation Under Control, Good Growth Prospects

Rampant inflation, a chronic Brazilian condition from the 1970s onward, has been brought under control in recent years. And while the Brazilian Central Bank reports that GDP growth averaged a meager 2.3% between 1991 and 2003, analysts project that growth for 2007 will be between 4.5% and 5%. In considering the long term, Brazil has the benefit of a number of "unique advantages," said Huang, including its relatively young population. In 2000, approximately 30% of the nation was 14 years old or younger, according to the Economic Commission on Latin America and the Caribbean. The organization estimated that in 2010, this demographic will comprise 27% of the nation. This represents "a new stimulus that has to be addressed through education," said Huang. Brazilian Education Minister Fernando Haddad agreed. His goal is to make the quality of Brazil's education system "comparable to the average of the OECD countries by 2021," with training in science and technology one of his top priorities. To this end, the new, so-called Rouanet Law for research encourages private sector cooperation with Brazil's universities by offering companies a combination of tax credits and patent rights for investment in innovation. Floyd Kvamme, partner emeritus of California-based high-tech venture capital firm Kleiner Perkins Caufield & Byers, and co-chair of U.S. President George W. Bush's Council of Advisors on Science and Technology, emphasized the importance of such public-private partnerships. "The educational system is fundamental for much of the new, innovative industries in the U.S.," he said. "They all started with people in their twenties." Analysts pointed to Brazil's software industry as one example of success. "The level of software here is very advanced," said Kvamme. Michel Levy, president of Microsoft Brasil, highlighted the strong performance of Brazilian students in Microsoft's Imagine Cup, the world's largest student technology competition.

Investing In Innovation

"Brazil could go beyond India" in terms of software, he said. In five to 10 years, Brazil could move "one step up in the value chain if it continues to invest in innovation." But such investment is often hard to come by. "The bottleneck [to entrepreneurship] is a lack of financing and venture capital," said Levy. "Venture capital in Brazil is a fraction of what it is in the U.S.," added Roberto Vellutini, manager for infrastructure and environment at the Inter-American Development Bank. So far in 2007, Brazilian investors have committed a mere 500 million Brazilian reals ($250 million) to venture capital, and foreign investors have committed "very little," said Marcus Regueira, president of the Rio de Janeiro-based Brazilian Private Equity and Venture Capital Association. But he was optimistic. "I think the industry is ripe for growth," he said, adding that he expects both domestic and foreign venture capital investment in Brazil to increase in 2008, although he declined to project by how much. Domestically, "the recent movement toward venture capital is a diversification process in the portfolios of institutional investors," he said. He said he expects institutional participation will boost Brazil's venture capital industry, just as it did in the U.S. in the 1980s. In terms of foreign venture capital investment, "I see lots of interest, a lot more interest recently then say a year ago," said Regueira. This interest is primarily in areas linked to technology, he added, such as bio-fuels, information technology, telecommunications and agro-business. In March 2006, Intel capital, the investment arm of Intel Corp., announced the creation of a $50 million venture capital fund to stimulate Brazilian technological innovation. "Intel Capital is a global investor and we recognize the importance of Brazil as an emerging market leader," said Arvind Sodhani, president of Intel Capital, in a press release. "We anticipate that the establishment of the Brazil fund will inspire even more innovative business models among Brazilian entrepreneurs." Overall foreign direct investment for the 12 months ended June 2007 was a robust $32.3 billion, up from $18.8 billion in calendar year 2006. Brazil's venture capital industry has the "brains, entrepreneurs and managers to support it" said Regueira," what it needs now is "a critical mass" of investors.