Brazilian entrepreneurialism is not reflected in the innovation sector

Difficulties found in the business sector are even greater in the technological segment; in large companies, the problem is regulatory uncertainty, says researcher.

By Fábio de Castro

Agência FAPESP – Every entrepreneur encounters adverse conditions when starting a business in Brazil, but for small, technology-based companies the difficulties are even greater. At the same time, larger companies are having difficulty effectively utilizing the laws that stimulate innovation. For this reason, private sector activity in research and development remains extremely timid in Brazil.

This is how Luiz Eugênio Mello, director of the Vale Technological Institute (ITV), described the scenario on the last day of the 1st Preparatory Meeting for the 2013 World Science Forum, held on August 31, 2012 at FAPESP’s headquarters.

Mello, who is a Full Professor at Universidade Federal de São Paulo (Unifesp), affirmed that Brazilian entrepreneurs are finding extremely hostile conditions. It takes an average of 119 days to open a company in Brazil, in contrast to 38 in China, 30 in Russia, 29 in India, 15 in Germany, and six in Canada. On average, the closing of a company takes 10 years.

“None of this impedes Brazilians from having a highly entrepreneurial profile. But the entrepreneurialism that we have here is not associated with a dimension that the country needs. It is focused mainly on services, while what we need is new, technologically based companies,” Mello said to Agência FAPESP.

When an entrepreneur opens an inn, a bakery or a car wash, according to Mello, he or she has access to the experience of other companies and knows the market, demand and profile of consumers. This information reduces entrepreneurs’ degree of uncertainty and makes them more willing to face the enormous difficulties of the Brazilian business environment.

“But when it involves a completely new business that has never been set up by anybody, with a high degree of uncertainty, which is inherent in innovation, the entrepreneur has no stimulus. There are many problems that are not simple to resolve and have exponential impacts. This creates an almost insurmountable barrier. Brazil has entrepreneurship in the technological area, but it leaves a lot to be desired,” he said.

According to Mello, larger companies deal with other problems: they cannot take advantage of the resources that are available under the Incentive Law or the Innovation Law. “These are good laws that must be perfected. In practice, the number of uncertainties and insecurities that these laws involve is so large that companies do not use them,” he said.

According to Mello, a study conducted by the National Association of Research and Development of Innovative Companies (Anpei) estimates that only 600 to 900 of the roughly 300,000 companies in Brazil use the Incentive Law.     

“That is very few. Certainly, this does not occur because companies are not interested in getting their money back. They do not use the resources because the law is still not sufficiently clear and lacks needed improvements. I think that that the country is experiencing a new moment, but the road ahead is long,” he said.

Great uncertainties

According to Mello, it is clear that companies should invest in research and innovation, but investments of this kind are far from trivial.

“The primary function of the university is to produce quality minds, and there are indicators to measure this. But industry has other parameters, and its indicator is, in essence, profit,” he commented.

A company, according to Mello, does not have the scope to produce science but rather to generate returns for its shareholders. “A company innovates when this allows for increased profits, reduced costs, expansion into new markets, or survival in the business,” he said.

In some cases, the investments are too high to allow high profit margins, according to Mello. Vale’s largest current undertaking, for example, is the S11D iron project in Carajás, Pará State, which will cost US$ 19.5 billion.

“You cannot deal with major uncertainties in a project of this magnitude. Innovation faces this difficulty, which is why we have to conduct tests,” he explained. One example of this is the copper hydrometallurgical unit that Vale established solely for tests.

“The unit produced 10,000 tons of copper cathode per year, cost US$ 120 million and operated three and a half years before being closed.  It was a pilot plant set up to evaluate the development potential for this technology. We decided that we would not implement it. This US$ 120 million expenditure prevented Vale from spending US$ 3 billion on something with a very high risk. For the company, it was a very good deal,” he said.