Twenty years of the Innovation Act: a promising seed in barren ground

Despite the bold and modern set of legal instruments, the measures have not yet been enough to change the Brazilian economy’s capacity for innovation

André Tortato Rauen

In essence, innovation is a survival strategy for capitalist companies. But we have learned from a wealth of international experience: if the government doesn’t help, these companies will invest less in the activity than socially desirable.

In other words, without government-funded technology, the new iPhone to be launched in six months’ time is going to be very disappointing.

This is because, as much as a company relies on innovation to maintain its market position, the sharpest innovations are uncertain and costly. But that’s not all. There are technological challenges that only the government can tackle, because they are very complex and diffuse.

In our example, if it weren’t for government funding, we wouldn’t have touchscreens.

Although private companies are the central hubs for the innovation process, government involvement can increase both the speed at which innovations are introduced and their intensity and impact.

This is precisely what countries like the United States, China, and almost all of Europe are doing.

You would be mistaken in thinking that the famous Silicon Valley is more the result of the American entrepreneurial spirit than massive government funding.

Take the needs of the US Department of Defense out of the historical equation and see if there would be funding for the “self-made men” who have become today’s technology heroes.

Innovation Act

It’s not that there is no innovation without government funding. There is. The problem is its speed and direction. What’s more, the effectiveness of government involvement depends heavily on the quality of the business environment. That is, government involvement is important, but far from sufficient.

In Brazil, to promote government funding, Brazilian society, especially universities and the government, created the Innovation Act.

It was enacted on December 2, 2004 and aims to establish “[…] measures to promote innovation and scientific and technological research in the manufacturing field, with a focus on technological training, achieving technological autonomy, and developing Brazil’s national and regional manufacturing system.”

After a series of amendments made in 2016, this Act culminated in a wide range of new legal possibilities that challenge the conceptual model of Brazilian Administrative Law, which is still based on a limited relationship between public and private entities.

It gives rise to, for example:

A new relationship between universities and corporations;
Endowments (patrimonial and philanthropic);
Outright grants;
Technology requests;
The legality of negotiating intellectual property;
Explicit mention of failure in cases of technological uncertainty.

As has become clear over the last twenty years, merely providing a bold and modern set of instruments has not been enough to change the Brazilian economy’s capacity for innovation.

The manufacturing industry’s innovation rate, which was 31.9% from 1998–2000, rose to 34.3% in 2017 (most recent measurement).

As for the Global Innovation Index, in 2009 we were the 50^th most innovative economy, and in 2021 we were still in the same position. However, in 2020, we rose to 62^nd!

A reader unfamiliar with Brazil’s nuanced business environment and other laws governing the public-private relationship might say that the situation would be much worse in the absence of the Act. But that doesn’t seem to be the case.

Of course, the Innovation Act has not changed Brazil’s limited business environment or the general spirit of public-private relationships in Brazil, expressed in a vast and complex broader legal framework.

And innovation is basically that: risk and uncertainty in the relationship between public and private entities.

In other words, even in the presence of perfect legislation, the rate of innovation in Brazil would not explode.

Brazilian challenges

Although the Innovation Act is in line with the zeitgeist of the world’s most innovative economies, it operates on barren ground.

In Brazil, it is challenging to open a well-known small business, a vivarium that develops and sells genetically modified mice, which requires dozens of time-consuming permits and various imported supplies, so it’s practically impossible.

If conducting business under Brazilian capitalism is difficult, conducting business with technological risk is even worse.

This business environment also involves the ethics and rules of incentive and punishment present in Brazilian society, which have amalgamated into other much more restricted and recognized legislation, and over which the Innovation Act alone has little persuasive power.

That’s why, even after twenty years, its use is still very limited. Of course, Brazil’s historically peripheral position in global technology chains doesn’t help the matter.

Those trying to apply the Innovation Act’s provisions must contend with a whole range of prejudices, communication difficulties, reversals of the burden of proof, and legal ignorance, which only lead to inefficiency and friction.

It’s crucial to remember that the innovation process is time-bound, uncertain, asymmetric, and interdependent:

Time-bound, because context matters, as does the speed of introduction;
Uncertain, because it is not known for certain whether the desired technology can be developed or whether it will be accepted by the market;
Asymmetric, because, as knowledge is cumulative, one agent tends to know more than another;
Interdependent, because it requires the work of agents with varying logistics, such as universities, which train people and produce knowledge, and companies, which produce goods and services.

The whole problem is that we have created a special kind of capitalism in which time belongs to the government, not the market. Uncertainty is avoided at all costs, asymmetry is ignored, and interdependence is criminalized.

Twenty years later, we have realized that the Innovation Act is necessary, but insufficient on its own.

Either we transform the business environment and the entire legal framework that supports it, or positive government involvement in innovation will continue to be lost in the arid soil in which it is planted.

André Tortato Rauen is an economist with a PhD in science & technology policy from the University of Campinas (UNICAMP), currently a professor at the College of the Federal Public Audit Office (TCU). He is also a special advisor to the Brazilian Industrial Development Agency (ABDI).

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