Brazil must embrace change to flourish; 74% of GDP growth over the past decade was due to the increase in the number of people working and only about 26% was attributable to productivity gains

October 22, 2013 10:03 pm

Brazil must embrace change to flourish

By Joseph Leahy

The Technological Park of the Federal University of Rio de Janeiro could hardly be better located, given its purpose. Set on an island in Guanabara Bay, the giant natural harbour that forms the setting for Brazil’s second-largest city, the centre has a prime vantage point looking out over the ocean and the country’s huge oil discoveries that lie beneath. These deepwater fields, called pre-salt because they are buried under a layer of sodium chloride that is up to 2km thick, are helping drive a wave of innovation in the energy sector.The Rio technology park is playing its role by attracting names, ranging from software group EMC to oil services companies Halliburton and Tenaris, to Rio to help exploit the discoveries.

“The park has been in place for 10 years,” says Mauricio Guedes, executive director. “The speed of its development has been almost frightening.”

As it is the world’s sixth or seventh largest economy, depending on the exchange rate, Brazil is keen to ensure it does not fall behind on innovation, research and development in a world in which it is not enough to be a simple manufacturer or producer of commodities.

Success will depend on whether, by becoming more productive through innovation and the use of technology, the country can offset high costs, changing demographics and the danger of “Dutch disease” – which is caught when a country makes so much revenue from commodity exports that it de­industrialises.

The World Economic Forum classifies Brazil as in the final stage of transition towards a developed economy – the phase of evolving from an efficiency-driven growth model to an innovation-inspired one. “Approximately 74 per cent of the GDP growth over the past decade was due to the increase in the number of people working and only about 26 per cent was attributable to productivity gains,” says Boston Consulting Group.

“This is very different from the productivity-driven growth of other rapidly developing economies. As the workforce expansion weakens, it will be critical for Brazil to increase productivity significantly to meet its aspiration of growing GDP by more than 4 per cent per year.”

Brazil has made strides in innovation, research and development. The most visible example is Embraer, the third-largest commercial jet producer in the world by units sold. Embraer is innovative as much in terms of its business model as its aircraft designs. Rather than trying to go it alone, the company uses the global supply chain to source components. To share the risk when developing products, it invites suppliers to participate as partners in projects.

Another institution known for its innovation is Embrapa, the agricultural research agency that brought soyabeans from Asia and cattle from India to suit the harsh conditions of the Brazilian cerrado, or savannah.

Then there is Petrobras, the world’s deepwater oil exploration and production expert. With most of its production offshore, Petrobras is pushing ever deeper into the ocean in search of reserves. In its Lula field, it is drilling 7km below the surface of the Atlantic. At its Cenpes research centre near Rio’s Technological Park, it has 227 laboratories researching everything, from the seismic technology to evaluate deepwater fields to the materials required to resist the corrosive chemicals and high temperatures of the oil deposits.

Even Brazil’s automotive sector is known for some important innovations. Not only has it adapted to use the “Flex” engine – capable of running on ethanol or petrol – but several companies have developed indigenous models. Chevrolet built the Meriva minivan in São Paulo and Volkswagen created the Fox small car especially for Brazil.

“Brazilian innovations in the aircraft, energy and automobile industries have been internationally recognised,” wrote Rasmus Lema, Ruy Quadros and Hubert Schmitz in a report for the Institute of Development Studies.

The country’s online sector is growing, as smartphone use takes off and Facebook users multiply. The number of venture capital investments is rising. Based on data from Startup Dealbook Brazil, tech start-ups increased from 45 in 2011 to 79 last year.

“Today we have 25 large technology hubs,” says Flaviano Faleiro, managing director for strategy and innovation at Accenture in Brazil.

He notes that Brazil’s spending on research and technology was rising at nearly 7 per cent a year, a figure second only to China’s 11 per cent.

“There is a big gap when you compare Brazil with the US and other countries, but if compare us with 10 years ago, we have made big strides in terms of the [innovation] ecosystem,” said Mr Faleiro.

Standing in the way of this progress are a familiar set of challenges, including poor education and red tape. There are also the government and industry’s protectionist tendencies, which stifle competition and reduce the incentives to be creative.

Nicholas M. Donofrio, of NMD Consulting, says one important question is whether Brazil needs to organise itself better through investment in infrastructure and schools.

“It is not that Brazil lacks talent … The question is do you have it organised in a fashion where it can be collaborative and multi-discipline,” asks Mr Donofrio.

Brazil ranks 55th in the World Economic Forum’s global competitiveness index in terms of innovation, compared with China at 32nd and India 41st.

But the Forum said “the country still benefits from important strengths, especially its large market size and its fairly sophisticated business community (which ranks 39th), with pockets of innovation excellence (36th) in many research-driven, high-value-added activities”.

Some of these are on display in the Technological Park. EMC, for instance, is breaking new ground by providing big data – the huge volumes of information gathered from traditional and technological business practices – for the oil sector, and employing professionals ranging from statisticians to philosophers to design industry processes.

“Of the 10 most sought-after professions today, five to six didn’t exist 10 years ago,” says Karin Breitman, head of EMC’s research and development centre at the park.

It is a measure of how fast things are changing. And, if Brazil is to remain competitive, it will need to change with them.