The challenges and obstacles to innovation in Brazil

Recently, the chief innovation officer of a large telecom asked me a point-blank question.

“After all, Valter, does the Law of Good really apply to ICTs?”

I could simply answer yes, of course, because ICTs, the acronym for information and communication technology companies, are among the most innovative companies in the country. And Law 11,196, or Lei do Bem, as we know, is the main legislation to encourage innovation. It all fits.

So I started thinking and decided to write a more detailed answer that takes into account some important aspects of the current scenario. First of all, it makes sense that there are doubts regarding the application of the law in this new industry. So, if you have the same question that bothered the aforementioned executive and this column helps you understand what is going on, it is he who we have to thank.

The application of the Lei do Bem (Good Law) to innovation projects in ICTs is going through a delicate moment. A paradox, since Brazil is stronger than ever in information and communication technologies.

To understand this, we need to go back to 1992, the year in which the Industrial Technology Development Program (PDTI) was created, the predecessor of the current Lei do Bem (Good Law). It had everything it needed to succeed. It was based on the most effective practices in advanced and innovative countries like France and provided for the following: companies could deduct part of everything they invested in innovation from their income tax and the Social Contribution on Net Income (CSLL).

The logic is fair and still underpins the Lei do Bem (Good Law): those who take risks to promote competitiveness and technology in the country deserve to pay less taxes.

Fifteen years after the creation of the PDTI, around 70 companies used the program annually – innovative giants, but only from traditional industries, such as Petrobras, Vale, and Embraer. Even the construction industry, so powerful at the time, considered itself outside the program. It was a small participation and highlighted the need for adjustments.

The process required companies to submit their projects and wait for approval to use the incentives. It took so long that many projects were already finished when the authorization finally came. The specter of slowness, a historical enemy of innovation, worked against the incentive.

In 2007, faced with this bleak scenario, the then Minister of Development, Industry and Foreign Trade, Luiz Fernando Furlan, led an important change: companies could enjoy the benefits from the very beginning of the projects and report back until July of the following year. An extraordinary victory for innovation. The proof? The number of companies using the incentive soared and reached 3,500. Still not many in a universe of 194,000 eligible companies, but much more significant.

More recently, about 5 years ago, ICTs began to join the group of users of the Law in a more representative way. In 2022, according to data from the MCTI website, there were 58 registered banks – evidence of this representativeness.

It's only natural. Brazil is a world leader in banking and communication technologies. This is also attributed to decades of rampant inflation, which forced financial institutions to invest heavily in order to achieve speed in transactions without sacrificing security. In his biography, Bill Gates himself cites Bradesco, a Brazilian bank, as an example of an innovative company.

The telecommunications sector is no different. The unique challenges of connecting two hundred million citizens with sociocultural differences in a vast, rugged territory with villages that are difficult to access have pushed innovation in the sector to extremely advanced levels. For example, it is known that laying a cable through Brazilian rivers, especially in the Amazon basin, is many times more challenging than crossing an ocean. Just think of the variations in the intensity of the currents and the trees and objects that are swept away in the forest, unique and characteristic scenarios of our country-continent.

Some insecurity factors explain the late arrival of innovative ICTs to the Lei do Bem, among them:

• The misconception that the program was only intended for industry and traditional R&D, as we mentioned earlier.
• The huge amounts invested by ICTs in innovation. Banks in particular, hiring tens of thousands of data scientists and engineers every year and taking the absolute lead in absorbing this category of researchers.
• The metamorphosis of the industry, with banks becoming telecoms and telecoms absorbing the activities of banks. The R&D challenge that these changes represent is recent and clear. Naturally, there is still little repertoire on this type of project in the academic environment either.

Speaking of the academic environment, the arrival of ICTs in the program has required evaluators to have more specific knowledge about how R&D takes place in banks, insurance companies, technology companies and telecommunications. A recent survey we conducted with 63 innovative companies highlighted the six main factors that accelerate innovation in ICT: artificial intelligence; data science and processing; cloud computing systems; information security; communication networks and protocols; and automation strategies.

Such innovations must be created and tested on a gigantic scale to ensure the necessary safety, speed and processing capacity. This R&D is very different from the old bench tests of molecules or industrial parts.

Everything was going according to plan until, during the Bolsonaro government, we don't know exactly why, the evaluations from 2019 to 2022 accumulated at the Ministry of Science, Technology and Innovation (MCTI).

Even with this gap, companies continued to access the benefit within the limits and in the manner provided for in the Law.

In 2023, to resolve the impasse and facilitate the evaluations, the current government hired academics and made a concentrated effort. However, it seems that there were differences in the interpretation of what constitutes R&D in ICTs between the evaluators hired by MCTI and the scientists from the companies.

This may be one of the reasons for the unprecedentedly high level of project rejection (on average well above 50%, reaching 90% in some companies), as reported by the MCTI. A nightmare. Can you imagine what this means for a publicly traded institution that is certain of being innovative, has published its financial statements and now has to reopen the accounts from four years ago and report to shareholders? A blow to legal uncertainty in the most important instrument for encouraging innovation in the country.

Another theory used to explain the disallowances is the growing pressure from the Treasury to seek fiscal balance. It is worth highlighting here that the government's investment in the Lei do Bem is not actually a waiver, as it is sometimes called.

A study conducted in 2017 by the Center for Strategic Studies and Management (CGEE) of the MCTI and the Latin American Center for Excellence and Innovation (CLAEQ) compared the tax waiver of a sample of companies that use the Lei do Bem with the total direct taxes that these same companies collected on products launched less than three years ago – innovative products, therefore. It was found that for each real of incentives from the Lei do Bem, the companies collected 4 reais and 20 cents in direct taxes. In other words, this is not a waiver, but rather an investment by the government to collect more.

Recent surveys released by MCTI itself showed that for every real invested by the government via the Lei do Bem, on average 5 reais are applied directly by companies in innovation, without being classified for incentive purposes.

We agree with Minister Luciana Santos, from MCTI, who in her speeches emphasizes the need to expand the use of this instrument. However, it is essential that academia, companies and the government work together to find measures and actions that make it work better. There needs to be a consensus on what R&D in ICTs is and to value and encourage this industry, precisely one of the levers of innovation and competitiveness in the country. In addition, of course, to ensuring the resumption of the continuous flow of assessments within the year.

Using the Good Law correctly in all business sectors, and in ICTs in particular, is a crucial component for us to leave behind the position of a nation with little innovation that today, justifiably, causes us so much discomfort.