WORKING PAPER No 1023 - Departamento de...

WORKING PAPER No 1023

INNOVATION, THROUGH INTERNATIONALIZATION, IS GOOD FOR BRAZILIAN EXPORTS

Glauco Arbix Mario Sergio Salerno João Alberto De Negri

Brasilia, June 2004

WORKING PAPER No 1023

INNOVATION, THROUGH INTERNATIONALIZATION, IS GOOD FOR BRAZILIAN EXPORTS∗

Glauco Arbix∗∗ Mario Sergio Salerno∗∗∗ João Alberto De Negri∗∗∗∗

Brasilia, June 2004

∗The authors are grateful for the contributions of Antônio Barros de Castro, Renato Baumann, Ricardo Biel-schowsky, Wilson Suzigan and the following researchers at the Institute of Applied Economic Research (Ipea): Gilberto Hollauer, Nilton Nareto, Mansueto Almeida, Priscila Vieira and Waldery Rodrigues.The au-thors bear sole responsibiliy for any errors or omissions. This study was made possible thanks to the support of the Brazilian Institute of Geography and Statistics (IBGE), the Ministry of Development,Industry and Foreign Trade (Mdic/Secex), and the Ministry of Labor and Employment (MTE). ∗∗ Presidente of Ipea. ∗∗∗ Diretor of Sectoral Studies at Ipea. ∗∗∗∗ Vice-Diretor of Sectoral Studies at Ipea.

Federal Government

Ministry of Planning.

Minister – Guido Mantega Executive Secretary – Nelson Machado

The Ipea is a public foundation linked to the Ministry of Planning, which provides technical and institutional support for government policy initiatives – enabling the State to formulate a variety of policies and programs for Brazil’s development – and makes its research and studies available to the general public.

President Glauco Arbix

Director of Social Studies Anna Maria T. Medeiros Peliano

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Director of Regional and Urban Studies Marcelo Piancastelli de Siqueira

Director of Sectoral Studies Mario Sergio Salerno

Director of Macroeconomic Studies Paulo Mansur Levy

ISSN 1415-4765 JEL F10

Q55

WORKING PAPER

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Chief Press Secretary Murilo Lôbo

Executive Secretary ot the Editorial Committee Marco Aurélio Dias Pires

CONTENTS

ABSTRACT

1 INTRODUCTION 7

2 EVIDENCE CONCERNING THE FACTORS WHICH DETERMINE BRAZIL’S EXPORT PROFILE AND CHARACTERISTICS OF THE INTERNATIONALIZATION OF FIRMS IN BRAZIL 8

3 INTERNATIONALIZATION FOCUSED ON TECHNOLOGICAL INNOVATION OF DOMESTIC INDUSTRIAL FIRMS: RECENT CHARACTERISTICS AND THEIR IMPACT ON BRAZILIAN EXPORTS 11

4 THE IMPORTANCE OF GOVERNMENT SUPPORT AND COOPERATIVE ARRANGEMENTS FOR A FIRM’S TECHNOLOGICAL INNOVATION 26

5 CONCLUSION 29

BIBLIOGRAPHY 31

ABSTRACT

This study seeks to gauge the impact of internationalization focused on innovation on the foreign trade of firms in Brazilian industry, and establish parameters for gov-ernment policies which aim to encourage the internationalization of industrial firms in Brazil. Information from firms was used to classify companies in Brazilian indus-try into categories according to the following two criteria: i) origin (domestic, for-eign or both) of the controlling shareholders; and ii) internationalization focused on technological innovation. The results show that companies which are international-ized with a focus on innovation are more efficient at exploiting increasing returns to scale, and engage more intensively in international trade, exporting and importing more than other categories of firms.

The findings also show that they pay higher levels of compensation , probably because they are more productive , employ more educated personnel and possibly give them some kind of training. Amongst those firms which internationalize fo-cused on technological innovation, special attention should be given to those which are domestically owned. Here firms can be found which can serve as examples of internationalization to be followed by other domestically owned companies, espe-cially those which are already trying to innovate in a business group in the Brazilian market.The findings of the present study show that the internationalization focused on technological innovation of Brazilian industrial firms is an especially important component of Brazil’s international integration, and that there is a place for gov-ernment policy initiatives which encourage it.

1 INTRODUCTION

Brazil’s export performance has long been a concern of governments and the economic literature alike. The theme of the internationalization of Brazilian firms has recently returned to center stage, within the context of the Lula government’s Industrial, Technological and Foreign Trade policies. Given that a considerable part of international trade is carried out within firms, this kind of internationaliza-tion and its relation with exports deserves a more detailed examination. There are signs that export performance improves when a firm sets up a subsidiary abroad. This is because a subsidiary can be used to access sales and distribution channels, adapt products to the needs of specific markets, open up new markets, tap cheaper sources of funding and obtain technologies which are not domestically available.

There is a gap in the literature and in Brazilian public policies concerning the theme of internationalization and its impact on exports. This study hopes to con-tribute to filling this gap. Previous ones examined a few dozen companies at the most. This study makes full use of large domestic data bases, such as the Annual Survey of Industry (PIA) of the Brazilian Institute of Geography and Statistics (IBGE); the Annual Social Information Report (Rais) of the Ministry of Labor and Employment (MTE); the Foreign Trade Secretariat (Secex) of the Ministry of Development, Industry and Foreign Trade, and the Industrial Survey of Techno-logical Innovation (Pintec) also sponsored by the IBGE. Access to this data makes it possible to perform extremely wide-ranging analyses covering more than 90% of value added by industry. One of the questions in the Pintec survey refers to the use of a firm’s subsidiary abroad as the main source of information for innova-tion, thus providing the characteristics of firms which engage in this specific type of internationalization. This kind of proces is defined here as internationalization focused on technological innovation, where another unit of the group located abroad is used us the firm’s main source of information for technological informa-tion.

This study attempts to identify what impact this kind of internationalization has on a firm’s foreign trade, and more specifically to answer the following ques-tions: what are the characteristics of firms in Brazilian industry which internation-alize focused on technological innovation? What is the impact of this type of internationalization on Brazil’s foreign trade? What is the relative influence of different types of expenditure on innovation-linked activities on the technological innovation process of Brazilian firms? How important is public sector funding in firms’ decisions to carry out these innovations in Brazil. What parameters should the government use in deciding how to support this kind of internationalization of industrial firms in Brazil.

This paper is divided into five sections, including this introduction. Section 2 gives a general overview of studies which examine the factors determining Bra-zilian exports and the characteristics of the internationalization processes of firms in Brazil. Section 3 achieves three objectives: it compares the characteristics of firms which internationalize focused on technological innovation with other in-dustrial firms; it analyses what kind of impact this internationilization has on

Ipea texto para discussão | 1023 | jun. 2004 7

firms’ trade performance; and identifies what activities contribute most to a firm’s ability to innovate. Section 4 measures the importance of public sector funding for a firm’s innovation efforts. The last section concludes with an attempt to establish parameters for governmental support of the internationalization discussed in this paper.

2 EVIDENCE CONCERNING THE FACTORS DETERMINING BRAZIL’S EXPORT PROFILE AND CHARACTERISTICS OF THE INTERNATIONALIZATION OF FIRMS IN BRAZIL

Several studies of the factors which determine Brazil’s export profile have concentrated their attention on calculating the costs of domestic resources, which are a measure of a country’s comparative advantage based on Ricardian theories and the H-O theorem1. Products which generate the largest amounts of foreign exchange at the lowest cost in domestic resources are those in which the country potentially possesses comparative advantages. Several authors, such as Savasini et alii (1074), Savassini (1978), Savasini and Kume (1979), Paula Pinto (1981, 1984, and 1994), and Braga and Hickmann (1988), amongst others, have calculated the cost of Brazil’s domestic resources. These studies found evidence that Brazilian industrial sectors which are more labor-intensive have a lower cost per unit of for-eign exchange generated compared to others. They also discovered that resource costs are lower per unit of exports in industries which use a greater amount of un-skilled labor than in those with skilled workforces.

Hidalgo (1985) was one of the pioneers in empirically testing the H-O theo-rem for Brazil. The results corroborate the theorem, showing that Brazil exports labor-intensive goods and imports capital–intensive goods. O Lafetá Machado (1997) tested the H-O theory for Brazil based on the skilled and unskilled labor approach.2 The results show that Brazil’s trade pattern is consistent with the econ-omy’s relative quantities of factors of production, with exports made up of goods which are intensive in low-skilled labor.

Other empirical studies have tried to detect trade patterns that cannot be ex-plained by theories based on relative factor endowment. Teitel and Thoumi (1986) firmly uphold the view that as Brazil and Argentina are countries with a good human resource base and a reasonably qualified workforce, they have been able to grow by substituting imports, and embark on an industrialization process which is different from other developing countries. A relatively high income per capita concentrated in large urban areas, and a broad domestic market have been able to avoid substantial diseconomies of scale in these countries.

1 Heckscher (1919) and Ohlin (1933). 2. Before Lafetá Machado (1997), the Works of Tyler (1972), Rocca and Barros (1972) and Carvalho and Haddad (1977), had found evidence of the H-O pattern for Brazil, also based on the labor ap-proach.

8 texto para discussão | 1023 | jun. 2004 ipea

Hidalgo’s studies (1990 e 1993) contain evidence of an intra-industry pattern of trade3 in Brazil. He found that, at the end of the 1980s, more than half of Bra-zil’s exports of manufactured goods were of the intra-industry type. Machado (1992) also discovered a pattern of intra-industrial trade between Brazil and the countries of the Latin American Association for Development and Integration (Aladi). According to this study the region’s macroeconomic instability during the 1980’s prevented industries from establishing intra-industry trade links, and the only permanent intra-industry trade flows which developed were intra-firm ex-changes. Baumann’s (1993) findings were similar. The results of his research show that intra-firm trade in Brazil increased substantially during the 1980’s , and accounted for a significant share of exports in some industries.

The relation between industrial structure and Brazil’s exports of manufac-tured goods, was also analyzed by Braga and Guimarães (1985). This study is dif-ferent in that its data base uses information from firms. Some findings indicate that Brazil’s export performance in 1978 can be explained by the scale of produc-tion variable.4

Studies which examine the factors determining Brazil’s export profile using information from firms are not common in the Brazilian literature. Pinheiro and Moreira (2000) analyzed the profile of Brazilian exporting firms and uncovered evi-dence concerning the factors determining exports based on data from firms.These authors found that the main factor determining the probability of a firm being an exporter is its size5. They also found evidence that there is an inverse relation be-tween the probability of a firm being an exporter and the proportion of skilled/unskilled workers in the firm’s industry.

João De Negri (2003) carried out studies using data from firms , and found evidence that the size of the Brazilian market enables firms to achieve competitive scales of production. Thus Brazilian firms are also competitive in the production of goods in which increasing returns to scale are one of the determining factors in international competitiveness. Fernanda De Negri (2003) detected significant dif-ferences in trade performance between domestically-owned and foreign compa-nies. Foreign companies on average export and import more than domestic ones, but the difference is far greater in the case of imports. The study showed that for-eign companies import on average 290% more than domestic companies, com-pared to 70% higher average exports.

3. In order to explain this characteristic of international trade between countries, theories were formu-lated base on the Chamberlinian hypotheses of product differentiation, economies of scale and mo-nopolistic competition. The inclusion of increasing returns to scale in international trade models provided a complementary framework for the explanation for international trade in the H-O models. Chamberlinian trade models can be found in the works of Krugman (1979 and 1981), Lancaster (1980), Helpman (1981), Helpman e Krugman (1985). 4. Braga e Mascolo (1980) found evidence that the profitability of firms in Brazilian industry is consid-erably influenced by size. 5. Similarly, Markwald e Puga (2002) showed that 85.5% of large industrial firms are exporters, com-pared to only 40.6% medium-sized firms, and 12.4% of small ones. Veiga and Markwald (1997) found that small and medium-sized firms account for only a small and irregular share of Brazilian exports, despite their considerable numerical annual presence amongst exporting firms.

ipea texto para discussão | 1023 | jun. 2004 9

There is a consensus in the literature that the internationalization6 of firms af-fect their export performance. Iglesias e Motta Veiga (2002) noted existing concerns at the unsatisfactory internationalization levels of Brazilian industrial firms. Studies of the internationalization of these firms are also far and few between.

Dias (1994) studied 22 Brazilian firms which had invested abroad. He dis-covered that there were several reasons for setting up a subsidiary abroad, and that they had the especially important function of providing solutions for prob-lems related to technology and product specification. Brasil et alii (1996) studied 150 companies and found that the need to be closer to the customer, open up new markets and gain access to technology, were the three most important factors in their decision to invest abroad. The Brazilian National Development Bank (BNDES, 1995) studied thirty large domestic conglomerates and found that the role of the majority of their foreign subsidiaries was to establish closer links with the cultural and organizational reality of the host country, and enable the Brazilian firm to obtain specific assets capable of enhancing its performance in the market.

The Iglesias e Motta Veiga (op. cit.) paper is unique in studies of the interna-tionalization of firms, in establishing a link between internationalization and ex-port performance. They selected a group of exporters with investments abroad and discovered that around 85% of these facilities were used in sales and product dis-tribution. Investments in production, which accounted for 12% of the sample, were concentrated in the textile, chemical, basic metallurgy and auto parts sectors. According to the authors, logistics and the need to monitor consumer market trends, constituted the main reasons for investing abroad.

In sum, the empirical evidence concerning the factors which determine Bra-zil’s export profile, showed that Brazil has static comparative advantages in low-skilled labor and natural resource-intensive products. There are traces, however, of intra-industrial and intra-firm patterns of trade between Brazil and the main in-dustrialized economies. Studies of firms, also show that both their size and in-creasing returns to scaled are especially important variables in determining the probability of a Brazilian firm becoming an exporter. As for the evidence con-cerning internationalization of Brazilian firms, the studies show that some of them internationalize in different ways. This internationalization has been more evident in labor and natural resource intensive industries, in which Brazil has recognized comparative advantages.

Although there are studies which deal with the factors which determine Bra-zil’s export profile exports and the internationalization of firms, gaps still exist in the domestic economic literature. An especially important one concerns the rela-tion between a specific type of internationalization, the kind that focuses on tech-nological innovation, and its impact on Brazilian industry’s export performance. The aim of this study is to gather elements which help fill this particular gap.

6. Amongst the theories which try to explain the internationalization of firms, Dunning’s ( 1988, 1991,1993 ) eclectic theory is especially noteworthy. According to this approach, transaction costs and information, agent’s opportunism and asset specificity are fundamental for determining a firm’s foreign investments. On transaction costs, see Coase (1937) and Williamson (1985)


3 INTERNATIONALIZATION FOCUSED ON TECHNOLOGICAL INNOVATION OF DOMESTIC INDUSTRIAL FIRMS: RECENT CHARACTERISTICS AND THEIR IMPACT ON BRAZILIAN EXPORTS

3.1 CHARACTERISTICS OF BRAZILIAN FIRMS WHICH INTERNATIONALIZE FOCUSED ON TECHNOLOGICAL INNOVATION

In order to classify industrial firms into categories and identify those whixh inter-nationalize a part of their operations aiming at technological innovation, this study used the following sources of information: the Annual Industrial Survey (PIA), of the Brazilian Institute of Geography and Statistics (IBGE); the Annual Social Information report , of the Ministry of Labor and Employment (MTE); the Foreign Trade Secretariat (Secex) of the Ministry of Development, Industry and Foreign Trade (Mdic); and the Industrial Technological Innovation Survey (Pin-tec), also sponsored by the IBGE.7

The Pintec was used to classify the firms and obtain other information about technological innovation; information on the characteristics of company work-forces are from the Rais; data on firms, such as gross revenue, value added and others, are from the PIA; information about foreign trade, exports and imports are from the Secex, with data referring to the year 2000.

Two criteria were used to classify the firms: i) origin of the controlling share-holders; and ii) internationalization focused on technological innovation. There are two questions in the Pintec / IBGE8 questionnaire concerning these criteria. The first refers to the origin of the firm’s controlling shareholders. In this case there are three possible replies; domestic, foreign or domestic and foreign ( mixed). The second refers to the location of the firm which the industrial group uses as its main source of innovation – related information. In this case there are also three possible replies; the firm may have stated that it uses a firm located abroad as a source of information for technological innovation; the other firm used as its main source of innovation-related information is located in Brazil; or the group simply has no firm, either in Brazil or abroad, which is used as a source of information for the innovation process, thus highlighting the firm’s own effort and capacity to innovate, without depending on others in the group. Seven catego-ries of firms were constructed, based on these replies: three were deemed to be in- 7. The information used is not stored in Ipea’s data base. Thus studies like the present one depend on Ipea’s partnerships with the IBGE, MTE and the Secex / Mdic. The access to the information neces-sary for this study was made in strict compliance with the procedures which respect the confidentiality of restricted information. 8 . The Pintec/IBGE’s objective is to produce a series of sectoral indicators relating to Brazil industry’s technological innovation activities. Carried out by the IBGE with the support of Finep, the survey uses the methodology recommended by the Oslo Manual, and more specifically the model proposed by Eu-rostat, the third version of the 1998-2000 Community Innovation Survey (CIS), in which fifteen member countries of the European Community took part. The results of the Pintec refer to industrial firms with ten or more employees, or around 70 thousand nationwide (IBGE, 2002)


ternationalized with a focus on innovation and four were deemed not to be, as is shown in Table 1.

TABLE 1

Categorization of firms in Brazilian industry according to the origin of the con-trolling shareholders and their internationalization focused on technological innovation

Replies to the Pintec questionnaire Categories* - Description Internationaliza-tio-n focused on

innovation

Innovates us-ing sources of informa-tion from

other firms What is the origin of the firm’s con-

trolling sharehold-

ers?

Where is the other firm in the group used as the

main source of informa-tion for innovation lo-

cated?

Foreign Brazil FOR_BR − Foreign firms that use firms located in Brazil as their main source of information for innovation.

YES YES

Mixed Mixed Domestic

Brazil Abroad Abroad

DOM_ABR − Domestic firms which use firms located abroad as their main source of information for innovation and firms with mixed capital that use firms located in Brazil or abroad as their main source of information for technological innovation.

YES YES

Foreign Abroad FOR_ABR − Foreign firms which use firms located abroad as their main source of information for technological innovation .

YES YES

Domestic Brazil DOM_BR − Domestic firms which use firms located in Bra-zil as their main source of in-formation for technological innovation.

NO YES

Domestic Does not have any

DOM_ISOLATED − Domestic firms which do not use other firms as a source of informa-tion for technological innova-tion.

NO NO

Foreign Does not have any .

FOR_ISOLATED − Foreign firms which do not use other firms as a source of informa-tion for technological innova-tion

NO NO

Mixed Does not have anyi

MIX_ISOLATED − Mixed capi-tal firms which do not use other firms as a source of in-formation for technological in-novation.

NO NO

Source: Pintec/IBGE. Prepared by the authors. Obs.: *The first part of the category’s name refers to the firm’s ownership,and the second to the location of the other

firm in the group used as its main source of information for innovation.

For the purpose of this study, a Brazilian firm can be said to be international-ized with a focus on innovation when it produces in Brazil, and uses another


company of the group abroad as its main source of information for technological innovation. According to this definition , the categories FOR_BR, DOM_ABR and FOR_ABR are made up of firms which internationalize their operations with a focus on innovation. The FOR_BR category contains those foreign firms which use companies located in Brazil as their main source of information for innova-tion. However, in spite of declaring that their main of information for innovation is located in Brazil, it is reasonable to believe that their subsidiaries in other coun-tries can also be used for this purpose. Thus the firms in this category can be de-fined as internationalized with a focus on innovation. The category FOR_ABR is also made up of firms with foreign controlling shareholders, but they differ in that they declare that their main source of information for innovation is abroad. The BR_ABR category is made up of mixed-capital firms, which use another company located abroad or in Brazil as their main source of information for tech-nological innovation and firms, with domestic controlling shareholders which use another company of the group located abroad as a source.Mixed capital firms which use other firms located in Brazil as their main source of information, were deemed to be internationalized with a focus on innovation because it is highly probable that their association with foreign capital can also be used to this end, in spite of their main source’s location in Brazil.

The DOM_BR, DOM_ISOLATED, FOR_ISOLATED and MIX_ISOLATED categories were deemed to be non-internationalized with a fo-cus on innovation. In the DOM_BR category, the domestically owned firms use others located in Brazil as their main source of information for technological in-novation. As these firms have no foreign capital, they were considered non-internationalized. The DOM_ISOLATED category is made up of domestically- owned firms which declared not having another one used as a source of informa-tion for innovation. In the FOR_ISOLATED and MIX_ISOLATED categories, the presence of foreign capital or mixed ownership shows their internationalized nature; however they did not declare having firms in Brazil or abroad used to ob-tain information for technological innovation, thus excluding them from those companies which are internationalized with a focus on technological innovation.

Table 2 shows the share of each of these categories in Brazilian industry, ac-cording to the following variables: number of firms, workforce, gross revenue, value added, exports and imports.

TABLE 2

Percentage shares of the categories of firms in industry as a whole according to selected variables in the year 2000.

Categories Number of firms.

Workforce Gross revenue

Value added

Exports Imports

FOR_BR 0,08 1,72 2,77 2,40 2,92 2,37 DOM_ABR 0,35 1,63 3,01 2,98 5,81 2,87 FOR_ABR 1,33 12,26 25,33 23,41 27,32 35,94 DOM_BR 0,73 8,39 15,95 21,44 14,75 29,46 DOM_ISOLATED 96,10 70,85 45,54 42,79 39,15 21,17 FOR_ISOLATED 1,16 4,18 5,74 5,39 7,20 7,24 MIX_ISOLATED 0,24 0,97 1,66 1,59 2,85 0,95 Industry − total 100 100 100 100 100 100

Source: Pintec/IBGE, PIA, Secex and Rais. Prepared by the authors.


As can be seen in Table 2, the indicators show that 96.1% of firms belong to the DOM_ISOLATED category. Although containing the majority of firms, this category accounts for only 42.79% of industry value added and and an even lower share of exports (39.15%).

The DOM_ABR category stands out amongst those categories which are in-ternationalized with a focus on innovation. The firm’s controlling shareholders are domestic or control is shared with foreigners. This category accounts for only 0.35% of firms in Brazilian industry. Its numerical insignificance is to be ex-pected as the internationalization of firms focused on innovation is not a wide-spread phenomenon in the Brazilian economy.

Even though few domestically controlled or mixed capital firms engage in this type of internationalization, it should be emphasized that this group’s repre-sentativeness increases nine-fold when the analytical variable used is gross reve-nue or industrial value added, and almost sixteen times in the case of exports. These firms account for around 3% of industrial gross revenue and value added, and for 5.8% of total industrial exports, or US$ 2,5 billions a year.

What are the main differences between these categories of firms? Are there differences in the averages per category of variables such as sizes of firms , value added, exports, imports and workforce characteristics? To answer these questions, Table 3 presents average firm and workforce characteristics for each category of firms created according to the criteria of the controlling shareholders and interna-tionalization focused on innovation.

TABLE 3

Arithmetic average of company and workforce characteristics, according to categories of firms in the year 2000.

Categories Characteristics of firms Characteristics of the workforce

Workforce (n)

Gross revenue (R$ mil-lions)

Value added

(R$ mil-lions)

Exports (R$ mil-

ions)

Imports (US $ mil-

lions)

Average compensa-

tion (R$/mth)

Education (years)

Job dura-tion

(months)

FOR_BR 1.153,0 293,5 96,5 26,0 17,4 1.420,7 9,6 67,0 DOM ABR 329,2 75,0 28,1 8,9 5,0 1.285,3 9,6 50,6 FOR ABR 562,7 167,6 61,2 13,5 16,4 1.719,8 10,1 57,6 DOM BR 733,8 189,9 101,3 13,2 24,3 838,5 8,2 50,2 DOM ISOLATED

102,8 4,1 1,5 0,3 0,1 500,2 7,0 37,6

FOR ISOLATED 266,5 43,3 16,1 4,1 3,8 1.339,5 9,2 54,5 MIX ISOLATED 288,4 61,1 25,5 7,8 2,4 1.212,3 9,0 55,7


When comparing categories of firms the first especially important finding, is that the lowest average scale of production, measured by workforce, gross revenue and value added, is to be found in the DOM_ISOLATED category. In the year 2000 the average workforce numbered 102,8 and average gross evenue was R$ 4.1 mil-lions. This category’s average value added is also low compared to the others. For any given variable, dispersion around the average is relatively high, indicating that this category is more heterogeneous than the others.Most Brazilian industrial firms are of this kind. In most cases it is reasonable to suppose that , on average,


their scale efficiency and participation in international trade are low and yet, as a group, they account for 39.15% of total industrial exports. These firms, apart from not being internationalized with a focus on innovation, are also not very interna-tionalized in terms of their foreign trade, given that they export and import an av-erage of US$ 0,3 million and US$ 0,1 million respectively, a much lower amount than the other categories. It is noteworthy, however, that these companies have an average workforce of one hundred people, gross revenue of R$ 4 millions and US$ 300 thousands in exports, an export/gross revenue ratio similar to the other categories. Considering that this ratio indicates the importance of exports in a firm’s productive activities, this indicator seems to show that, on average, exports in this category have a relatively similar importance as in the others.

The second important finding is that though the scale of production of firms in the DOM_ISOLATED, FOR_ISOLATED and MIX_ISOLATED categories is similar; their trade performances are different. They are similar in declaring that they do not have a firm, in Brazil or abroad, used as a main source of information for innovation, and differ as to the origin of the firm’s controlling shareholders, whether domestic, foreign or mixed. It is reasonable to suppose that foreign com-panies in the FOR_ISOLATED category and those which are domestically owned and associated with foreign capital in the MIX_ISOLATED category, are more integrated into marketing channels abroad, thus enhancing their average export and import potential, even if they do not try to obtain technological innovation-related information from other firms.

The third noteworthy finding is the large trade deficit of the DOM_BR cate-gory. In this category the controlling shareholders are domestic and they use other domestic firms as their main source of information for innovation. This deficit can possibly be attributed to the fact that a large number of these firms belong to the chemical, vehicle assemblers, autoparts and capital goods sectors, which notori-ously import more than others9, given that the process innovations in these seg-ments require considerable imports of machinery and equipment.

The fourth finding is that the scale of production is relatively greater in those categories which are internationalized with a focus on innovation. It is noteworthy that companies in the FOR_BR category employ a large number of people, ex-plained by the fact that this category contains large foreign-owned companies in the labor-intensive foodstuffs segment. This also accounts for the category’s large trade surplus, given Brazilian industry’s comparative advantages in products such as soy oil, orange juice, and instant coffee.

As for the individual characteristics of workers, the table shows that firms that are internationalized with a focus on innovation (FOR_BR, DOM_ABR, FOR_ABR categories) and the non-internationalized ones in which foreign capital is present (FOR_ISOLATED and MIX_ISOLATED), compensate their workers better than the domestically owned non-internationalized firms in the DOM_BR and DOM_ISOLATED categories. A considerable part of their compensation dif-

9 The autovehicle segment had considerable deficits in the post-autovehicle agreement period (1997-2002) The autoparts sector recorded a trade surplus only in 2003.


ferentials can probably be attributed to labor productivity which varies according to firm specifics and the individual characteristics of workers.

Firstly, in relation to that part of compensation which can be attributed to the characteristics of the workforce, the data presented show that a workers average years of education and job duration, are lower in the DOM_BE and DOM_ISOLATED categories. These two variables have a direct relation with the technology used by the firm. The length of time workers stay at the firm is an im-portant indicator of technological proficiency. Average years of education is a proxy for the firms technological level, for it is reasonable to suppose that more sophisticated technologies require a more skilled workforce. The internationaliza-tion focused on innovation which is a feature of firms in the FOR_BR, DOM_ABR and FOR_ABR categories probably requires more educated and bet-ter trained workers. Brazilian workers must go though some kind of learning process inside the firm. During the training process the worker is often required to have completed his education up to a certain level , thus to some extent improving overall domestic labor force skill levels. Job stability favors learning and reduces spending on the training, attraction and dismissal of personnel. In the case of the FOR_ISOLATED and MIX_ISOLATED categories it is very probable that the higher compensation levels can be attributed to the presence of foreign capital.10

Secondly, in relation to that part of compensation which can be accounted for by the firm’s characteristics, it is possible that the firms belonging to the FOR_BR, DOM_FOR, FOR_ABR, FOR_ISOLATED and MIX_ISOLATED categories are more concerned with competitiveness, and thus use wage-efficiency mechanisms to increase the productivity of their workforces. The wage – efficiency theory is based on the hypothesis that monitoring costs can be very high in large firms and/or those which use more sophisticated technologies, and that labor turnover and training are costly. The higher compensation prevalent in these categories can also be attributed to their scale of production given that increasing returns to scale can guarantee higher productivity for large firms. It should also be pointed out that the firm’s ex-posure to international markets, through internationalization focused on innovation or the presence of foreign capital amongst the controlling shareholders, creates positive externalities capable of increasing labor productivity.

In sum, it was possible to observe, that those firms which are internationalized with a focus on innovation are bigger , possibly appropriate increasing returns to scale more efficiently, and engage more intensively in international trade, exporting and importing more than other categories of firms . It was also observed that they pay higher compensation, probably because they are more productive, employ more educated workers and possibly give them some kind of training. Among the firms which internationalize with a focus on innovation, it is important to pay spe-cial attention to firms in the DOM_ABR category. It contains domestically- owned and mixed firms whose process of internationalization can serve as an example to be followed by other domestically-owned firms, mainly those which are already making an effort to innovate in a business group, such as the firms in the DOM_BR category. 10. See Arbache e De Negri (2000) and De Negri e Acioly (2004).


3.2 RELATIVE IMPACT OF DIFFERENT TYPES OF EXPENDITURE ON INNOVATIVE ACTIVITIES IN THE TECHNOLOGICAL INNOVATION PROCESS OF BRAZILIAN INDUSTRIAL FIRMS

In the preceeding section, it was seen that the categories of firms analyzed differ according to their characteristics and workforce . Are these differences important in enhancing firms’ innovation capabilities? What is the percentage of innovative companies in each category? To answer this question Table 4 presents the per-centages of companies that carry out product and process technological innova-tions in each category.

TABLE 4

Percentage of firms that carry out technological innovation according to categories of firms between 1998-2000

Categories Innovators (product and/or

process)

Product innovators Process innovators

FOR_BR 94,0 68,4 75,8 DOM_ABR 75,5 64,1 55,0 FOR_ABR 95,9 79,9 74,4 DOM_BR 93,7 72,0 77,4 DOM_ISOLATED 30,0 16,1 24,1 FOR_ISOLATED 23,5 15,3 18,0 MIX_ISOLATED 38,1 34,7 29,3


The statistics presented in Table 4 show that the categories which use another company in the group as their main source of information for innovation, contain a larger percentage of innovative firms than those categories which do not. This is also the case for process and product innovation. How should firms’ expenditures be allocated to increase the probability of being an innovator?

An objective way of identifying the importance a firm attaches to the imple-mentation of innovations is the amount spent by companies on activities linked to technological innovation in relation to their gross revenue. Table 5 presents aver-age percentages of spending relative to gross revenue on six kinds of technologi-cal innovation – related activities, according to categories of firms. The first kind of spending includes that carried out on internal R & D activities. This type com-prises the design, building and testing of prototypes and pilot installations, as well as software development. The purchasing of R & D involves the hiring of ser-vices offered by companies or technological institutions.The acquisition of out-side knowledge includes transfer agreements resulting from the purchasing of licenses, patent exploitation and brand utilization, knowhow, software and other kinds of third party knowledge . To bring technological innovations to the market the firm has marketing, market testing and advertising expenditures as well as what is spent adapting the product to different markets. In the case of industrial project design the firm’s expenditures include those on new technical specifica-tions, operational characteristics, methods, work standards and software, as well as metrology, standardization and conformity assessment procedures. In the case


of labor training the purchasing of the services of specialized personal is included together with direct expenditure.11

TABLE 5

Average spending by firms on activities related to technological innovation as a percentage of gross revenue, according to categories of firms, in the year 2000

Categories Spending on R&D

Acquisition of R&D

Acquisition of knowledge

Workforce training

Introduction of innovations to

the market

Industrial project de-

sign FOR_BR 0,73 0,20 0,10 0,06 0,14 0,99 DOM_ABR 0,26 0,06 0,06 0,23 0,61 0,88 FOR_ABR 0,89 0,23 2,20 3,07 0,57 0,10 DOM_BR 1,90 0,15 0,76 0,39 0,56 0,85 DOM_ISOLATED

0,73 0,10 0,16 0,17 0,23 0,71

FOR_ISOLATED

0,29 0,01 0,02 0,02 0,09 0,09

MIX_ISOLATED 1,00 0,02 0,01 0,02 0,09 0,11 Industry I− total 0,75 0,10 0,27 0,52 0,25 0,67


The figures in Table 5 show that, for Brazilian industry as a whole, the inno-vation activities which demand higher levels of spending are R&D, labor training and industrial project design. Spending on the workforce is high probably because most process innovations require the use of new machinery and equipment involv-ing specific labor training for their operation.

In principle no specific pattern distinguishing categories of firms was de-tected. However it is clear that , on average, the purchasing of knowledge and R & D outside the firm is relatively unimportant. The exception is to be found in the FOR_BR and FOR_ABR categories, where the controlling shareholder is foreign, in which the acquisition of knowledge and R & D seem to be relatively more sig-nificant. Although there is no detailed information about their origin , it is rea-sonable to suppose that a considerable part of these purchases are made abroad.

Spending on R & D as a proportion of the gross revenue of domestically owned firms which use other companies in Brazil as their main source of informa-tion for technological innovation (DOM_BR) is, on average, the highest amongst all categories – even compared to companies which are internationalized with a focus on innovation. This behavior seems to show that firms with a domestic con-trolling shareholder , which use another belonging to the group, located in Brazil, as their main source of information for technological innovation, have to make a greater endogenous effort to produce technological innovation through their own R&D, than companies in those categories where the controlling shareholder is for-

11. Pintec contains information on expeditures on acquisitions of machinery and equipment used in technological innovation. This variable was not recorded in Table 5 for methodological reasons. In-vestments of firms in machinery and equipment are often greater than their gross revenue or are pro-portionately large in relation to the year’s gross revenue. This machinery, as is usual in the capital goods market, is generally purchased with relatively long grace and amortization periods . Thus this variable’s expenditure / gross revenue ratio gives the false impression that the firm has committed a significant part of its annual gross revenue, which is not true given this segment’s financing regime.


eign. These findings are also corroborated by the R&D expenditure indicators re-lating to mixed firms, the MIX_ISOLATED category which are relatively high compared to the other categories . This shows that the location of R&D expendi-tures is closely related to the shareholder’s origin, and tends to be concentrated in the parent company. This result is consistent with the findings of previous re-search.12

Given that innovation is fundamental to business competitiveness, it would be important to carry out specific studies of this category even addressing issues related to internationalization. It would be important to understand if there is a significant group of DOM_BR companies, which are internationalized without focusing on innovation. If this were the case, it would mean that the endogenous (domestic) innovation effort is bearing fruit in terms of international competi-tivess. The problem of this kind of company is its average negative foreign trade balance, suggesting dependency and not technological autonomy. Finding an-swers to these questions would require other data bases containing information about investments abroad.

The indicators also show that the FOR_ISOLATED and MIX_ISOLATED categories spend little on bringing innovations to the market. As shown in Table 5 the percentage of innovative firms in these categories is smaller than in others. The DOM_ISOLATED category’s spending on this item is greater than that of the preceeding categories, and its expenditure on R & D and industrial project design is also relatively large. This appears to show that many industrial projects and ex-penditures on R&D in this category are not eventually sanctioned by the market, suggesting that this innovation is more of the process type, aimed at the rationali-zation of production (costs, quality etc) and searching for new market niches.

In the DOM_FOR category, the spending / gross revenue ratio for expenditures on R & D, acquisitions of R & D, acquisition of knowledge and labor training, is relatively lower than the average for industry as a whole. Part of this difference can be attributed to the fact that this category’s average gross revenue is greater than the industrial average. The firms in this category may also be using their affiliates abroad to reproduce technological innovations available in other markets, or spend-ing part of their budgets on innovative activities in firms belonging to the group lo-cated abroad. Independently of why firms in this category spend relatively less than the average on some innovative activities, it is important to underscore that there may be room for policy mechanisms which stimulate spending on innovative activi-ties..

However firms’ spending on innovation-related activities does not show the amount spent by each category relative to overall spending by Brazilian industry on these activities. To measure this Table 6 shows total spending on innovation-related activities for the year 2000, according to categories of firms. .

12. Fleury (1997), studying the behavior of multinational companies with respect to engineering activi-ties, showed that R&D and basic engineering was concentrated in the parent companies, with subsidi-aries focusing on process engineering; Salerno, Marx e Zilbovicius (2003) − based on an extensive survey of the autovehicle sector (including parent companies) – introduced the concept of project headquarters, which is closely linked to the local choice of suppliers.


TABLE 6

Total spending on activities related to technological innovation, according to categories of firms, in the year 2000 (In millions of R$)

Categories Spending on R&D

Acquisition of R&D

Acquisition of knowledge

Workforce training

Introduction of innovations to

market

Industrial pro-ject design

FOR__BR 164 33 38 4 44 193 DOM_ABR 40 11 34 19 47 50 FOR_ABR 1.403 329 680 143 693 1.412 DOM_BR 734 93 79 37 89 239 DOM_ISOLATED

1.274 157 316 205 424 1.153

FOR_ISOLATED

95 7 21 7 119 68

MIX_ISOLATED 30 0,6 0,8 1,5 5 183 Indústry − total 3.741 631 1.168 417 1.421 3.297


Table 6 show that R&D and industrial project design activities account for most firms’ spending on innovation. In the year 2000, Brazilian industry spent R$ 3,7 billions on R&D. Companies with foreign controlling shareholders accounted for a significant share of these expenditures – especially these in the FOR_ABR category which accounted for R$ 1,4 billion.13, even though these firms represent only 1.33 % of Brazilian industry. The firms in the DOM_ISOLATED category which represent 96%, spent around R$ 1,3 billion.

This pattern is to be found in all other types of innovation-related expendi-ture, thus confirming that the firms with a foreign controlling shareholding in the FOR_ABR category account for most of industry’s spending in this field. More-over, as these firms are few in number their individual spending is considerably greater than firms in other categories.The second highest level of overall spending on these activities can be found in the NAC_ISOLATED category, but as it con-tains the majority of Brazilian industrial firms, average investment levels per firm are lower than in all other categories.

Three probabilistic models were used to gauge the influence of different types of spending as a proportion of gross revenue, on the likelihood of a firm be-ing an innovator. The dependent variable is the firm’s status as an innovator or non-innovator, product innovator and process innovator, and the explanatory vari-ables are the different kinds of spending on technological innovation-related ac-tivities divided by gross revenue. Average years of education of the workforce was also used as an explanatory variable. The results are presented in Table 7.Apart from the types of spending, dummy variables were also used for divisions of the National Classification of Economic Activities (Crae) not shown in the ta-ble.14 The spending on the workforce training variable was not significant in the 13. In absolute terms, foreign companies invest more; however preliminary estimates made by. Dias (2004) show that domestically owned firms invest proportionately more on R&D in relation to gross revenue, than foreign firms. 14. The models were first of all estimated with the variable spending on machinery and equipment. This variable showed a correlation above 0,5 with the variable spending on workforce training. Pur-chases of machinery and equipment are most probably carried out together with spending on work-force training to operate this machinery and processes, and this must often happen in firms which


model, in which the dependent variable was product innovation, and the spending on R&D and industrial project design variables were not significant in the process innovation model. The fact that product innovation is not significantly correlated with training suggests that innovations are incremental, and do not depend much on work methods. Other results can be seen in Table 7.

TABLE 7

Relative impact of types of spending on innovative activities on the techno-logical innovation process of Brazilian industrial firms. (probit probabalistic model, year 2000)

Explanatory vari-ables: types pf

spending in relation to gross revenue.

Dependent variable

Innovator (product and/or processp)

Product innovator Process innovator

Parameter (standard de-

viation)

Marginal probability[simulation]

Parameter(standard deviation)

Marginal probability [simulation]

Parameter (standard de-

viation)

Marginal prob-ability

[simulation] Spending on R&D 21910,4***

(878,8) 8720,8

[6] 14011,3***(475,1)

4350,0 [3]

ns --

Acqusition of R&D 32614,3*** (2815,3)

12981,2 [1]

7537,0***(978,5)

2340,0 [0,2]

11287,0*** (1087,4)

4048,9 [0,4]

Acqusition of knowl-edge

43967,4*** (3290,2)

17500,0 [3]

5162,7***(627,0)

1602,8 [0,3]

10999,7*** (1194,7)

3945,4 [1]

Workforce training 96676,2*** (1351,4)

38479,2 [12]

ns -- 28168,2*** (1233,4)

10104,6 [3]

Introduction of in-novations to market

21532,3*** (1104,4)

8570,3 [2]

1529,3***(314,5)

474,8 [0,1]

ns --

Industrial project design

16344,9*** (280,4)

6505,6 [5]

2356,7***(295,0)

731,7 [1]

1054,9*** (103,6)

378,4 [0,3]

Worker’s education 0,106*** (0,004)

0,042 [8]

0,109***(0,005)

0,033 [7]

0,098*** (0,004)

0,035 [7]

Model statistics Intercept -1,12 (0,003) Loglikelihood1: -19034,20 No obs.: 9070 No Parameters: 33 Loglikelihood0 :-44874,87 R2: 0,58 Obs.: Dummies per unre-ported Cnae1 division

Intercept -1,51 (0,003) Loglikelihood1 :-16163,52 No obs.: 9070 No Parameters: 32 Loglikelihood0 : -33479,8 R2: 0,52 Obs.: Dummies per unre-ported Cnae1 division

Intercept: -1,13 (0,003) Loglikelihood1: -20619,7 No obs.: 9070 No Parameters: 31 Loglikelihood0: -40664,02 R2: 0,49 Obs.: Dummies per unreported Cnae1 division

Source: Pintec/IBGE, PIA, Secex and Rais. Prepared by the authors Note: 1Classificação Nacional de Atividades Econômicas.( National Classification of Economic Activities) Obs.: The results in brackets refer to the increase in the percentage probability of a firm being na inovator, caused by a simulated 100% increase in spending for a constant level of gross revenue and an average two year increase in years of education. * = significant to 10% (did not occur), ** = significant to 5% (did not occur), *** = signiicant to 1%.

The marginal probability column in Table 7 shows by much the firm’s like-lihood of being an innovator increases per increase in a unit of the explanatory variable. As the types of spending are given relation to gross revenue, it is unrea-sonable to believe in a unit increase in these variables as this would mean invest-ing all the firm’s revenue on activities linked to technological innovation. For a better interpretation of the results, as simulation was made gauging how much the firm’s likelihood of being an innovator would increase, keeping revenue constant,


introduce process innovations. To avoid problems of multicolinearity the spending on machinery and equipment variable was removed form the model.

if spending on different innovation activities increased 100% . The results of this simulation are presented in brackets in the marginal probability column in Table 7.

The results of the simulation show that the three kinds of spending that most increase the probability of a firm being an innovator, are those on workforce train-ing , R&D and industrial project design. If Brazilian industrial firms spent 100% more on workforce training they would increase their probability of being inno-vative by 12%. This result is especially important, because it means that attempts to increase Brazilian industry’s capacity to innovate, require greater investments in educations and training, and this could form the basis of a nationwide pro-innovation program. In the case of R&D, the increase in the probability of being an innovator is 6%, and 5% in the case of spending on industrial project design. The probability of a firm being an innovator would increase by 8% if the average period of education increased by an average of two years. Each percentage point increase in the likelihood of firms being innovators means 227 new innovative Brazilian industrial firms. Thus a 100% increase in spending on the three most important technological innovation – related activities, or a total of R$ 7,4 bil-lions, together with an average two more years of education for the workforce, would lead to a seven thousand increase in the number of new innovative indus-trial firms.

At first sight, it seems exaggerated to spend an extra R$ 7,4 billions on work-force training, R&D and industrial project design to generate seven thousand new innovative firms. However these figures should be put into perspective: Accord-ing do Pintec data, there are 70 thousand firms in Brazilian industry with more than ten employees. Around 22 thousand of them are innovative. 7 thousand new innovative industrial firms would mean increasing the number of innovative firms in Brazilian industry by 30%. Another important point is that most spending on innovation – related activities is carried out by firms with foreign controlling shareholders. Domestically-owned mixed firms in the DOM_ABR category are the most successful at innovating and spend less than the average, as can be seen in Tables 5 and 6. It would be reasonable to suppose that a much lower effort would be needed if firms in the DOM_BR ad DOM_ISOLATED categories fol-lowed the example of DOM_FOR firms and internationalized with a focus on in-novation.

In the models which were disagregated according to product and process in-novators, the parameters fell significantly . This fall is to be expected as there is little interface between process and product innovators. In the product innovator model, the most important spending is that on R&D , because a 100% increase would increase the firm’s probability of being an innovator by 3% . The two year increase in the worker’s average education would have the same impact on both the product and process innovation models, with a 7% increase in the probability of being an innovator.

An especially significant result of this model is that which shows the impor-tance of workforce skills in determining the likelihood of a firm innovating . Of the four variables that most influence the probability of a firm being an innovator,


two are directly linked to the workforce: training and education. These two vari-ables are important factors determining a company’s ability to compete in domes-tic and international markets. It should be emphasized that the workforce training variable is closely linked to process innovation, as this type of innovation depends on the purchasing of machinery and equipment, which , in turn, require specific workforce training.

3.3 FOREIGN TRADE PERFORMANCE OF FIRMS THAT INTERNATIONALIZE FOCUSED ON TECHNOLOGICAL INNOVATION

The literature shows that technological innovation and increasing returns to scale are amongst the factors which determine a country’s international competitive-ness. In the preceding section the characteristics of the workforce were identified as an especially important variable for making a firm an innovator. There is evi-dence in the Brazilian case that the quality of the workforce is also an important factor in enabling companies to compete in export markets. What is the impor-tance of technological innovation in making a Brazilian industrial firm an ex-porter?

A probabilistic model was tested in which the firm’s status a an exporter or non-exporter is correlated with it being on not being an innovator, and with its scale efficiency, calculated by Joao de Negri (2003). The scale efficiency index varies between O and 1 and measures the productivity gains which a firm obtains according to its scale of production, and is thus a way of comparing firms with respect to their efficiency of scale.

The results presented in Table 8 show that the firm’s probability of being an exporter increases by 16% when it carries out technological innovation. In the case of increasing returns to scale, an increase of 0,1 in the scale efficiency index would increase the probability of a Brazilian industrial firm being an exporter by 4.2%.

These results are especially important for Brazilian industry’s integration with international markets for they show, that despite Brazil’s recognized competitive in labor and natural resource-intensive goods, technological innovation and increasing returns to scale are also fundamental to Brazilian industry’s position in international markets. In this sense Brazil is different from the average developing country. Its industry is already competing in some international markets which are typical of in-dustrialized countries and where competitiveness depends on increasing returns to scale and technological innovation.

TABLE 8

Probability of the firm being an exporter due to its technological innovation and scale efficiency. (Probit probabilistic model, year 2000)

Explanatory variables Dependent variable


Exporter Parameter

(standard deviation) Marginal probability

Innovative (technological innovation) 0,50 (0,02)

0,16

Scale efficiency 1,33 (0,03)

0,42

Model statistics Intercept: -1,99 (0,001) Loglikelihood1: -15269,65 No obs: 8622 No Parameters: 28 Loglikelihood0 :-24219,96 R2: 0,37 Obs.: Dummies per unreported Cnae1 divsion

Source: Pintec/IBGE, PIA, Secex and Rais. Prepared by the authors Note: 1Classificação Nacional de Atividades Econômicas.( National Classification of Economic Activities) Obs.: * = significant to 10% (did not occur),

** = significant to 5% did not occur ), *** =significant to 1%.

If Brazil is already present in international markets where a firm’s degree of competitiveness depends on increasing returns to scale and innovation , what is the importance of internationalization in increasing the probability of a firm being an exporter? Does internationalization focused on technological innovation influ-ence the probability of a firm being an importer? Two probabilistic models were tested to answer these questions. In the first the dependent variable is the firm’s status as an exporter or non-exporter, and in the second as an importer or non-importer. The explanatory variables are dummies for each category of firm cre-ated specially for this study , and dummies per division of the National Classifica-tion of Economic Activities (Cnae). The reference category is the DOM_ISOLATED one and the results are shown in Table 9.

The results in Table 9 show that in categories of firms which internationalize focused on innovation (FOR_BR, DOM_FOR , and FOR_ABR) the probability of a firm being an exporter is greater in the DOM_ISOLATED category. In the case of the FOR_BR and FOR_ABR categories, which contain companies with for-eign controlling shareholders, the probability of a firm being an exporter, if it be-longs to one of these two categories, is respectively 38% and 39% greater than those in the DOM_ISOLATED category. If a firm belongs to the DOM _FOR category it has 27% more chances of being an exporter than if it belongs to the DOM_ISOLATED category. These figures show that internationalization focused on innovation is positively correlated with the probability of a firm being an ex-porter, and is even greater when the controlling shareholders are foreign. The presence of foreign capital in the FOR_ISOLATED and MIX_ISOLATED cate-gories and the innovation effort of the DOM_BR firms possibly had a positive ef-fect on the probability of a firm being an exporter, in relation to those in the DOM_ISOLATED category, even though they are not internationalized with a focus on innovation.

TABLE 9

Probability of a firm being an exporter or importer according to its category


(Probit probabiilistic model , year 2000, reference category: DOM ISOLATED)

Explanatory variable Dependent variable Exporter Importer Parameter

(standard devia-tion)

Marginal probability

Parameter (standard devia-

tion)


FOR_BR 1,86*** (0,17)

0,38 2,46*** (0,23)

0,54

DOM_ABR 1,35*** (0,08)

0,27 1,70*** (0,01)

0,37

FOR_ABR 1,90*** (0,04)

0,39 2,31*** (0,05)

0,51

DOM_BR 1,18*** (0,05)

0,24 1,59*** (0,05)

0,35

DOM_ISOLATED Reference category

- -

- -

- -

FOR_ISOLATED 1,40*** (0,001)

0,28 1,51*** (0,04)

0,33

MIX_ISOLATED 1,52*** (0,09)

0,31 1,44*** (0,10)

0,31

Model statistics Intercept: -1,59 (0,001) Loglikelihood1: -20866,77 No: 10328 No Parameters: 33 Loglikelihood0: -24219,96 R2: 0,14 Obs.: Dummies per unreported Cnae1 division

Intercept: -1,45 (0,001) Loglikelihood1: -20609,39 No: 10328 No Parameters: 33 Loglikelihood0: -25391,90 R2: 0,19 Obs.: Dummies per unreported Cnae1 division

Source: Pintec/IBGE, PIA, Secex and Rais. Prepared by the authors. Note: 1Classificação Nacional de Atividades Econômicas.(National Classification of Economic Activities) Obs.: * = significant to 10% (did not occur),

** = significant to 5% (did not occur)), *** = significant to 1%.

As for the probability of a firm being an importer, the results shows that in-ternationalization focused on innovation hás a positive impact on this probability. In the FOR_BR, DOM_ABR and FOR_ABR categories, the probability of a firm being an importer increases 54%, 37% and 51% respectively, in relation to the DOM_ISOLATED category. This probability is greater compared to firms which do not internationalize focused on innovation.Thus in the DOM_BR, FOR_ISOLATED and MIX_ISOLATED categories, the probability of firm being an importer increases 35%, 33% and 31% respectively. Once again the probability of a firm being an importer increases even more when the firm has a foreign con-trolling shareholding than when this control is domestic or mixed.

Despite the greater probability of a firm in the DOM_ABR category being an importer rather than an exporter, this category has a trade surplus of more than US$ 0,5 billion. The DOM_BR category has a trade deficit of more than US$ 3 billions. In the case of the DOM _ISOLATED category, firms on average export and import little, but it has a trade surplus of around US$ 1 billion.

In sum, evidence was found from trade flows that firms which international-ize focused on innovation have a greater probability of being exporters than those which do not engage in this kind of internationalization. The probability of a firm being an importer also increases when it internationalizes focused on innovation.


4 THE IMPORTANCE OF GOVERNMENT SUPPORT AND COOPERATIVE ARRANGEMENTS FOR THE TECHNOLOGICAL INNOVATION OF FIRMS

This study has detailed the characteristics of different categories of firms classi-fied according to the origin of the controlling shareholders and their internation-alization focused on technological innovation. It was seen that, in general, domestically- owned and mixed-capital firms which internationalize focused on innovation, are more competitive than the majority of firms in Brazilian industry, and their characteristics are similar to foreign companies whose greater competi-tiveness is recognized by all.

In Brazil various types of government support are available for companies in their efforts to innovate, especially in the shape of funding for activities linked to technological innovation. Many companies also cooperate with other organiza-tions in order to develop innovations. What is the relative importance of public sector funding and inter-organizational cooperation for the different categories of firms? Table 10 shows the percentage of firms in each category which received government funding for technological innovation-related activities in the year 2000, together with the percentages of those which took part in cooperative ar-rangements linked to innovation.

TABLE 10

Distribution of firms, according to each category, which received public fund-ing or took part in cooperative arrangements with other organizations in order to carry out technological innovation in the year 2000 (In %)

Received public funding Engaged in cooperation FOR_BR 5,9 37,5 DOM_ABR 14,6 27,1 FOR_ABR 5,1 36,9 DOM_BR 13,1 38,8 DOM_ISOLATED 3,8 8,8 FOR_ISOLATED 1,3 19,7 MIX_ISOLATED 10,2 15,1


The figures show that the highest percentages of companies receiving gov-ernment funding are to be found in the DOM_ABR, DOM_BR and MIX_ISOLATED categories, made up of domestically-owned or mixed-capital firms. In these three categories, more than 10% of firms (in each category) re-ceived some kind of government financial support to leverage their technological innovation activities. However it is noteworthy that 5% of foreign firms in the FOR_ABR category receive government support. As this category concentrates the greater part of spending on innovation-related activities, it is possible that these firms absorb a considerable volume of government funding. Table 10 shows that the FOR_BR, DOM_ABR, FOR_ABR and DOM_BR categories contain both the highest percentages of firms which cooperate and the most innovative firms.


Three probabilistic models were run in order to guage the importance of different sources of funding for the probability of a being an innovator. The firm’s status as innovator, product innovator and process innovator was explained by the relative shares of internal, private sector or government funding in total spending on R& D and other spending on activities related to technological innovation. The results are presented in Table 11.

TABLE 11

Relative impact of different sources of funding for innovative activities on the technological innovation of Brazilian industrial firms (Probit probabilistic model, year 2000)

Explanatory variables: per-centage distribution of

amounts spent on innova-tive activities

Dependent variables

Innovative Product iinnovator Process innovator Parameter

(standard de-viation)



tion)



tion)


Internal funding: expendi-ture on R&D

0,0072*** (0,0002)

0,0028

0,013*** (0,0001)

0,0036

ns --

Private sector funding: ex-penditure on R&D

ns -- 0,011*** (0,0011)

0,0030

ns --

Public funding: expenditure on R&D

0,0036** (0,0019)

0,0014

0,0098*** (0,0012)

0,0027

0,0059*** (0,0014)

0,0019

Internal funding: other ex-penditure.

0,0250*** (0,001)

0,0100

0,012*** (0,0001)

0,0034

0,023*** (0,0001)

0,0078

Private sector funding: other expenditure

0,3300*** (0,0005

0,0133

0,011*** (0,0003)

0,0030

0,033*** (0,0004)

0,011

Public funding: other ex-penditure

0,0280*** (0,0005)

0,0112

0,012*** (0,0004)

0,0035

0,028*** (0,0004)

0,0095

Model statistics Intercept -1,29(0,002) Loglikelihood1: -19009,91 No: 10328 No Parameters : 32 Loglikelihood0 : -44874,87 R2: 0,58 Obs.: Dummies per unre-ported Cnae1 division

Intercept -1,67 (0,019) Loglikelihood1: -20452,05 No: 10328 NoParameters : 32 Loglikelihood0 : -33479,86 R2:0,39 Obs.: Dummies per unre-ported Cnae1 division

intercept: -1,44 (0,018) Loglikelihood1: -19938,83 No: 10328 No Parameters : 30 Loglikelihood0 : -40664,02 R2: 0,51 Obs.: Dummies per unre-ported Cnae1 division

Source: Pintec/IBGE, PIA, Secex and Rais. Prepared by the authors . Note: 1Classificação Nacional de Atividades Econômicas. ( National Classification of Economic Activities) Obs>: * = significant to 10% ( did not occur ),

** = significant to 5% (did not occur ), *** =significant to 1%.

The analysis of the results can focus directly on marginal probability . In the case of R&D , internal funding is twice as important as government funding for a firm’s technological innovation efforts. The results show that a ten percentage point increase in internal funding as a share of total spending on R&D would increase the probability of a firm engaging in technological innovation by 2.8%. If government funding for R&D activities is increased by ten percentage points, the probability of a firm carrying out technological innovation increases by 1.4%. In the case of R&D spending on product innovation, internal funding also comes first, followed by pri-vate sector funding and lastly by government funding, in determining the probabil-ity of a firm being a product innovator; as for process innovation, private sector and internal funding were not significant and government funding was found to be the main variable explaining the probability of a firm being a process innovator.

Table 11 shows that the importance of different source of funding for other ac-tivities related to technological innovation, in determining the probability of firms


being innovators, is relatively the same in the three models . In the case of process innovation, government funding seems to be relatively more important than other sources of funding. This finding is plausible given that government funding sources such as the BNDES and Banco do Brasil, finance purchases of machinery and equipment which are used in process innovation.

In sum, this section found evidence that cooperation is possibly important in contributing to firms’ technological innovation, for it is in the FOR_BR, DOM_ABR, FOR_ABR and DOM_BR categories, which contain the highest per-centages of innovative firms, that we find the highest percentages of firms taking part in cooperative arrangements which also receive government innovation-related fund-ing. This would seem to show, in principle, that this government funding is being channelled to the more innovative firms, and that it is positively related to the prob-ability of a firm carrying out technological innovation . There is also some evidence that a significant share of government funding in this field is going to foreign firms. The results also reveal that government funding is more important for process than product innovation and that the largest shore of total spending on R&D is accounted for by internal funding.

These results have important implications for the Industrial, Technological and Foreign Trade policies centered on innovation which the government has be-en formulating and implementing, As innovation depends on the reduction of pri-vate sector costs and risks, appropriate policy instruments must be drawn up. In the case of process innovation, public sector funds are being put to good use, helping to reduce costs, through the programs and initiatives of the BNDES and related government agencies. The gradual reduction of the IPI (Industrialized Goods Tax) on capital goods, which began at the end of 2003; the reduction of the period allowed for compensating credits of the COFINS (Social Security Contri-bution) announced in April 2004, and the removal of the import tax on machinery and equipment not produced in Brazil, are examples of measures aimed at reduc-ing private sector costs.

If one admits that market-oriented (product innovation) innovation is the most important, than private sector spending is the crucial explanatory variable. Even considering that the above analyses were based on figures for the year 2000, before the present export boom and the implantation of the new Lula govern-ment’s policy instruments15, the data show that private sector spending on R&D must be stimulated. Moreover one of the Brazilian Industrial Development Agency’s priorities is the reduction of the risk of innovation, not only for small and medium sized firms, but also for large ones.

15 The following policy instruments deserve special mention: the new institutional and strategic pos-ture of the Apex (Brazilian Export Promotion Agency) , Decree no. 4.928 of 23/12/2003 (R x D, patent-ing and certification incentives), updating of the Brazilian metrology and certification system (forestry, software etc), the Innovation Law and the setting up of the Agencia Brasileira de Desenvolvimento In-dustrial (Brazilian Agency for Industrial Development)


5 CONCLUSION

This study concludes with the following question: What parameters should the government use to support the internationalization of Brazilian firms?

The above analysis has demonstrated that considerable benefits can flow from the internationalization of firms focused on technological innovation. It was found that these companies pay higher levels of compensation, employ more educated per-sonnel and thus generate better quality jobs. Moreover companies which are inter-nationalized with a focus on innovation, spend a larger percentage of their gross revenue on training , thus helping to improve overall domestic workforce skills. It was also seen that those firms which internationalize with a focus on innovation, export more than those that do not. Thus there is evidence that the technological in-novations which are a fruit of the internationalization process increase firms’ com-petitiveness, which in turn improves their export performance. The opening up of new markets abroad is seen as enhancing the firm’s growth potential, with the inter-nationalization process itself positively reinforcing its technological capability.

The internationalization focused on innovation of Brazilian industrial firms is thus an especially important element in Brazil’s integration with international mar-kets, and there is ample scope for public policy initiatives which encourage this process.

It is noteworthy that technological innovation produces long-term increasing returns to scale which cannot be quantified by static models and thus cannot be ap-praised in terms of short-term cost. However the short-term cost of an incentive pol-icy such as a long-term credit line to encourage internationalization, can be reduced to a certain extent, if the latter is focused on technological innovation and if this pol-icy is bounded by criteria whivh give priority to those domestically-owned firms, which are already making a considerable effort to carry out technological innova-tion, thus enabling them to enhance their innovation potential. Thus it should be clear that public policy initiatives must be guided by the trajectory of successful domestically-owned companies, whose example could be followed by other domes-tic firms, especially those that are already making a significant innovation effort. It should be emphasized that incentives for internationalization focused in technologi-cal innovation should go hand in hand with mechanisms which stimulate an increase in private sector spending on innovation-related activities in Brazil.

The important of workforce skills for a firm’s innovation potential stands out amongst the finding’s of this study. Of the four variables which most influence the probability of a firm being an innovator, two are directly linked to the work-force: training and education. This provides an important parameter for long-term government policy. Even if there is no automatic cause and effect relation be-tween workforce education levels and a firm’s push to innovate and international-ize, the data show that companies that internationalize focused on innovation employ labor with higher levels of education. Thus a policy designed to encour-age innovation in industry must involve steps to increase the overall populations’ level of education.


Another of the study’s findings that deserves emphasis, is that cooperation seems to be an important tool for technological innovation, given that firms seek-ing to innovate are engaging in joint information gathering. If this kind of coop-eration is important, the state has a role to play supporting initiatives designed to discover business opportunities abroad, and which can be carried out jointly with the industrial development promotion agency and business groups interested in in-ternationalizing their operations with a focus on innovation.

5.1 ISSUES TO BE ANALYZED IN DEPTH

The present article is the first of its kind to study internationalization covering practically the entire universe of Brazilian industrial companies. It has dealt solely with a specific kind of internationalization, focusing on innovation, made possible by examining the data contained in the replies to a question in the Pintec Survey (see Table 1). The article has raised some issues which could be explored in greater depth in future studies (some are already underway at Ipea):

a) The above analyses consider industry as a whole. This may be necessary in order to obtain an overall view, but are there probably important differences between sectors, which could be uncovered by specific sectoral analyses. .

b) Likewise this overall analysis could be broken down to reflect regional as-pects. Locational variables could be introduced into the analysis, provid-ing support for a regional development policy.

c) The Pintec survey opens up many avenues of research, and, in this case, has enabled us to examine a specific kind of internationalization of Brazil-ian industrial firms. Internationalization can occur in different ways, even without using subsidiaries abroad as the main source of information for technological innovation. Access to broader data bases concerning the in-ternationalization of Brazilian firms would lead to a better understanding of its effects, thus enabling the drawing up of much more efficient poli-cies.


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© Instituto de Pesquisa Econômica Aplicada – Ipea 2004

PUBLISHING Coordination Silvânia de Araujo Carvalho

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