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Brazil’s INOVAR: Building an Entrepreneurship Ecosystem

Lately, Brazil has been in the business of building things from the ground up. From stadiums that hold millions of people to entire market ecosystems, this is challenging work for a government. In anticipation of the World Cup, Brazil received heavy criticism for its infrastructure development. However, Brazil’s efforts at developing an entrepreneurship ecosystem have consistently been touted as a success by many policymakers and investors.  

Yet while some Brazilian programs have been relatively successful at addressing superficial holes in the entrepreneurship ecosystem, such as access to financing, the government has yet to address the structural issues from which these problems stem. 

Entrepreneurial capital in the form of micro-enterprises and self-run businesses has long been part of the economic fabric of Brazil. However, throughout Latin America in the last 20 years, there has been more focus on encouraging the “opportunity entrepreneur.” As highly skilled individuals eligible for salaried employment these people choose to start their own businesses out of opportunity rather than necessity. It is widely recognized that encouraging these individuals to start entrepreneurial and innovative enterprises creates productivity gains and economic growth within a country.

In places like Silicon Valley, the combination of stellar universities, a risk-tolerant atmosphere, an agreeable regulatory environment, and attractive tax code has given rise to a deep supply of entrepreneurs—creating demand for funding and a market for venture capitalists. By putting many sectors under state control, the statist economic policies of many Latin American countries through the 1980s stymied the natural growth of these entrepreneurial enterprises, and the ecosystem that could have grown up around them.

As many of these economies, including Brazil, began to liberalize in the 1990s, their governments recognized the merits of encouraging entrepreneurship and a venture capital market, hoping to construct both from the ground up.

In Brazil, the most cohesive effort at achieving this was spearheaded by the government’s Agency for Innovation, Financiadora de Estudos e Projetos (Financial Backer for Studies and Projects—FINEP). In 2000, FINEP collaborated with a range of partners, such as the Multi-Lateral Investment Fund (MIF), to launch INOVAR, a project to address concerns that Brazil’s opportunity entrepreneurs were being deterred by capital constraints and an underdeveloped venture capital industry. INOVAR is primarily an incubator of funds, in which a few of Brazil’s major pension funds—such as Petros, the pension fund for Petrobras—invest. However, the program also helps venture capitalists and entrepreneurs find one another, while educating investors in due diligence and best practices.

INOVAR has had moderate success in reducing capital constraints. A 2013 Ernst and Young report noted that Brazil ranks 9th out of the G20 countries in access to funding—much higher than its Latin American neighbors Mexico and Argentina. However, capital is still expensive in Brazil, and many companies must still rely on banks or family connections, rather than risk capital.

As countries throughout Latin America continue to promote opportunity entrepreneurship and venture capital as a path towards economic growth—while simultaneously searching for public policies that will stimulate this previously latent market—they will consider whether to follow Brazil’s lead. Building and stimulating a market that has not developed naturally is an immensely difficult task, and some may question whether it is one that any government can tackle.

Countries that have taken a very active role in encouraging entrepreneurship, like Brazil, should be applauded for their vision. However, many of these countries have left structural problems untouched. Brazil maintains a very complex tax code, as well as a rigid labor market. Brazil’s regulatory environment also remains harmful to small businesses: it takes an average of 119 days to start a business in Brazil, and the World Bank ranked Brazil 116th out of 189 countries in its 2013 Ease of Doing Business Index.

Just as massive infrastructure development programs like Manaus’ Arena Amazônia—and its eleven sister stadiums—can only reap long-term benefits if they are underpinned by sound economic policies, the Brazilian government must tackle critical structural problems before INOVAR can have a sustainable effect.

Until Brazil’s problematic regulatory environments, tax codes, and labor markets are addressed, they will continue to stunt the success of government-run programs seeking to stimulate entrepreneurship and risk capital. Worse, these problems will impede the organic and permanent establishment of a dynamic entrepreneurship ecosystem and venture capital industry in Brazil.

*Sophia Sciabica is a contributing blogger to AQ Online and is a policy intern at Americas Society/Council of the Americas in Washington DC.

Any opinions expressed in this piece do not necessarily reflect those of Americas Quarterly or its publishers.
Tags: Brazil Infrastructure, Entrepreneurship

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