Letter IEDI n. 858–Industry as the engine of progress: R&D and Innovation in the world and in Brazil
All economic activities generate jobs, income and products and services that are fundamental to society. However, not all of them have the same capacity to generate impacts on other activities and on the dynamism of the economic system as a whole. The contribution of each activity to the construction of long-term growth and development is even more unequal, which is largely due to technological innovation.
Today's Letter IEDI is part of a series of studies that underpin the IEDI industrial strategy to be released soon. This paper discusses the role of the industry in development, in Brazil and worldwide, focusing on one of its main attributes, namely, its research, development and innovation (R&D&I) efforts.
The OECD's Analytical Business Enterprise Research and Development estimates that manufacturing accounts for no less than 70% of entrepreneurial spending on R&D. For services and agriculture, the rates are much lower: 27.7% and 0.2%, respectively. In Brazil, although the IBGE's Technological Innovation Survey (PINTEC) does not allow the same grouping of activities as the ANBERD, the industry also appears as the major center for conducting business R&D activities, manufacturing in particular with a 71% participation in 2014 (latest data).
Such R&D&I efforts are more intense the greater the ability of industrial firms to achieve a certain level of profitability. Not surprisingly, in Brazil the most innovative companies are usually among the most profitable. With enough funds to finance its investments, industrial enterprises' R&D&I activities are capable not only of creating new industrial goods, but also of revolutionizing the production processes of the sector itself and of other economic segments, promoting productivity increases over time. In this respect, manufacturing plays a unique role in developing innovative economic activities, especially those based on new technologies.
In the chapter "Why Manufacturing Has Been Important for Development" of a book published in early 2018, world Bank economists also argue that the industry is a key element in R&D&I activities. According to the Bank, the sector is fundamental for countries' development by presenting factors that, although not exclusive to it, do not appear with the same intensity in other sectors. It is the industry that has a high average productivity and a high capacity to absorb less qualified labor released from other sectors, while being the main responsible for the international integration of economies and for innovation activities, as mentioned.
In Brazil, however, there are voices in the current economic debate that argue that the country's development can dispense with the industry's contributions, despite evidence of the sector's importance for economic growth, tax collection, employment, exports, investment and R&D. This is an unfortunate situation, since in the rest of the world only a few —and certainly no prominent international organization— dispute the relevant roles played by manufacturing.
It is worth emphasizing some data of our national context. The Brazilian industry alone is responsible for the collection of 27% of taxes and supports a tax burden of 45% of its value added, according to a Firjan study using Federal Revenue data for 2016. Services, the activity that earns the most (40% of the total), have a much lower tax burden than the industry (23%). Regarding employment, job posts generated by manufacturing represent 15% of formal work, according to the CNI, and pay wages above the national average, reaching a 26% higher value in the case of employees with at least higher education. The importance of the industry for both taxes and employment far exceeds its share of the economy, which is currently at only 10% of GDP.
In addition, due to its inter-sectoral relations, when the industry grows it has great capacity to leverage the dynamism of other economic activities. The input-output matrix illustrates these interactions. Almost half of Brazilian industry's total inputs are supplied by sectors other than the industry itself: 9% are from agriculture and 34% are services (data for 2014). These inputs represent no less than 43% of Brazil's agricultural production and, for services, a more self-contained sector, something like 13% of its total output.
When we look at investment, the industry stands out once more. In the period 2007-2015, for example, the investment rate of the industrial sector remained above the rate of the economy as a whole in most years. In 2013, while the economy invested 20.9% of GDP, reaching its best mark in the recent period, the general industry presented an investment rate of 24.1% of its GDP, according to IEDI estimates made from IBGE's Annual Industrial Survey data (Letter IEDI No. 855 "Structural changes in the Brazilian industry between 2007 and 2015").
In addition, in the external front, exports of manufacturing products remained at the top, despite the sharp appreciation of commodity prices. Between 1997 and 2017, typical industrial products (according to the OECD classification) corresponded to more than 70% of our export basket on average.
Recently, in the chapter "Manufacturing Jobs: Implications for Productivity and Inequality" of April 2018's edition of its World Economic Outlook, the IMF finds no evidence that the industry is not central to countries' development either. In this study, unlike some interpretations that maintain that Brazilian development can dispense with the contributions of its industry, the IMF does not arrive at such conclusion. The work seeks only to show that there are some branches of services as capable as manufacturing of leveraging the productivity of countries.
For a sample of 62 countries (19 developed and 43 emerging), the IMF identifies that, in 2005, some branches of the private services sector had productivity levels equal to or above the average of manufacturing: transport and communications, financial intermediation and business activities. Some of these branches, such as telecommunications and financial intermediation, were among the types of services whose productivity grew more rapidly between 2000 and 2010.
If confirmed, this finding is positive because economic development, as conceived by the IEDI, is a process of advancing the complexity of the productive structure, creating and strengthening activities of greater added value and productivity level. In this sense, the important thing is for Brazil to preserve and continue to advance in the development-promoting economic activities that it already has —not only in industrial segments, but also in agribusiness branches— and, in addition, start acquiring higher prominence in activities with the same properties, as in service segments.
Unlike Brazil, most countries in the world are not capable of taking advantage of the dynamism of the three macro-sectors for the benefit of their development. The country can not and should not give up any of them.