The Political Economy of Innovation Why is Brazil Stuck in the Technology Ladder?1,2

The essay considers the role of big private businesses (BBs) within the Brazilian national system of innovation (NSI). Our question is as follows: How do the innovation practices and political behavior adopted by BBs shape the Brazilian NSI? It is our claim that although BBs play a prominent role in leading innovation nationally, they are not supportive of institution-intensive solutions for strengthening the NSI, and thereby contribute to the creation of a dynamic that we call the ‘low-innovation trap’. The obstacles to escaping this trap are manifold, but here we shall focus on 01. the lack of coordination between actors and instruments within government, 02. the high level of instability in the Science, Technology and Innovation (ST&I) budget, 03. the increasing obstacles faced by BBs wishing to innovate and 04. the lack of correspondence between government proposals and societal demands. Without a strong coalition pushing for it to be upgraded, it is likely that the NSI will remain unfit for purpose.

large and growing body of literature argues that building a strong National System of Innovation (hereinafter NSI) is a precondition to climbing the technological ladder and thereby overcoming underdevelopment (FREEMAN, 1995(FREEMAN, , 1987. In this literature the term 'NSI' refers to broad interactions between institutions including governments, firms and Science, Technology and Innovation (hereinafter ST&I) actors, such as universities and research institutes (LUNDVALL, 2007(LUNDVALL, , 1992. Based on an evolutionary economic approach (DOSI et al., 1988;NELSON and WINTER, 1982), the literature suggests that during the catching-up process it is to be expected that a certain amount of temporal mismatch between universities, research institutes and the productive sector may occur as a consequence of the cutting-edge knowledge produced and adopted by ST&I actors (ALBUQUERQUE et al., 2015). This temporal mismatch may or may not be converted into technological opportunities by existing and new businesses (PÉREZ, 2001) depending on the institutional framework available (CHAMINADE and EDQUIST, 2010;EDQUIST, 1997).
In mature NSIs (ALBUQUERQUE, 1999), technological mismatches push the productive sector to adjust to new technologies, leading to new equilibriums at higher technological levels. Over time, this dynamic is eventually repeated in a nonlinear fashion by creating opportunities for new entrepreneurs (SCHUMPETER, 2017), challenging existing industries and advancing the development process. In contrast to mature NSIs, relatively less dynamic systems lack strong major institutional actors, especially top-level universities, and a set of vigorous interactions between firms, research institutes and universities that could coordinate the innovation process at the production level (AROCENA, GÖRANSSON and SUTZ, 2015). Consequently, mismatches do not take place as expected: universities and research institutes do not perform well in ST&I and when they do work properly the productive sector does not take full advantage of the opportunities to innovate (AROCENA and SUTZ, 2005;SRINIVAS and SUTZ, 2008).
In the footsteps of scholars advocating the need for a 'southern' or 'peripheral' perspective on NSIs (ALBUQUERQUE et al., 2015;AROCENA and SUTZ, 2010), we aim in this article to understand the conditions that trap less-developed countries in a situation of continuous mismatch between ST&I actors and businesses. Specifically, we focus on institutional fragilities that may inhibit the A translation of ST&I efforts into the productive sector, thus blocking co-evolutionary processes. Our claim is that because the co-evolutionary process of mismatches between ST&I actors and firms may generate conflicts and pressures for structural and institutional changes, strengthening the NSI requires the support of a strong coalition that embraces the uncertain pace of technological change. For this reason, the answer to the question regarding the opportunities for climbing the technological ladder must, in our view, consider the political sphere.
Countries that were able to escape from the trap and climb up the technological ladder managed to reduce the impediments to collective action faced by ST&I and business actors by planning and gathering the resources needed to build and refine their NSIs. Existing NSI scholarship has emphasized the role played by the State in driving innovation. Japan (FREEMAN, 1987;ODAGIRI, 2006), South Korea (KIM, 1999;LEE, 2019;WESTPHAL, KIM, and DAHLMAN, 1985), Taiwan (AMSDEN, 2001;HOU and GEE, 1993) and Singapore (YEUNG, 2006) are commonly-cited examples. Moreover, seminal work has highlighted the importance of big businesses (BBs) in promoting innovation and economic upgrading (CHANDLER JR., 1990;PENROSE, 1959). These examples underline the importance of States encouraging the incubation of large national champions in search of innovative results (AMSDEN, 2001;LEE, 2019), and again Japan and South Korea spring to mind with their 'keiretsu and chaebol', respectively.
The historical trajectory of the Brazilian economy challenges arguments on the roles of the State and BBs in driving economic upgrading. Compared to its peers in Latin America and the Caribbean and other less-developed countries (LDCs), Brazil has managed to develop a considerable amount of State capabilities and has been able to strengthen private actors by means of supporting domestic BBs and attracting foreign direct investment (FDI) -not only during the heydays of the import substitution industrialization regime but also after liberalization (HIRATUKA, COUTINHO, and LAPLANE, 2003). During the 2000s, especially under the two Lula governments, there was a clear intent to push the productive sector through the promotion of national champions, the internationalization of domestic firms and the implementation of horizontal industrial policies (CARVALHO, 2018). Nonetheless, Brazilian companies have made scant progress in terms of technological innovation, and public funds injected into R&D activities have not been translated into commercial innovation (ZUÑIGA et al., 2016). The Brazilian and similar cases call for an examination of the complementarities between the State and BBs (domestic and MNCs) in fostering NSIs.
Because innovation is a long-term, complex and risky endeavor, businesses are sensitive to any disruption or shift in public policies. For this reason, the institutionalization and continuity of science, technology and innovation (ST&I) policies over a long period of time would be an even more valuable contributor to the Brazilian NSI than, say, predictable injections of public funds. In fact, in less dynamic NSIs, massive public investments in R&D can produce undesirable results: firms feel compelled to focus on short-term projects in anticipation of policy changes and resources end up being captured by incumbents (BREZNITZ and ORNSTON, 2017). This vicious cycle is characteristic of the aforementioned 'low innovation trap', in which the existing economic structure inhibits the formation of upgrading coalitions that could sustain a long-term project for strengthening the NSI.
The first section of this paper constitutes this introduction; the remainder is organized as follows: the second section begins with a puzzle, examining the complementarities between BBs and the State that lead to the 'low-innovation trap'.
The original research contribution made by this article resides in this section.
Section three focuses on Government initiatives, although it is far from exhaustive given the full panoply of ST&I instruments in Brazil. Section four focuses on the behavior of BBs, contrasting their innovation activities with political initiatives aimed at strengthening the Brazilian NSI. Finally, we conclude with the assertion that Brazil is trapped in a low-innovation dynamic which we believe is partly caused by fragilities in the coalition that supports innovation. The absence of a strong private coalition that could support comprehensive investments in the NSI make pro-innovation public policies extremely vulnerable.
Setting up the debate: businesses, politics and the low-innovation trap Schneider (2019, 2016)  Achieving the needed reforms in economic structure may well be a more difficult task than gaining the scientific and engineering knowledge needed to operate the new technologies. There are several reasons. One is the political power of old firms and industries, and the difficulties they may have in transforming themselves. For comfortable, politically well-connected old firms, creative destruction is not a welcome thing. Politically and socially, creative destruction is not easy to handle (NELSON, 2008, p. 17). In this sense, lagging behind may not only be profitable, but also a survival strategy for those who hold economic power. This is the essence of the 'trap'. BBs might deliver better innovation results than other sized firms, which may serve as a justification for government investment in and incentives in favor of their activities. However, governments cannot count on them to support institution-intensive solutions that could enable a country to exit the trap.
Due to their advantages of scale and scope, BBs are expected to be leading agents of innovation because they tend to be more efficient in developing new technologies than smaller firms (COHEN, 2010;COHEN and KLEPPER, 1996;NELSON and WINTER, 1982). Consequently, BBs have become the primary targets  (AMSDEN, 1989;CHANG, 2003;EVANS, 1980;KOHLI, 2009). Latin American countries have given excessive importance to foreign capital, which has been assigned the role of increasing the technological capability of the region by supporting product and process innovations produced by transnational companies (KATZ, 2000). The entrance of foreign direct investment (FDI) into the region has created profound economic segmentation by enhancing structural heterogeneity (FURTADO, 1959) and feeding a 'modernization- markets), they have the advantage of offering higher wages than local businesses or attracting employees directly from prestigious universities (HEYES and RAINBIRD, 2011). Indeed, empirical evidence demonstrates that MNCs routinely provide higher wages in LDCs than their local counterparts do (BROWN, DEARDORFF, and STERN, 2003).
A similar argument can be made regarding the demand-side for innovation.
Increasing investment in R&D is widely recognized as key to overcoming underdevelopment. As in education, R&D investments cannot be achieved overnight: they require a range of institutions that promote cooperation among universities and business, property rights protection, innovation financing, technical training and so on.
Generally, countries with the highest levels of gross expenditure on R&D (GERD) are the ones with the highest private sector participation in R&D (Table 01) funding. In South Korea and Japan, private expenditure represented more than 76% of total GERD (in 2017), and both countries' R&D investments represent more than 03% of GDP. In Latin America, by contrast, the innovation shortfall is accompanied by a lack of private R&D investment. In Argentina and Mexico, the private sector accounts lass then 20% of total GERD (in 2017), followed by Chile (31.43%) and Brazil (47.46%). The GERD as a percentage of the GDP in those countries has settled at less than 01% (except in Brazil, which has maintained its GERD/GDP at around 01%   (Table 02).
Domestic businesses in Latin America have evolved in a productive structure that provides few incentives to innovate. Many of them were able to grow and survive in sectors free of pressure to build innovative capabilities. The kind of R&D carried out by domestic firms is commonly oriented towards innovative processes and products for the domestic market rather than cutting-edge technologies. Their efforts to innovate tend to be even more tepid than those of MNCs (ZUCOLOTO and CASSIOLATO, 2013).
Low demand for innovation reinforces the mismatch between the production of knowledge and technology in the region. Consequently, the increase in scientific output observed in the last decade (measured by the participation of Latin American countries in the worldwide publication of scientific papers) has not been accompanied by an increase in patent applications, which suggests that private sector demand has not evolved at the same pace as scientific supply (DUTRÉNIT and ARZA, 2015). To illustrate this, we have depicted in Figure 02  of causality remains controversial. Is the lack of business investment in R&D attributable to the absence of institutional framing or is it the case that failure to invest in institution building can be put down to weak demand for R&D? In this article, we shall take a detour off the conventional path followed by NSI scholarswho tend towards the former explanation -and propose that the latter be explored.
Chang (2007)     The picture here resembles the argument put forward by Acemoglu, Johnson, and Robinson (2005), who point out that producers are the main 'demanders' of institutions to foster economic activity. Yet, at the same time that they demand institutions to protect their property rights, they erect barriers against the entry of new entrepreneurs, thereby blocking economic development (ACEMOGLU, 2008). Once established, incumbent businesses prefer to maintain the barriers to entry, thereby inhibiting the access on the part of newcomers to skilled labor and technology so as to defend their incomes (PRZEWORSKI, 2007).   In the following sections, we expand the framework proposed by Schneider (2019, 2016) to shed light on the participation of BBs in upgrading coalitions in Brazil. Focusing on both public and private initiatives, we analyze the political obstacles that impede Brazil in its climb up the technology ladder.

Mismatches within the public sector
Brazil industrialized rapidly in the period between 1930 and 1980. Briefly, we can say that Brazil has been able to build a relatively diversified and integrated productive structure based on the welcoming of MNCs and on the establishment of big public companies (DAHLMAN and FRISCHTAK, 1990)  In the last two decades, governments with divergent ideologies 4 have taken important steps to foster ST&I activities and spur innovation. During this time, a myriad of institutional arrangement such as National Acts, Decrees, Programs, Action Plans and Strategic Plans (Table 03) Table 03).
It is also interesting to note that national ST&I strategies were also put in place during this period. Despite there being no doubt Brazil has built a diversified set of ST&I policies and programs, it faces two paramount challenges that are of concern to us. First, there is a lack of articulation and coordination between Commerce Ministers, who are responsible for proposing policies in this field ( Figure   03). They show that the irregularity of ministerial terms of office goes a long way to explain recurrent discontinuities in industrial and ST&I policies.
Ministers of Science and Technology (…) and Industry and Commerce (…), responsible respectively for ST&I and industrial policy-making, spend an average of 1.5 years in office. They rarely spent even half of a President's four-year term, and most last less than 12 months. This illustrates the extreme volatility of public-policy making and coordination in these areas of government (PELAEZ et al., 2017, p. 800 however, the amendment has already led to a drastic cut in the federal ST&I budget for key programs, as depicted in Figure 04.

Mismatches within the private sector
It is interesting to note that historically most innovation efforts in Brazil have not been performed by private big businesses. Indeed, by breaking down gross domestic expenditure on R&D (GERD 15 ) by fund source, we can see that the share financed by the public sector accounted for more than 50% in the last decades and reached its peak in 2013, when it accounted for 57.7% of total GERD.
The diversified set of ST&I policies, programs and action plans summarized in Table 03  The GERD increase in the previous decades was accompanied by a persistent low innovation rate according to data from the Brazilian Innovation Survey (PINTEC), as can been seen in Table 04. The industrial innovation rate in the last decades has fluctuated but is always around 35%. However, once we break down the data according to business size, the figures become more intriguing: BBs' rate of innovation has fallen from 72.55 to 67.31%. Why is that?
Before trying to answer the previous question, it is important to take a closer look at the rate of innovation. In Table 05 and Table 06, we show that most of the innovation performed in Brazil is incremental rather than radical in nature, independently of the business size or type of innovation (i.e. product or process). However, even if the percentages of radical innovation (that is, products/processes that are completely new to international markets) are higher for BBs, they have not increased significantly over time. In fact, looking at Table 05, in which we present the degree of novelty of the main product brought onto the market by innovative industrial businesses, we can see that BBs' radical product innovation increased slightly from 5.74% to 7.43% over the course of a decade and in Brazil, also suggest that BBs have not increased significantly their supply of innovative products to international markets. The same can be said about innovations in their production processes (Table 06).
Therefore, a possible answer to the previous question is that Brazilian BBs face more obstacles than they used to, in spite of all the National Acts, Decrees, Programs, Action Plans and Strategic Plans proposed to spur innovation. Indeed, once we look at the obstacles perceived by non-innovative BBs, we see that 'high innovation costs', 'excessive economic risks' and 'shortage of appropriate funding sources' continue to be the top three most highly perceived obstacles (Table 07).
Another possible answer to the previous question is that there is a lack of coordination between the public and private sectors in Brazil.  One of the reasons for this lies at the heart of the dilemma described by Evans (1985) in relation to public intervention. On the one hand, effective intervention requires autonomy to protect public entities from the pressure of particularistic interests. On the other hand, autonomy ends up generating isolation from the productive domain and leading to uncoordinated actions. To solve this dilemma, Evans (1985) envisages the concept of 'embedded autonomy', and argues that a certain autonomy is necessary to formulate collective goals and cannot be disentangled from dense links with society, specifically with industrial capital, which in Brazil is mainly controlled by BBs (ALDRIGHI and POSTALI, 2010;LAZZARINI, 2018;SCHNEIDER, 2010). Brazil has been able to create 'pockets of efficiency' (EVANS, 1995) and has been very active in reviving industrial and innovation policies (SUZIGAN and FURTADO, 2010;TURCHI and MORAIS, 2017), but has not succeeded in building the relative autonomy necessary to balance private and public efforts (LIMOEIRO and SCHNEIDER, 2017).
An example of this lack of coordination can be observed in the mismatch between the public discourse of businesses associations favoring innovation and their effective lobbying in Congress. The Brazilian National Confederation of Industry (CNI16) encompasses the entire industrial sector, including both innovative and non-innovative companies. Not only is CNI the most relevant industrial association in the country; it is also the most prominent in the NSI. Besides ______________________________________________________________________________________________ 16 Confederação Nacional da Indústria, CNI. its active engagement in vocational training -especially in relation to the so-called S-System 17 -, the CNI has set up the largest forum in Brazil for businessgovernment consultation on innovation. In 2008, the CNI invited CEOs of Brazilian BBs to establish the so-called 'Business Mobilization For Innovation' (MEI 18 ). The MEI is made up of more than 200 executives and 153 companies. In the last ten years, their main achievements were successfully lobbying to include 'innovation' as a duty of the State in the Federal Constitution (85A), formulating and regulating of the Legal Framework for the ST&I Act (Law 13,243) and keeping in place the 'i do Bem' (Law 11,196 of November, 21, 2005) 19 .
In 2019, the MEI launched its agenda for the following years (CNI, 2019), endorsing the need for prioritizing innovation in the public agenda along with better coordination between the highest level of government and business associations.
Moreover, the MEI also called for budget stability for innovation, more training for the work force, internationalization of Brazilian universities and a reduced bureaucracy. However, these demands do not seem to be translated into lobbying activities, at least not in Congress. A brief overview of the Legislative Agenda of Industry -a document published annually that lists the main legislative activities affecting their interests -shows that the industrial agenda resembles the fragmentation of the public sphere. In the last 11 years (2008)(2009)(2010)(2011)(2012)(2013)(2014)(2015)(2016)(2017)(2018)(2019), few proposals mentioned the public instruments listed in Table 03 .
The Biosecurity Act (Law 11,105 of March, 24, 2005) was the most frequently cited during this period, probably because of the commercial use of Genetically Modified organisms (GMOs), including the relaxation of marketing rules and food labeling.
The most important action related to the Innovation Act in the pipeline is a bill whose goal is to improve the performance of research institutes in ST&I activities. Since 2016, the CNI has been following the course of this bill and supporting it with some reservations. Firstly, the CNI endorsed the need for According to the ANPEI, coordination between industrial policies and innovation law should be a high priority, as should be integration between innovation law and educational policies. These demands along with other priorities are listed in the 'Priority Agenda' that was presented by ANPEI to the Bolsonaro Administration's new Minister of ST&I. However, beyond these highly visible initiatives, ANPEI is not a relevant actor in lobbying for innovation policies (FRASSÃO, 2018;LIMOEIRO and SCHNEIDER, 2017). A survey of twenty ANPEI members revealed that their lobbying for innovation was less intense than for other economic policy areas, such as trade and tax (FRASSÃO, 2018  More research is needed on the Brazilian pro-innovation policy lobby. Studies on private lobbying in Brazil reveal that much success is translated into bills that do not go on to become legislation (with more than 50% being archived or rejected), which suggests that lobbying is more effective at maintaining the status quo than changing it (SANTOS, 2014). Therefore, although a Brazilian upgrading coalition seems to be coming into existence, this coalition has not succeeded in building coordination mechanisms. The Brazilian NSI still strongly depends on the public sphere, and innovative companies have not yet learned how to translate their demands for strengthening the NSI into effective policies. Moreover, other economic issues end up surpassing pro-innovation lobbying in the public debate (macroeconomic stability, labor, pension plans and tax reforms), which gives the government leeway to set its own agenda.   However, it seems that neither IFES nor the private sector took part in the design of the program, nor were they consulted before the Program was announced 26 .
The main strategy of the 'Future-se' program is the creation of a private fund called the Knowledge Sovereign Fund 27 , whose shares will be traded on the stock exchange to finance research, innovation, entrepreneurship and the internationalization of educational institutions. The intention of the MEC is to raise about BRL 100 billion, from Federal Government assets, constitutional funds, tax incentives, cultural resources and equity funds. To date, no study or official document estimating the capacity of the Fund to meet this goal has been published.
On the contrary, a report prepared by the Congress shows that the category of 'self-   Santos. So, this is what we call a "future return percentage": it's a kind of royalty because universities create an environment conducive to innovation. So we will tell the investor this: "Investor, why are you going to invest in Neymar? Let's invest in the junior team of Santos [Football Club]". But we don't have the Santos' junior team, we have the Brazilian junior team! We have a network of Federal Universities and Institutes which is gigantic, where many Neymars can emerge, and from there, this return goes back to the very lowest fund, creating a virtuous circle. This increasingly raises the wealth of this Sovereign Fund and then the Universities will be totally independent from their federal budgets. Harvard did it. We are taking inspiration from best practice. Is there a Sovereign Fund like this anywhere else in the world? No. We have put together the various positive actions that there are around the world, we have brought them all together and that's our advantage (LIMA, 2019; time 35m54s). This clearly shows that the current Government has not understood the real challenges affecting the Brazilian NSI. 'Future -se' reinforces not only the mismatch between universities and firms, but also the enduring lack of coordination between government proposals and the willingness of the private sector in Brazil to expand investment in ST&I. Tulio Chiarini, Fernanda Cimini, Marcia Siqueira Rapini & Leandro Alves Silva (2020) 14 (2) e0001 -29/39

Final comments
We have addressed some institutional and political dynamics involving Brazilian BBs and the State. Our point of departure was the following question: how are the innovative practices and political behavior adopted by BBs able to shape the Brazilian NSI?
The assumption behind our question was that the way in which businesses are organized in each country is necessary to understand the political obstacles to its economic upgrading.
Brazil offers an intriguing scenario in which to examine the interactions between BBs and the State in the consolidation of the NSI. On the one hand, the country has developed an active private sector, with domestic BBs and MNCs operating in the most important economic sectors. On the other, the Government has increased its participation in innovation efforts, especially during the 2000s. However, the private share of the GDP in R&D has not increased, and the rate of innovation of BBs has decreased.
Our claim is that there are mismatches within the public sector (exacerbated by the lack of coordination between actors and instruments within the public sector itself and by the instability of the ST&I agenda) and there are also mismatches within private sector. We believe that both the Brazilian government and businesses are fragmented and failed to form a strong coalition with a strong interest in fostering innovation as a matter of State with a long-term perspective. As a result, Brazil faces a low-innovation trap, by which we mean a situation in which the interactions between the most important actors responsible for carry out innovation do not enhance the institutions necessary to foster innovation in the rest of the economy. The reasoning behind this argument lies in the way in which BBs are organized in Brazil, which seems to stymie the formation of political coalitions that could push for policies to strengthen the NSI.
In line with our argument, the ongoing lack of coordination of the main institutions of the Brazilian NSI may be a sign that the big players in the system do not care about building institutions that could provide public goods -otherwise, they would be the first ones to raise their voices against the retreat of the State from the front. This suggests that the efforts of the State to stimulate innovation have not created the right incentives for enticing BBs into supporting the NSI. Those that do not depend on public instruments to innovate, e0001 -31/39 such as MNCs and some domestic BBs, benefit from the existing resources, such as public funding, human capital and cooperation networks, without contributing to their provision. In this sense, by providing goods unconditionally, the Brazilian State becomes at the same time responsible for and a victim of the low-innovation trap. This situation is reinforced in a negative cycle especially when there is an economic downturn like the one Brazil has been suffering since 2013, which has caused companies to reduce their innovative efforts.
Rather than suggesting actions to escape from the trap, our intention is a distinctly modest one: to call attention to the fact that the strategies and practices adopted by BBs in Brazil are creating a trap for the NSI. Much of the debate on policy prescriptions and institution building in the NSI will be fruitless if the structural and political foundations that block upgrading changes are not fully understood.
Moving this agenda forwards implies a change of focus from institutional arrangements to institutional origins, i.e., recognition that BBs have their own interests that may not be congruent with the upgrading of institutions. The exit from the trap may be found in developing new patterns of interaction among domestic businesses, MNCs and the State. This essay was our first attempt in that direction.