Source: World Economic Forum 2016-17 Report Source: World Economic Forum 2016-17 Report

# **_Excessive (and ineffective) use of business support programs_**

Third, several business support programs seem to be inefficient in reaching their objectives and appear to undermine creative destruction. At the micro level, evaluations of specific business support programs suggest a broad lack of impact on productivity. For instance, Lazzarini et al. (2014) analyze BNDES direct activity through loans and equity funding and find evidence that BNDES mostly financed large and profitable firms, lowering their financial expenses, but with no effect on their investments and performance in the period 2002-2009. Also, size-based policies – such as Simples, the largest tax exemption program in place in Brazil – have shown no impact on key economic performance indicators. For instance, Piza (2016) finds that Simples was not effective in increasing formalization rates of small firms. More recently, Corseuil and Moura (2017) show that the same program did not have any impact on firm performance within manufacturing industry: the impacts on wages, employment and value added were all statistically null. In addition, Lei de Informática and Lei do Bem<sup>33</sup> disproportionately benefited a small number of large firms and are not able to cover, by design, young firms that are likely to be more productive. Moreover, a recent assessment of various Brazilian programs of firm support — including productive finance, business consulting, value chain, export promotion, and innovation support – presented by Pires and Russel (2017) suggests there were few positive results on productivity or other indicators; in most cases either no impact was found or regression results were inconclusive. Overall, the evidence suggests that through these non-competitively allocated incentives, Brazil has created an unlevel playing field that has favored the profitability of less efficient firms, both small as well as larger and older firms – thereby preventing more efficient firms from expanding, and likely deterring potentially more productive firms from entering these markets (Dutz et al., 2017).

## **Box 2. Inovar Auto: Key features and impact**

Inovar-Auto was created in April 2012. Its official objective was to promote R&D, improve the quality of domestically produced cars (energy efficiency was a target within this framework) and to promote investment and domestic production.

The incentives provided under the program followed a two-pronged approach. First, it increased a tax levied on industrialized products (IPI) by 30 percent for all light-duty vehicles (LDVs) and light commercial vehicles. Second, it defined a set of requirements for automakers to qualify for up to 30 percent discount in the IPU as follows:

- Meet a corporate average vehicle efficiency target (precisely to improve the average efficiency for new LDVs by about 12 percent from 2012 levels by 2017)

- Conduct a minimum number of manufacturing and engineering activities in Brazil for at least 80 percent of produced LDV and light commercial vehicles,<sup>34</sup> and

33 Lei do Bem is an R&D tax subsidy program instituted in 2007 with the objective of expanding incentives for investments in R&D; it authorizes companies that invest in R&D and meet certain requirements to claim tax incentives automatically for certain types of spending.

34 For cars and light commercial vehicles these manufacturing stages are: Stamping; welding; anticorrosive treatment and painting; plastic injection; motor manufacturing; gearbox and suspension systems assembly; steering and suspension systems assembly; electrical systems assembly; axle and brake systems assembly; monoblock manufacturing or chassis assembly; final assembly, review and testing; and own laboratory infrastructure for product 18