Can Startups Solve Brazil’s Protectionist Problem?

Can Startups Solve Brazil’s Protectionist Problem?

Can promoting startups in Brazil rejuvenate the country’s economic image and kick start the growth that Brasilia is looking for?

Brazil’s eagerness to join the international governance club is no secret. With this month’s election of Brazilian diplomat Robert Azêvedo as the new head of the World Trade Organisation (WTO), the country has gotten another taste of the international leadership roundtable – and the responsibilities that come with it – as it continues to lobby for a permanent seat on the UN Security Council.

But despite its new leadership of the WTO, Brazil has been unable to shed its protectionist reputation, and questions remain whether President Dilma Roussef’s government is prepared to grant international markets open access to its domestic economy.

Brazil has traditionally seen itself as a regional leader, and enjoys a number of free trade agreements through MERCOSUL, the Latin American trading bloc. President Roussef has also initiated efforts to implement more bilateral trade agreements as a means of accelerating GDP growth; Brazil’s economy only grew by 0.9% in 2012 (versus 2.7% in 2011).

But beyond the MERCOSUL member states and Brazil’s bilateral trade partners, the country has struggled to rework its image as a desirable place to do business. Brazil fell two spots to 130th (out of 185) in the World Bank’s 2013 Ease of Doing Business rank, and foreign leaders including U.S. President Obama were quick to criticize Brazil after adopting greater protectionist tariffs in late 2012.

While Brazil is widely considered a stable democracy, its infamous bureaucracy and draconian tax laws with a top rate for corporations of 34% have discouraged all but the most committed companies with the necessary resources from setting up operations in Brazil. Legal requirements include resident labor market tests –  which require companies to prove there are no resident Brazilians who could fill the role – and the need to train Brazilians to eventually replace foreign employees, not to mention the high payroll taxes and ever-changing tax codes. It should come as no surprise that while small and medium enterprises (SME) account for 98% of all companies in Brazil and 96% of all employment, few are foreign owned or operated.

President Rousseff hopes to change this. In April, Rousseff’s government announced the US$78 million Startup Brasil program (modeled after a similar pilot in Chile), which will provide visas to foreign entrepreneurs to start or develop young tech-related businesses in Brazil. To be eligible, the startups must target the Brazilian market. New companies will receive guidance from business accelerators on how to develop the business and remain competitive in the local market. The startups are also eligible for seed funding worth up to R$200,000 (US$98,000) from the government to start their business, with additional funding available from private investors. Entrepreneurship is a boon to any economy, creating jobs, boosting GDP and promoting the national brand overseas, and Brazil’s government seems to have taken note.

Brazil already has the essential social characteristics to foster innovation, boasting the third largest entrepreneurship community in the world. As The Economist noted, “Brazil does not lack go-getters,” and its stable democracy can only help in encouraging new businesses. Last year, Brazil, with a population of 201 million people, registered 315,645 new limited liability corporations, compared to 429,363 in the UK. Startup Weekend, an international grassroots program that brings designers, programmers and marketers together to launch startups in one weekend, serves as an entrepreneurship litmus test; the organisation has already held events in eight Brazilian cities including São Paolo, Rio de Janeiro, Brasilia and Recife.

Brazil is feverishly preparing to welcome the world during the 2014 World Cup and the 2016 Olympic Games, but will first need to demonstrate its seriousness about opening its economy beyond Latin America. Startups might just be the gateway.

Categories: Economics, Latin America

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