Tax Incentives to Encourage

Much has been said about the importance of innovation, especially after the rise of globalization and implementation of more open markets. In this paper, we will show how innovation is linked to schools of thoughts that sought to explain and understand what would lead nations to reach a certain degree of long-term development, since the model of Joseph Schumpeter in the mid-1930s until Romer’s model in the mid-1980s. We seek to bring a definition for innovation, aiding in the standardization adopted by OECD manuals that mentioned the four species of innovation contained in the Oslo Manual. In doing so, we try to answer the question why would we need the presence of government functioning as an inducer of an innovation policy? In order to answer this question we will bring six arguments to justify this presence of government, emphasizing that improving productivity will be a key factor for developing economies like Brazil, and the benefits of closing the income gap with advanced countries. Furthermore we will show that there is a strong positive correlation between total factor of productivity and income per capita, and on the other hand a considerable positive correlation between total factor of productivity and investments in R&D. This suggests that investment in R&D has high social return. Thus we mention the main tools used by the government to resolve the market failures that hinder firms from investing in innovation and adopting new technologies, two of which are Direct Subsidies and Tax Incentives. We will present two charts making a comparison between Brazil and a sample of countries: In one graphic, we show the absolute amount invested in R&D, and the other graphic the relationship between investment in R&D and GDP is displayed, demonstrating that Brazil faces with the reality of underinvestment in R&D and needs to urgently leverage investments in the area. In light of this, and after giving an overview of the main direct subsidies and tax incentives used in Brazil to foster investments in innovation, we conclude that a national effort with the presence of the states must be given in order make such a leverage. At the end of the paper we will make the transition from theory-based discussion to a more practical approach to the matter. This will bring about some sort of contribution that can positively change a part of the reality of Brazil, and with that, enforce all the knowledge learned in Minerva Program classes and research. So, we present a draft of tax incentive legislation, a draft of an agreement of tax benefit related to a state jurisdiction tax called ICMS, in order to show how Brazilians States could help in a effort to reduce the underinvestment in R&D in Brazil.