Brazil State-Level Business Operating Environment

A new index developed by the Economist Intelligence Unit for CLP

Findings and Methodology
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Brazil: 2013 State-Level Business Environment Index
Executive summary
To gain a better understanding of the comparative business operating environments in Brazils 26 states
plus the Distrito Federal (Federal District), the Economist Intelligence Unit (EIU) has constructed the
third edition of the Brazil State-Level Business Environment Index. The goal of this Index is to spur
debate on the factors that affect business operations. In the context of the general elections in Brazil in
October 2014, it is also intended to help shape the agenda, thereby prompting improvements in policy
and programmes when state governments take office in January 2015 for a new four-year term.
The Index provides a snapshot of the current business operating environment in each state at yearly
intervals, starting in 2011, updated in 2012 and again this year with the latest available data. It provides
companies with insights into which states offer the most opportunities and which have the most
obstacles to progress. For policymakers, the index highlights where each state is performing relatively
well and where improvements need to be made. As most of the indicators are of a structural nature, by
conducting the research over a multi-year period, the Index aims to identify and visualise key,
underlying trends that can serve as the basis for actionable decision-making.
Similar to its performance in 2011 and 2012, So Paulo has the best overall score for its business
environment and continues to outperform a group of five other southern and south-eastern
states. Within this group Paran and Santa Catarina have moved up since 2011, overtaking
Minas Gerais. The top six states score well across most of the eight categories in the Index.
However, the tax system and business-opening times remain weaknesses for even the top-
scoring states, which could also benefit from improvements in infrastructure and the political
and security environment.
Much like in 2011 and 2012, 21 states would benefit from improvements to shortcomings
identified in this study, namely complex tax systems, insufficient infrastructure, inadequate
quality of the bureaucracy, a small pool of qualified human resources, persistent corruption and
limited investment in innovation.
Although advanced economies are gradually emerging from several years of crisis, the tailwinds
that propelled Brazils 2004-10 boom are fading as China slows, credit growth eases and the
labour market tightens. Brazils potential annual economic growth rate is now only between 2-
3%, a level which is barely sufficient to meet its development goals. Re-igniting Brazils growth
engine requires structural reforms at the national, state and local levels in order to increase
investment, efficiency and productivity. Building consensus on a pro-growth development
agendaand implementing it successfullyshould be among the top priorities for the
authorities that take office in January 2015 at all government levels.
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Areas of strength
Despite weaker growth, Brazils market opportunities remain an attraction for investors. States
in the south and south-eastern regions continue to offer the largest consumer markets and
highest average per capita incomes. Consumer markets in the centre-west states continue to be
strengthened by the income generated by the expansion of agricultural exports. At the same
time, better economic growth in recent years, propped up by income transfers to poorer
households have put states in the north and north-east on the radar for investors seeking new
frontiers in consumer markets, not least as some of these have large populations and
considerable catch-up potential.
Foreign direct investment has held up despite weaker growth, with over US$64bn flowing into
the country in the 12-month period to April 2014. A handful of states have established
investment-promotion agencies, helping them attract a greater share of foreign investment.
Other states can learn from these successes by channelling greater human and financial
resources from their budgets into promotion activities. In the event that Brazils economic
growth continues to underperforminevitably dampening FDI inflows in the longer term,
efforts to attract foreign investment will become increasingly important.
Overall the Brazilian environmental legislation is more than adequate in establishing the legal
foundation for the conservation, protection and monitoring of the environmental as well as
including punitive actions for environmental misconducts. This is reflected in the 26 states
various environmental laws and decrees. The majority of the states address the main
environmental themes with dedicated pieces of legislation, illustrating the importance of the
issues. The most common environmental themes covered by most States include water,
forestry and protected areas whilst air quality and land use are included in the overall arching
states environmental policy.
Areas of weakness
At the national level, Brazils main areas of weakness in the business environment are the heavy
financial and administrative burdens of the tax system, red tape, insufficient infrastructure, skills
shortages and weak innovation. At the state level, judging by the high average number of tax-
related decrees issued by each state, much still needs to be done to simplify and rationalise tax
systems. One positive development to reduce red tape in the future is the introduction of online
business registries through the Redesim initiative, a nationally-integrated registration system
for enterprises that aims to reduce and simplify bureaucracy. Two states have already
implemented both stages of the programme, cutting business opening times, while most others
have now implemented the first stage and are now addressing the second.
The quality of road infrastructure has deteriorated in many states since the first iteration of this
study, although states that have embraced the concessions model perform better. In this
context, the benefits from a handful of road concessions auctioned under the federal
governments Plano Nacional de Logstica Integrada (PNLI, the national integrated logistics plan)
should help to improve conditions, once they enter into operation.
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Skills shortages persist across nearly all states, despite the federal governments flagship
vocational training programme (Programa Nacional de Acesso ao Ensino Tcnico e Emprego,
Pronatec), which has seen nearly 7m people enrol in training courses since its inauguration in
2011, according to the government. Authorities can also work with educators to address the
skills mismatch among new graduates and the needs of the private sector. Closer ties between
the public sector and universities will also be needed to spur innovation in technical areas.
Noteworthy changes
During the three-year study period, 10 states improved their overall rank relative to others,
while 8 states saw their rank slip and 7 states were stable. While divergence in annual GSP rates
played a role, the changes were mostly driven by structural factors in the Index. This indicates
that state-level policy decisions and programmes have the potential to bring about
improvements in the business environmentor, conversely, to lose ground vis--vis other
states.
Despite shortcomings in corruption standards and quality of the bureaucracy, Brazil has long
been regarded by investors as having a stable political environment at the national level. This
view was tested by the dramatic street protests of mid-2013, when ordinary civilians vented
their frustrations over the poor quality of public services, particularly health, education and
transport. Their grievances were aimed at all levels of powernational, state and local
governments.
The results of our Index this year still show more than two-thirds of states enjoying a
satisfactory or strong level of political stability. This is consistent with the resilience that political
institutions ultimately displayed during this challenging episode, as the protest movement
dissipated. But a failure to deliver improvements on these fronts has the potential to cause
greater political instability in the future, impairing the business environment.
Most states have seen an improvement in the quality of telecommunications services during the
four-year period, reflecting increased high-speed internet-penetration rates. However, states in
the northern region still lag behind, indicating that a digital divide persists that policymakers
should address. With more online transactions moving to mobile telephony, attention is turning
to speeds and penetration rates of these technologies, although this is not currently measured
in our model. In October 2012 an auction of 4G licenses was held, with roll-out of these
technologies leading to 2.5m users by April 2014.
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Category results
Political Environment
There is no serious threat to political stability. There will be elections at federal and state level in
October 2014, and it is possible that the outcome leads to an uneasy transition in a few states. However,
democratic institutions have been strengthened in Brazil after almost 20 years of direct elections. Since
2012, the high-profile trial at the Supremo Tribunal Federal (STF, the Supreme Federal Court) against
corruption at federal level (the so-called Mensalo) marked the political landscape in Brazil. There is a
greater awareness regarding corruption among public opinion. Nevertheless, the situation in Brazilian
states (scores) has continued to deteriorate.
The quality of provision of public services is generally low and below par in most states. This has
motivated widespread public protests in June-July 2013 and ahead of the 2014 World Cup. Scores have
generally declined further compared to 2012.
Public safety has deteriorated according to the latest, consolidated data available (2011). Homicide rates
in most states in Brazil score very poorly when compared to international standards. Santa Catarina, So
Paulo, Piau, Minas Gerais, Rio Grande do Sul have the lowest homicide rates (in that order) ranging
from 12.6 per 100,000 to 19.2. But no state enjoys rates anywhere near the global average of 6.9 (US
scores 4.8 and Western Europe, 1.0). Despite improvements in security in Rio de Janeiro state, homicide
levels are at an unacceptably high 28.3 per 100,000.
Economic Environment
Brazils modest growth in 2013 reflected weakness in services. Industry was disappointing, but
agriculture outperformed, lifting those states with an agricultural base. Nevertheless, markets in all
states expanded, supporting their market-size scores. This year Rio de Janeiro joined So Paulo as the
only states achieving the highest score for market size, though most states, with the exception of the
smallest statesAcre, Amap and Roraimaoffer attractive market opportunities, particularly as
incomes continued to rise.
The Distrito Federal and So Paulo are in the highest income per capita group. The next bracket features
a group of three southern and south-eastern statesRio de Janeiro, Rio Grande do Sul and Santa
Catarinaand these states have been joined this year by three from the centre-west, Gois, Mato
Grosso and Mato Grosso do Sul, reflecting the agriculture boom there. Amap is the only state from the
north or northeast in the second highest income per capita bracket. Only two states in the southern and
south-eastern regions fail to qualify for the top two bracketsMinas Gerais and Esprito Santo, which
feature in the middle tier of the five income brackets in our model.
Tax and Regulatory Regime
This year we again took into consideration data from Thomson Reuters FISCOSoft, a tax and accounting
information provider, which estimates the average number of state tax decrees issued monthly. Only
four states issued an average of 7.5 or fewer changes per month, and seven issued 20 or more monthly
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changes throughout the year, notably Mato Grosso, Minas Gerais, Paran, Pernambuco, Rio de Janeiro,
Rio Grande do Sul and So Paulo. While measuring the impact of each decree is beyond the scope of this
research, the sheer numbers provide a snapshot of the difficulties businesses face in complying with
new regulations.
The research also looks at the time it takes to open a business in each state, an important element of
the bureaucratic regime that firms must navigate. The scores are unchanged from last year, but most
states have made efforts to streamline the process of opening a business by setting up one-stop
online registries under the official Redesim initiative, including Alagoas and Minas Gerais. All of Brazils
states, except for three, have now implemented the first (of two) stages of the Redesim programme.
These advances are likely to affect states performance for this indicator going forward. Streamlining
business opening (and closing) times would help to boost entrepreneurship in Brazil, but other reforms
are also needed to improve the regulatory environment.
Policy towards Foreign Investment
Despite Brazils sluggish economic performance, the country continues to enjoy large foreign direct
investment, with over US$64bn (2.9% of GDP) flowing into the country in the 12 months to April 2014.
At the state level, Minas Gerais, Rio Grande do Sul, Rio de Janeiro, So Paulo andjoining them this
yearPernambuco are all considered to have excellent investment-promotion agencies. Meanwhile, a
handful of other states have been making efforts to improve their institutional capacity.
In this years research we once again focused on information provided by state budget laws regarding
the amount of ICMS sales tax revenue that state governments expect to set aside to attract investments.
Although five states still do not publish any information on these tax breaks, all states offer investment
incentives. Financing from regional development banks and funds are other types of incentives. This
year six statesSo Paulo, Gois, Amazonas, Santa Catarina, Rio de Janeiro and Minas Geraistop the
list, offering the greatest number of incentives.
It should be noted that there is some controversy surrounding these tax breaks, as they form part of a
fiscal war between states. Federal authorities are trying to harmonise tax rates and better regulate
these tax breaks, which in theory have to be approved by the treasury, but this seldom happens, in
practice. A recent IDB study calculated that they amounted to over 15% of the ICMS tax revenue
(equivalent to 1.2% of GDP) and were twice the amount that states spent on infrastructure. Given the
poor conditions of infrastructure generally, this highlights the challenges facing state policymakers to
balance their development goals.
Human Resources
Despite tepid growth Brazils labour market remains tight, sustaining skills shortages particularly in
technical and engineering fields. Much like in 2011 and 2012, four states have very good human
resources and receive high scores in this categorySo Paulo, Rio de Janeiro, Minas Gerais and Paran.
This year, Gois and Amazonas have joined four other states, with good human resourcesRio Grande
do Sul, Santa Catarina, Distrito Federal and Esprito Santo. The remaining 17 states were scored as either
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moderate or needing improvement, owing primarily to their poor performance across the indicators
evaluating availability of skilled labour and the number of university graduates. To help address Brazils
human resources challenges, the government introduced Programa Nacional de Acesso ao Ensino
Tcnico e Emprego (Pronatec, the National Programme for Access to Technical Education and
Employment) in 2011, but the results have been mixed.
Infrastructure
Penetration rates of high-speed internet (greater than 2 megabytes per second) have more than tripled
since 2011, although rates vary considerably and every state still has room for improvement. The
Distrito Federal has the highest high-speed internet-penetration rate (15.6%) in the country (national
average 5.8%), followed by a group of eight southern, south-eastern and centre-western states.
Improvements have begun to materialize in most northern and north-eastern states, but a digital divide
persists.
With a few exceptions the quality of road infrastructure has deteriorated in several states, indicating
that wear and tear from rising road use has exceeded maintenance. Highways in 20 states are assessed
as being of low or very low quality. According to the Confederao Nacional do Transporte (CNT, the
national transport confederation) the quality of roads adds 25% to the operational costs faced by
transporters. Poor road quality also increases fuel consumption, harming the environment. Five states
scores deteriorated this year compared to the 2012 Index. Two states improved, but this reflected a
recovery to scores achieved in 2011, as they had slipped in 2012.
On the positive side, however, more than 80% of highways in So Paulo are rated as either of good or
very good quality while Paran, Rio de Janeiro and Rio Grande do Sul had at least 55% of their highways
rated as being of good or very good quality. These are states that have pioneered road concessions.
Under the governments Plano Nacional de Logstica Integrada (PNLI, the national integrated logistics
plan) several road concessions were auctioned last year and more are planned. This should have a
positive impact on the quality of infrastructure in the coming years.
Innovation
Much like in 2011 and 2012, So Paulo and Rio de Janeiro receive the highest scores for their overall
innovation environment, performing well across most indicators in this category. So Paulo stands out
as the only state having the top score for public sector R&D spending and number of patent requests.
But this year the state slipped as corporate R&D spending dropped slightly in GDP terms. The state of
Rio de Janeiro has been joined this year by the Distrito Federal as the two states with the highest scores
for corporate R&D spendingboth above 0.6% of GSP. Paran and Santa Catarina saw increases in
corporate R&D spending this year, putting them in the same spending band as Minas Gerais (between
0.4% of GSP and 0.49%). Except Amazonas and Rio Grande do Sul, company R&D spending in all other
states was below 0.3% of GSP.
The scores for the other indicators in this category were stable compared to last year as states struggled
to make tangible improvements in the innovation space. Cear and Esprito Santo achieved minor
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improvements in terms of patents requests, but these states still lag behind the leading six states.
Moreover, institutional weaknesses at the Instituto Nacional da Propriedade Industrial (INPI, the
national patents registry office) have increased approval times for these patent requests. The average
approval time has risen to 10 years, four times as long as in the US.
Sustainability
In 2011, 15 states already had specific climate change legislations that touched upon the issues of
emission reduction and climate change adaptation. By 2014, this number increased to 16 states. A
similar trend is seen for renewable energy themed measures, with five states adopting new laws
favouring wind and solar power. This increased importance in climate change can be traced to two
federal measures approved in 2009: the national policy on climate change (law number 12.187) and the
national fund for climate change (law number 12.114).
It is important to note that some states such as Rondnia tackled the two themes with one measure
(climate change and biodiversity together in the same law). Sustainable tourism has also received more
attention, with Amap and Tocantins adopting new laws encouraging the practice in their states.
Few states actually provide fiscal incentives or tax breaks for environmental purposes. The same
situation continues in 2014 with the ICMS Ecolgico (Green VAT)the tax revenue sharing scheme
leading the way. Other types of environmental protection and conservation incentives also stem from
the ICMS (Imposto sobre Operaes relativas Circulao de Mercadorias e Servios, a value-added tax
on goods and services) and climate change laws, notably the payment for environmental services, which
has been adopted most recently by Santa Catarina and Paran.
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Scoring Criteria and Categories
The Brazil State-Level Business Environment Index is a dynamic scoring model of 26 indicators across
eight categories. The model measures the current state of the business operating environment across 26
states and the Distrito Federal. The overall score (0100) for states in the index is a weighted average of
the eight categories, where each is scored on a scale of 0 to 100, where 100=the most favourable
business operating environment conditions. Each category is normalised and weighted based on sums of
underlying indicators.
The eight categories of the index are: Political Environment (which comprises four indicators: Political
Stability, Corruption, Bureaucracy and Security Conditions; Economic Environment (which comprises
four indicators: Market Size, Market Growth, Average Per Capita Income and Income Disparity); Tax and
Regulatory Regime (which comprises two indicators: Consistency of Tax System and Opening a
Business); Policy towards Foreign Investment (which comprises two indicators: Incentives to Invest and
Policy towards Foreign Capital); Human Resources (which comprises three indicators: Availability of
Skilled Labour, Labour Productivity and University Graduates); Infrastructure (which comprises two
indicators: Quality of the Telecom Network and Quality of the Road Network); Innovation (which
comprises five indicators: Public R&D Expenditure, Private R&D Expenditure, Presence of R&D
Infrastructure, Fiscal Incentives for R&D, and Patent Requests); and Sustainability (which comprises four
indicators: State Environmental Plan/Strategy, Fiscal Incentives for Sustainability, Environmental
Regulator and Quality of Environmental Legislation).
The categories and indicators are:
1 Political Environment 5 Human Resources
1.1 Political Stability 5.1 Availability of Skilled Labour
1.2 Corruption 5.2 Labour Productivity
1.3 Bureaucracy 5.3 University Graduates
1.4 Security Conditions 6 Infrastructure
2 Economic Environment 6.1 Quality of the Telecom Network
2.1 Market Size 6.2 Quality of the Road Network
2.2 Market Growth 7 Innovation
2.3 Average Per Capita Income 7.1 Public R&D Expenditure
2.4 Income Disparity 7.2 Private R&D Expenditure
3 Tax and Regulatory Regime 7.3 Presence of R&D Infrastructure
3.1 Consistency of Tax System 7.4 Fiscal Incentives for R&D
3.2 Opening a Business 7.5 Patent Requests
4 Policy towards Foreign Investment 8 Sustainability
4.1 Incentives to Invest 8.1 State Environmental Plan/Strategy
4.2 Policy towards Foreign Capital 8.2 Fiscal Incentives for Sustainability
8.3 Environmental Regulator
8.4 Quality of Environmental Legislation

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Methodology
a. General
The Brazil State-Level Business Environment Index is comprised of categories that are related to the
attractiveness of the business operating environment in each state.
To score the indicators for the Index, the research team gathered data from the following sources:
Primary legal texts and legal reports
Academic and government publications
Websites of governmental authorities, international organisations and non-governmental
organisations
Business organisations and business schools
Interviews with experts, as needed
Local and international news media reports
b. Data Modelling
Data were collected across 26 indicators for each state. The indicators range from rankings across three
(0,1,2) to five possible levels (0,4). Each indicator is constructed such that a higher value associates with
a more favourable business operating environment. For example, for the Corruption indicator, a state
with very high corruption is assigned a level of 0 whereas a state with very little corruption is assigned a
value of 4.
The scoring scheme for each component of the Brazil State-Level Business Environment Index is listed
below:
1 Political Environment Rating 0-100 (100=best)
1.1 Political Stability Rating 0-3 (3=best)
1.2 Corruption Rating 0-4 (4=best)
1.3 Bureaucracy Rating 0-4 (4=best)
1.4 Security conditions Rating 0-4 (4=best)
2 Economic Environment Rating 0-100 (100=best)
2.1 Market Size Rating 0-4 (4=best)
2.2 Market Growth Rating 0-4 (4=best)
2.3 Average Per Capita Income Rating 0-4 (4=best)
2.4 Income Disparity Rating 0-4 (4=best)
3 Tax and Regulatory Regime Rating 0-100 (100=best)
3.1 Consistency of Tax System Rating 0-4 (4=best)
3.2 Opening a Business Rating 0-4 (4=best)
4 Policy towards Foreign Investment Rating 0-100 (100=best)
4.1 Incentives to Invest Rating 0-4 (4=best)
4.2 Policy towards Foreign Capital Rating 0-3 (3=best)
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5 Human Resources Rating 0-100 (100=best)
5.1 Availability of Skilled Labour Rating 0-4 (4=best)
5.2 Labour Productivity Rating 0-4 (4=best)
5.3 University Graduates Rating 0-4 (4=best)
6 Infrastructure Rating 0-100 (100=best)
6.1 Quality of the Telecom Network Rating 0-4 (4=best)
6.2 Quality of the Road Network Rating 0-4 (4=best)
7 Innovation Rating 0-100 (100=best)
7.1 Public R&D Expenditure Rating 0-4 (4=best)
7.2 Private R&D Expenditure Rating 0-4 (4=best)
7.3 Presence of R&D Infrastructure Rating 0-4 (4=best)
7.4 Fiscal Incentives for R&D Rating 0-2 (2=best)
7.5 Patent Requests Rating 0-4 (4=best)
8 Sustainability Rating 0-100 (100=best)
8.1 State Environmental Plan/Strategy Rating 0-4 (4=best)
8.2 Fiscal Incentives for Sustainability Rating 0-2 (2=best)
8.3 Environmental Regulator Rating 0-3 (3=best)
8.4 Quality of Environmental Legislation Rating 0-4 (4=best)
c. Calculating the Index
Modelling the indicators and categories in the index results in overall scores of 0-100 for each state,
where 100 represents the most favourable business environment conditions and 0 the least favourable:
Category score = weighted individual indicators.
Indicator scores are normalised on the basis of:
x = (x - Min(x)) / (Max(x) - Min(x)),
where Min(x) and Max(x) are, respectively, the lowest and highest values in the 27 states for any given
indicator. The normalised value is then transformed to a 0-100 score to make it directly comparable with
other indicators.
The overall score for each country is the weighted sum of the category scores, as determined by the
weighting profile:
Overall score = weighted category scores.
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Indicator definitions and construction
1) Political Environment
This category comprises four indicators: Political Stability, Corruption, Bureaucracy and Security
Conditions.
Indicator
Indicator definitions and construction
Political Environment

1.1 Political Stability This indicator looks at the level of political stability
in terms of the ability of the state executive to
advance legislation through the state legislature.
Assessment is based on the following criteria: the
level of public support for the state governor;
number of seats that the governing party
maintains in the state legislature; and the strength
of political alliances.

Scoring:
3= Strong (governor enjoys a stable political
environment)
2= Moderate (political environment is stable)
1= Low (governor does not have a strong majority
and depends on alliances)
0= Very low (governor has no formal majority and
has to make case-by-case agreements with other
parties to pass legislation)

Scoring notes:
Pre- and post-election political alliances have a
significant impact on the overall level of political
stability. Post-election, state legislators oftentimes
support the incumbent governor in an effort to
promote their own political interests. State
legislators joining a ruling alliance post-election
are more likely to withdraw their support in the
event that the governor suffers from waning
popularity or when the governors term is drawing
to an end (particularly in the event that the
governor is unable to stand for re-election).
1.2 Corruption This indicator looks at the pervasiveness of
corruption among public officials. The assessment
considers the number of corruption investigations
and systems in place to prevent corrupt practices.

Scoring:
4= Very low level of corruption
3= Low level of corruption
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2= Moderate level of corruption
1= High level of corruption
0= Very high level of corruption

Scoring notes:
The EIU utilises academic and other sources in
order to assess this indicator. One of the primary
sources is a study entitled Government
corruption in Brazil: Construction of indicators and
analysis of corruption in Brazils states (A
corrupo governmental no Brasil: Construo de
indicadores e anlise da sua incidncia relativa nos
estados Brasileiros) by Jos Luis Serafini Boll,
formerly of the Catholic University of Rio Grande
do Sul. This study analyses a relatively small
number of audits, which often take an extended
period of time to complete, making annual
comparisons in regards to the level of corruption
difficult.

The EIU also incorporates analysis from a
publication entitled Integrity Systems in Brazilian
states (Sistemas de integridade nos estados
brasileiros) by Bruno Wilhelm Speck and Valeriano
Mendes Ferreira (2011).

Systems in place to prevent corruption are also
considered in the evaluation of this indicator. In
those states where rigorous systems are in place
to prevent and combat graft, perceptions of
corruption tend to be as high as in those states
with less rigorous systems in place. This reflects
the fact that effective systems often lead to the
discovery of corrupt practices, which tend to be
heavily publicised in the media.
1.3 Bureaucracy This indicator looks at the quality of the
bureaucracy. Assessment is based on the level of
institutional capacity and the bureaucracys ability
to implement policies.

Scoring:
4= Very high quality of the bureaucracy
3= High quality of the bureaucracy
2= Moderate quality of the bureaucracy
1= Low quality of the bureaucracy
0= Very low quality of the bureaucracy

Scoring notes:
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A multifaceted approach is utilised to measure the
quality of each states bureaucracy. Research
focuses on management of state budgets,
including spending on the provision of public
goods and services. The EIU also looks at the
quality of the provision of public goods over time
and institutional development.
1.4 Security conditions This indicator looks at whether violent crime is
likely to pose a significant problem for business.
Assessment is based on the number of homicides
per 100,000 people.

Scoring:
4 = Fewer than 9.99 homicides per 100,000 people
3 = 10-19.99 homicides per 100,000 people
2 = 20-24.99 homicides per 100,000 people
1 = 25-34.99 homicides per 100,000 people
0 = 35 or more homicides per 100,000 people

Scoring notes:
Data on homicide rates was taken from the
Instituto Sangari report Mapa da violncia 2013:
Homicdios e Juventude no Brasil by Julio Jacobo
Waiselfisz.

2) Economic Environment
This category comprises four indicators: Market size, Market growth, Average per Capita Income and
Income Disparity.
Indicator
Indicator definitions and construction
Economic Environment

2.1 Market Size The Economist Intelligence Unit estimates of Gross
State Product for 2013.

Scoring:
4= Greater than R500bn
3= R150-499bn
2= R50-149bn
1= R15-49bn
0= Less than R15bn

Scoring notes:
Estimates are based on data from the Instituto
Brasileiro de Geografia e Estatstica (IBGE, the
national statistics office) and Banco Central do
Brasil (BCB, the central bank).
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2.2 Market Growth Economist Intelligence Unit estimates of annual
average percentage change, year on year, of Gross
State Product for 2012-2013.

Scoring:
4= Greater than 5% growth
3= 4-4.99%
2= 3-3.99%
1= 2-2.99%
0= Less than 2%

Scoring notes:
Estimates are based on data from the Instituto
Brasileiro de Geografia e Estatstica (IBGE, the
national statistics office) and Banco Central do
Brasil (BCB, the central bank).
2.3 Average Per Capita Income Annual average per capita income by state in
2013.

Scoring:
4=Greater than R21,000
3=R18,000-20,999
2=R15,000-17,999
1=R12,000-14,999
0=Less than R12,000

Scoring notes:
Data is taken from the Instituto Brasileiro de
Geografia e Estatstica (IBGE, the national statistics
office) and reflects average monthly income of all
employed persons 15 years or older. The EIU
multiplies per capita monthly income by 12 to
derive annual average per capita income by state.
2.4 Income Disparity This indicator evaluates the equality of income
distribution within a state. This is measured by a
Gini coefficient, which is scored on a 0-1 scale,
where zero indicates perfect equality in income
distribution. The score is displayed as a
percentage, where 1=100%. The higher the value
of the Gini coefficient, the more income disparity
there is in the state.

Scoring:
4= Less than 30
3= 30-39
2= 40-49
1= 50-59
0= Greater than 60
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Scoring notes:
Data is taken from the 2011 Pesquisa Nacional por
Amostra de Domiclios (PNAD, a national
household survey) by the Instituto Brasileiro de
Geografia e Estatstica (IBGE, the national statistics
office). Scoring reflects the Gini index, which
captures the distribution of monthly income from
all jobs held by individuals aged 10 years or older.

3) Tax and Regulatory Regime
This category is comprised of two indicators: Consistency of Tax System and Opening a Business.
Indicator

Tax and Regulatory Regime

3.1 Consistency of Tax System This indicator assesses the consistency and
stability of the local tax system. Research
considers the complexity of the tax system and the
volatility in the number tax norms issued by state.

Scoring:
4= Tax system is very stable and clear
3= Tax system is stable and clear
2= Tax system is somewhat stable and clear
1= Tax system is generally not stable and/or is
complex
0= Tax system is very unstable and complex

Scoring notes:
According to the Instituto Brasileiro de
Planejamento Tributrio (IBPT, the Brazilian
Institute of Tax Planning), six tax norms are
published in Brazil per business hour, which is
equivalent to 275,000 in the past 23 years (at
federal, state and municipal levels). At the state
level, it amounts to 85,517 over the course of the
past 23 years. Owing to the complexity of the data,
and the difficulty in obtaining reliable and up-to-
date metrics, analysis is based on primary and
secondary research. This research incorporates
data from Thomson ReutersFISCOSoft on the
number of state tax norms issued monthly. The
EIU estimates the average monthly change in tax
norms per year. The assessment also considers
fluctuations in tax income by state, based on ICMS
revenue data as a percentage of GSP.
17
3.2 Opening a Business This indicator looks at the average number of days
it takes to open a new business.

Scoring:
4= Fewer than 10 days to open a business
3= 10-14 days
2= 15-19 days
1= 20-29 days
0= 30 days or more

Scoring notes:
Assessment is based on data from each states
Junta Comercial (JC, the Board of Trade, a business
registry). Analysis also considers the results from a
survey conducted by the Departamento Nacional
de Registro do Comrcio (DNRC, the national
department for registering businesses). The survey
was based on the World Bank criteria for opening
a business, and covers the opening of businesses
at the JC and registry with the fire service and
other associated organisations.

4) Policy towards Foreign Investment
This category is comprised of two indicators: Incentives to Invest and Policy towards Foreign Capital.
Indicator
Indicator definitions and construction
Policy towards Foreign Investment

4.1 Incentives to Invest This indicator looks at the number and scope of
investment incentives. These incentives include
tax breaks from the Imposto sobre Operaes
relativas Circulao de Mercadorias e Servios
(ICMS, a state tax for goods and services) and
financial assistance from state agencies.

Scoring:
4= Very large number of incentives offered and a
high level of tax breaks and financial assistance
3= Large number of incentives offered across
numerous industries; considerable tax breaks;
and/or financial assistance
2= Numerous incentives that are broad in scope
are offered across industries
1= Some incentives are offered
0= Very limited incentives are offered: incentives
are limited in terms of industry or scope

18
Scoring notes:
Assessment looks at the legislative framework in
each state, focusing on the key investment
incentive laws. Analysis covers information on
investment incentive legislation. States typically do
not publish statistics on the value of investment
incentives.

The EIU also incorporates analysis of pre-
announced tax breaks reported in 2012-14 state
budget laws. The level of development of each
state and budgetary resources (that could
potentially be used for spending on incentives) is
also taken into consideration. State budget data
are available from the federal Ministry of Finance.
4.2 Policy towards Foreign Capital This indicator looks at state efforts to attract
foreign investment. The assessment is based on
institutional capacity. In particular, this research
focuses on whether states have a dedicated
investment promotion agency or another agency
within the state government with a similar remit.

Scoring:
3= Very encouraging to foreign investment
2= Encouraging to foreign investment
1= Some efforts to encourage foreign investment
0= Few efforts to encourage investment

Scoring notes:
This research focuses on whether states have a
dedicated investment promotion agency (IPA), and
the sophistication of the agency. A state that does
not have a dedicated IPA, and instead allocates
investment promotion responsibilities to other
agencies or ministries does not receive the highest
score. Assessment also looks at state agencies
relationship with Apex, Brazils national trade and
investment promotion agency. Apex has worked
with a number of state governments and IPAs.
Evaluation of sophistication of services is based on
a review of available services and information on
IPA websites.

5) Human Resources
This category is comprised of three indicators: Availability of Skilled Labour, Labour Productivity and
University Graduates.
19
Indicator
Indicator definitions and construction
Human Resources

5.1 Availability of Skilled Labour This indicator looks at the availability of skilled
labour. The assessment is based on data obtained
from the Ministry of Labour and the Instituto de
Pesquisa Econmica Aplicada (IPEA, the Institute
for Applied Economic Research).

Scoring:
4= Very good availability
3= Good availability
2= Moderate availability
1= Limited availability
0= Very limited availability

Scoring notes:
Scores are based on a number of state-level and
national surveys. A nation-wide survey is
conducted by the IPEA and looks at state and
sector-level demand for qualified labour. The IPEA
defines qualified labour as individuals with work
experience in a specific sector, and/or individuals
with above average years of schooling. As a
result, individuals with technical or university
degrees as well as those with at least 9-10 years of
schooling are considered to be skilled for this
research. State-level surveys include those
undertaken by Fundaco Dom Cabral (FDC, a
business school), the Confederao Nacional de
Indstrias (CNI, National Confederation of
Industry).
5.2 Labour Productivity This indicator estimates the average Gross State
Product produced by an employed adult by state.

Scoring:
4= Greater than R50,000
3= R40,000-49,999
2= R30,000-39,999
1= R20,000-29,999
0= Less than R20,000

Scoring notes:
Calculations utilise 2012 real GSP estimates for
each state and data for employed individuals aged
15 or older taken from the 2012 Pesquisa Nacional
por Amostra de Domiclios (PNAD, National Survey
of Domestic Samples) by the Instituto Brasileiro de
20
Geografia e Estatstica (IBGE, the national statistics
office).
5.3 University Graduates This indicator looks at the total number of
students graduating from public and private
higher-education institutions (municipal, state and
federal) per year by state.

Scoring:
4= 50,000 or more graduates
3= 30,000-49,999 graduates
2= 15,000-29,999 graduates
1= 5,000-14,999 graduates
0= Fewer than 5,000 graduates

Scoring notes:
Data is from Instituto Nacional de Estudos e
Pesquisas Educacionais (INEP, the National
Institute for Education Studies and Research), a
federal institution with links to the Ministry of
Education, and reflects the total number of
graduates from public and private federal-, state-
and municipal-governed institutions by state in
2011.

6) Infrastructure
This category is comprised of two indicators: Quality of the Telecom Network and Quality of the Road
Network.
Indicator
Indicator definitions and construction
Infrastructure

6.1 Quality of the Telecom Network This indicator considers the state of development
of mobile and fixed broadband connections and
the extent of the mobile telecommunications
network in each state. Assessment covers mobile
broadband subscriptions by state; the number of
high-speed fixed-line broadband subscriptions (at
least 2 Mbps); as well as the number of mobile
phone radio transmitters (indicating mobile phone
coverage capacity).

Scoring:
4= Very high quality
3= High quality
2= Moderate quality
1= Low quality
0= Very low quality
21

Scoring notes:
Assessment focuses on the number of high-speed
fixed-line broadband subscriptions (at least 2
Mbps), owing to the assumption that high-speed
Internet is crucial to business operations. The
primary source for telecommunications data is the
Agncia Nacional de Telecomunicaes (Anatel,
the National Telecommunications Agency, the
telecoms regulator).
6.2 Quality of the Road Network This indicator looks at the quality of the highways
in each state. The results are based on the findings
of an annual survey undertaken by the
Confederao Nacional do Transporte (CNT, the
National Transport Confederation).

Scoring:
4= Very high quality (at least 75% of roads are
good or very good quality)
3= High quality (60-74.9% of roads are good or
very good quality)
2= Moderate quality (45-59.9% of roads are good
or very good quality)
1= Low quality (30-44.9% of roads are good or very
good quality)
0= Very low quality (less than 30% of roads are
good or very good quality)

Scoring notes:
Analysis is based on data from the Pesquisa de
Rodovias (Highway Research) 2011 report
produced by the Confederao Nacional do
Transporte (CNT, National Transport
Confederation). Creation of a scoring scheme by
the EIU.

7) Innovation
This category is comprised of five indicators: Public R&D Expenditure, Private R&D Expenditure,
Presence of R&D Infrastructure, Fiscal Incentives for R&D, and Patent Requests.
Indicator
Indicator definitions and construction
Innovation

7.1 Public R&D Expenditure This indicator looks at state investment in research
and development (R&D) as a percentage of
estimated Gross State Product in 2011.

22
Scoring:
4= Greater than 0.30%
3= 0.20-0.29%
2= 0.10-0.19%
1= 0.02-0.09%
0= Less than 0.02%

Scoring notes:
Public R&D expenditure figures are published by
the Ministrio da Cincia, Tecnologia e Inovao
(MCT, the Ministry of Science, Technology and
Innovation). The EIU divides state-level
expenditure data by 2011 GSP estimates to
ascertain public R&D expenditure as a percentage
of GSP. R&D spending excludes spending on
scientific and technical activities related to R&D.
7.2 Private R&D Expenditure This indicator looks at private sector investment in
research and development (R&D) as a percentage
of Gross State Product in 2011.

Scoring:
4= Greater than 0.60%
3= 0.50-0.59%
2= 0.40-0.49%
1= 0.30-0.39%
0= Less than 0.30%

Scoring notes:
Private R&D expenditure figures are taken from
the Pesquisa de Inovao (PINTEC, the Brazilian
Technological Innovation Survey). The EIU uses a
simple calculationdividing state-level
expenditure data by 2011 GSPto ascertain public
R&D expenditure as a percentage of GSP. The 2011
GSP figures are produced by the Instituto
Brasileiro de Geografia e Estatstica (IBGE, the
national statistics office). State-level private R&D
data is only available for 15 states: Amazonas;
Bahia; Cear; Distrito Federal; Esprito Santo;
Gois; Mato Grosso; Minas Gerais; Par; Paran;
Pernambuco; Rio de Janeiro; Rio Grande do Sul;
Santa Catarina; and So Paulo.

For all other states, the EIU assumed that private
R&D expenditure was less than 0.30% of GSP.
State-level totals include spending by state-owned
enterprises, but exclude spending by firms that sell
their R&D services.
23
7.3 Presence of R&D Infrastructure This indicator looks at the presence of research
and development (R&D) infrastructure in each
state. Assessment includes the number of (non-
university) R&D public and private centres; the
number of universities with R&D activities; and the
number of individuals with a PhD in the fields of
exact (mathematics and physics) and earth
sciences, engineering, agriculture, biology and
health.

Scoring:
4= Very strong presence of R&D infrastructure
3= Strong presence of R&D infrastructure
2= Moderate presence of R&D infrastructure
1= Weak presence of R&D infrastructure
0= Very weak or no presence of R&D infrastructure

Scoring notes:
The number of (non-university) R&D public and
private centres is obtained from the results of a
study undertaken by the Centro de Gesto e
Estudos Estratgicos (CGEE, Center for Strategic
Studies and Management in Science, Technology
and Innovation) that provides information on
approximately 200 R&D organisations in Brazil. The
number of universities with R&D activities was
estimated using data from the Diretrio de Grupos
de Pesquisa (Directory of Research Groups), which
is managed by the Conselho Nacional de
Desenvolvimento Cientfico e Tecnolgico (CNPq,
National Counsel of Technological and Scientific
Development). The assessment also considers data
from CNPq on the number of individuals with a
Ph.D. in the fields of exact and earth sciences,
engineering, agriculture, biology and health.
7.4 Fiscal Incentives for R&D This indicator looks at the fiscal incentives
available to private or public sector entities for
spending on research and development (R&D).
Assessment considers the enabling framework for
incentives (i.e. state innovation incentive laws).

Scoring:
2= Numerous fiscal incentives exist;
1= Some fiscal incentives are available
0= No fiscal incentives are available

Scoring notes:
State innovation incentive laws are published by
24
the Ministrio da Cincia, Tecnologia e Inovao
(MCT, the Ministry of Science, Technology and
Innovation).
7.5 Patent Requests This indicator looks at the number of patents
requested by entities in each state annually.

Scoring:
4= More than 2,000 patent requests
3= 500-1,999 patent requests
2= 100-499 patent requests
1= 20-99 patent requests
0= Fewer than 20 patent requests

Scoring notes:
The data for patent requests is from the Instituto
Nacional da Propriedade Industrial (INPI, the
National Institute for Industrial Property).
Assessment is based on patent requests for 2012.

8) Sustainability
This category is comprised of four indicators: State Environmental Plan/Strategy, Fiscal Incentives for
Sustainability, Environmental Regulator and Quality of Environmental Legislation.
Indicator
Indicator definitions and construction
Sustainability

8.1 State Environmental Plan/Strategy This indicator looks at states' environmental plans
and strategies, which illustrate a state's
commitment to environmental protection.
Assessment is based on whether key
environmental areas are mentioned by the state's
environmental policies and pieces of legislation
that set the guidelines for the states
environmental protection programmes and
initiatives. These areas are: air quality, water
quality, energy, land use, biodiversity and forestry.

Scoring:
4= Six environmental themes are covered in the
state's plan/strategy for the environment
3= Five environmental themes are covered in the
state's plan/strategy for the environment
2= Four environmental themes are covered in the
state's plan/strategy for the environment
1= Three environmental themes are covered in the
state's plan/strategy for the environment
0= Fewer than three environmental themes are
25
covered in the state's plan/strategy for the
environment

Scoring Notes:
At a minimum, states environmental
policies/plans/strategies should include general
environmental themes that are common to all the
states. The policy/plan/strategy should also reflect
each states unique natural resources endowment.
Oftentimes, a states environmental strategy is
included in its environmental legislation.
8.2 Fiscal Incentives for Sustainability This indicator looks at what states do to encourage
businesses to undertake sustainability measures.

Scoring:
2=Numerous fiscal incentives exist
1= Some fiscal incentives are available
0= No fiscal incentives are available

Scoring notes:
Few states provide fiscal incentives to encourage
sustainable environmental practices by businesses.
The chief example of a fiscal incentive is the tax
revenue sharing scheme called ICMS Ecolgico
(Green VAT). The aim of the scheme is to
compensate municipal governments for the loss of
potential tax revenue from the designation of
protected areas (mainly by the state and federal
government) and also to encourage better
management of existing protected areas.
Assessment is largely based on state decrees,
environmental legislation and state constitutions.
The Taxa de Controle e Fiscalizao Ambiental
(TFCA, the tax on the environmental control and
regulation) is a tax applied by all states as a fee
and does not constitute an incentive or a tax
break. As such, it was not included in the
assessment.
8.3 Environmental Regulator The existence of a dedicated institution(s) to set
and enforce regulations increases the likelihood
that environmental regulations will be
implemented and actively enforced.

Scoring:
3= Organisation exists that sets and enforces
regulations and measures to ensure compliance
and enforcement are clearly defined
2= Organisation exists that sets AND enforces
26
regulations, but measures to ensure compliance
and enforcement are unclear or incomplete
1= Organisation exists that sets regulations;
however, no state-level organisation is mandated
to ensure compliance and enforce the regulations
0= No such organisation exists to set and/or
enforce regulations

Scoring notes:
The research focuses on institutional and
regulatory capacity and transparency. Assessment
considers the comprehensiveness of state
legislation in regards to environmental monitoring
and in the implementation of fines/punitive
actions for environmental misconduct. The
research also focuses on the degree of
transparency of the regulatory bodies with respect
to licensing, fines and types of environmental
crime/misconduct. The public accessibility of the
institution is also considered. Individuals should be
able to report environmental issues to the
regulatory body.
8.4 Quality of Environmental Legislation The implementation of environmental measures is
rooted in environmental legislation. This indicator
looks at the environmental legislation covering 17
key themes by state.

Scoring:
4= Very high quality (more than 14 themes
covered)
3= High quality (12-14 themes covered)
2= Moderate quality (9-11 themes covered)
1= Low quality (6-8 themes covered)
0= Very low quality (fewer than six themes
covered)

Scoring notes:
Assessment is based on the comprehensiveness of
state legislation. This indicator looked at the
federal and national legislation and compared
them to the states legislation while allowing for
the inclusion of each states specific pool of
natural resources and environmental issues.