Institutions, Technological and Commercial Innovations in the Brazilian Ethanol Industry

Publication Type:

Conference Paper


Gerpisa colloquium, Paris (2011)


biofuels, Brazil, Ethanol, Flex Engine, governance structure, Innovation adoption, Institutional Change, Technological Innovation


Institutions, Technological and Commercial Innovations in the Brazilian Ethanol Industry

In Brazil one of the most promising sources of renewable energy is ethanol and, more recently, biodiesel. Biofuels could bring not only significant environmental, social and economic advantages, but also contributes to innovation process such as flex fuel engines for cars and motorcycles. This paper investigates the Brazilian sugar cane governance structure and how the institutional environment influences the innovation process in the automotive sector.

Institutional demand for sustainable power has pushed the development of more efficient systems and technologies and also a diversification of supply sources, especially of clean and renewable energies. Several countries are seeking to reduce the use of these fuels, either by replacement of the product or by adding other fuels to decrease the polluting. This paper focuses on the Brazilian experience in structure this sustainable strategy and how the innovation was spread to the automotive industry and ethanol chain stimulated by the institutional governance structure.

Methodology was based on in-depth interviews with specialists and managers of the sector and in secondary data collected from other researches, associations and public and private organizations.

Results show how the innovation process was structured, which agents coordinate the knowledge development and flow, and how information and skills spread throughout the automotive sector.

In the one hand, in ethanol production the governance structure was based in a strong relationship between agriculture and industry that solves the problem of coordination and gives the supports for a rapid grow in the scale production. The sugar cane industry uses this economy of scale to invest in agricultural and industry innovations.

Some research associations are owned by ethanol organisations; nevertheless government itself still invests in promoting innovation, mainly in the agricultural sector. UNICA, the largest Brazilian (private) association of ethanol organisations, contributes significantly to the governance structure of the industry innovation, supporting also the communication and promotion of the product in other countries.

In the other hand, innovation in the automotive sector emerges as a result of a combination of technological innovation in the suppliers sphere with institutional change in the economical and political environment, which pushed the market as a hole to adopt the “flex” technology. With a device installed in the car Brazilian consumers could choose which fuel combination (petrol and ethanol) is more attractive regarding their values perceptions (Amatucci; Spers, 2010). The analysis of the flex fuel engine technology adoption by the Brazilian automakers brings to light a clear process that has a parallel with the California experience.

In the technological development phase, suppliers had worked alone without support neither from the industry or the government. In Brazil, the Brazilian sections of Bosch (since 1988) and Magneti Marelli (since the middle 1990s) worked in prototypes of the flex fuel, granting lower costs to the expensive sensor formerly necessary to balance the fuel mixture. With this kind of governance structure the lack of support was so dramatic that the suppliers had to buy their cars in the market in order to develop and test the prototypes.

The innovations were presented to the major Brazilian sections of the global automakers, but it wouldn’t evolve to a market solution yet. Apparently the automakers and the consumer market were still resentful of the past experience with pure alcohol engines, which sales relied on governmental tax incentives, but suffered from ethanol supply shortages, caused by the incipient development of the ethanol industry.

It was not until in an IPT (Technological Research Institute) from University of Sao Paulo event, where Bosh and Magneti Marelli had the opportunity to expose their technology to the industry and to govern representatives that the situation was changed. With the entrance of IPT in the game the new governance structure of innovation got the govern attention, and the incentives of the pure ethanol engine were granted to the (future) flex fuel engines. Only then the automakers fully adopted the innovation.

The process early in California had followed the same path. In the beginning of the 1980s, the American section of Robert Bosch developed a somewhat expensive but effective version of the flex fuel engine which didn’t take off until CARB (California Air Resources Board) manage to getting approval from the USA senate of the Alternative Fuels Act, and then American auto industry adopted the innovation, leading to an expressive number of flex engines sold in the American market even without enough ethanol available for all the cars.

These similarities suggest a model of evolution from the technological innovation to market adoption with institutional changes acting as the governance structure of the process. Figure 1 below shows such model:

Basic and Independent Technological Developments (prototypes) ->
-> Consumers, Public and Private awareness and path dependence of the social benefits of the innovation -> Institutional Changes:
Efficiente Governance Structure of Innovations in the ethanol and automotive sectors-> Economies of Scale and Market
adoption of the innovation

Figure 1 – Institutional changes and governance structure mediating the market adoption of a technological innovation.

In conclusion the institutional changes in the case of ethanol fuel in Brazil provides a stable governance structure to mediate the development of all phases of the production chain from sugarcane to the automobile; and economic agents such as UNICA and Brazilian government are striving for international institutional changes in order to extend the production chain to a global one.

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