Brazil's public enterprises turned in impressive growth performances over the last two decades by amassing and deploying large amounts of labor and capital and absorbing new technologies. This chapter looks in more detail at how these various factors were combined and examines the economic and financial rate of return achieved on Brazil's substantial investment in public enterprises. What can be said about productivity in the state-owned firms? How profitable have these firms been? How does this productivity and profitability record compare with available evidence on the private sector in Brazil? With the record of public enterprises in other developing countries? These are the types of questions addressed here.

Production and productivity: a framework

In general, the factors determining productive capacity in an enterprise are summarized in a production function in which the rate of output is expressed as a function of a flow of inputs. In addition to capital and labor, determinants of output include natural resources, management skills, the scale of production, and so on.

Statistical representations of the production function commonly make explicit consideration of just two inputs: capital and labor. Both of these are usually assumed to be homogeneous. Increases in output are attributed in part to change in the quantity of either input. The changes in output not explained statistically by changes in factor usage are usually attributed to a “catch-all” category known as “technical progress” or the “residual.” Subsumed within such broad terms are many output determinants – economies of scale, innovation, and so on – which are more difficult to identify statistically, but nonetheless important in explaining increasing productivity.