Is there a causal relation between ethanol innovation and the market characteristics of fuels in Brazil?

This study examines whether a causal relation exists between ethanol related innovation and fuel market variables in Brazil. Patent counts were used as proxy for innovation and assessed market variables include ethanol consumption and price, and gasoline price. The study refers to the period 1975–2008. Empirical evidence is formulated with an Autoregressive Distributed Lag (ARDL) model for cointegration and the causality is examined with a multivariate Granger causality test. The results demonstrate a potential causal relation between ethanol innovation and ethanol consumption, evidencing a unidirectional relation from ethanol consumption to patent registers in the studied period. Such a relation indicates that increments in ethanol consumption can potentially stimulate innovation in the sector. Moreover, the ethanol price and the cross-effect of gasoline price have an indirect effect on ethanol innovation. Several questions are raised regarding the yet to be determined factors driving innovation in the sector. Further studies focused on nonmarket aspects, including policy factors, subsidies and international technology spillovers, would potentially elucidate several unanswered questions concerning ethanol innovation in Brazil.