The new model would be a

The new model would be a radical alternative to the developmentalism responsible for the limited gaba receptors derived from excessive protectionism and state regulations that ensured high profit margins despite the low productivity (Franco, 1998). Inflation stabilization due to Plano Real (‘Real Plan’): a monetary, fiscal and exchange rate reform which complemented the frame by trying to gear the economy towards virtuous macroeconomic balance and growth. According to the official rhetoric, the new incentive regime aimed to move the Brazilian economy from an uncertain environment, which was closely regulated by the State, to a more predictable and competitive environment, less State orientated based on new fundamentals of economy—exchange and interest rates, real wages, relative prices—to induce the improvement in business expectations and “animal spirits”. The investments done by the companies aimed at reducing costs with the cheapening of highly technologically sophisticated imported capital goods, thus seeking rationalization. The industrial restructuring process, mainly in leading companies, was geared to organizational rationalization and modernization. It led to job reduction, quality improvement, costs reduction and increased productivity by modernized plants. Productive restructuring main features were: de-verticalization, specialization and flexibilization, all based on conservative business strategies such as the abandonment of high technology product lines in favor of more standardized ones, reduced levels of vertical integration consubstantiated in the replacement of the local production of parts, spare parts and components by imported ones, i.e.: a reversed substitution import process, a phenomenon known as “downgrading”. In parallel, processes were reorganized and adjusted. There were plant layout changes, reduction in hierarchies and in organizational levels, as well as new sectoral and intra-sectoral specialization strategies to achieve productive gains, allocative efficiency, and greater external integration within the Brazilian industry. It resulted in reduced inter-sectoral relations in the Brazilian economy and disrupted in a growth pattern based on the densification of departmental relationships. Companies also neglected oriented efforts to develop new products, R&Ds and brandings. The structural changes led to the modernization of productive capability in the largest companies and of the economic structure, but they did not lead to increase in innovation capability at the micro-level or in the economy as a whole (Carneiro, 2002; Miranda, 1996). As for the institutional changes in the MT industry, the trade reform and the openness process in the first half of the 1990s eliminated non-tariff restrictions (National Similar Product Law) and sought to reduce tariffs and their dispersion in the importation of capital goods. In practice, according to the ex-tariff regime, machines could be imported with zero tariff rates if the capital goods buyers reported that there were no national similar products. In 1990, the rate of conventional MT was of 40%, and of MT/CNC, 65%. In 1996, the rate applicable to all kinds of machines was of 17%, but it increased to 20% in 1997, due to the Asian crisis. In 2001, the rate was reduced to 14%, due to the convergence process established among MERCOSUR countries (Chudnovsky and Erber, 1999, p. 589). The automotive regime which was used as sector policy also had implications in the MT sector, because the automotive complex constitutes the main MT market, especially among more complex products, according to a technological point of view (p. 593). The regime reduced MT tariffs (2%), and at the same time, it forced automakers and component manufacturers to keep the ratio between local purchases and capital goods imports, mainly MT. Among the expected effects of the opening, there was the fact that it would allow the importation of parts, spare parts, electronic and mechanical components, which would enable enhancing the quality and performance of MT/CNC as well as the decrease in their production costs and prices. However, “The tariff levels applied to important MT components such as bearings, engines and CNC units are equal to or higher than those applied to the final product, thereby lowering the effective protection given to the MT production” […] “Differences between national and international taxes reduce competitiveness of local machines against their foreign competitors” […] “The highest financing cost for national MT purchasing favors the imports” (p. 590). Accordingly, the openness exposed the sector to a systemically set competition. In the early 1990s, “the economic crisis has reduced the availability of funding, increased interest rates, increased tax burdens and the exchange rates suffered great instability with overvaluation trends” (Erber and Vermulm, 1993, p. 198). These systemic conditions remained in the 1990s and 2000s and held a lower or higher degree of intensity due to times of exchange rate depreciation, such as the period between 1999 and 2003, and/or improved marketing conditions due to the decline in the Finame Leasing interest rate in 2005 and the increased demand between 2003 and 2008. However, throughout the period, real interest rates of funds borrowed in Brazil were much higher than the external ones, mostly due to the overvaluation of real effective exchange rates.