Public-Private Institutions in Emerging Markets

Research by Rafael Corredoira

Government sponsored institutions (GSIs) in Argentina created a combination of new knowledge and interactive relationships for solving the wine industry’s product development problems.

Public-private institutions may be a helpful mechanism for other nations looking to upgrade faltering industries or develop burgeoning industries—in clean technology, for example, or alternate energy sources.

In 1990, Argentina’s wine exports were close to zero. By 2000, the country had captured 3 percent of the $14 billion global wine market. Rafael Corredoira, associate professor of marketing, examined the mechanisms put in place to encourage development in the wine industry in the neighboring wine-making provinces of Mendoza and San Juan, and the relationship between those mechanisms and the broader policy problems of development. Mendoza and San Juan account for 90 percent of wine production in Argentina. Both provinces started with similarly unproductive histories. But Mendoza became an industry leader, eventually producing 90 percent of Argentina’s wine exports, while San Juan lagged behind. Why?

The answer lies in the way the government of each province chose to encourage development. The province of Mendoza created government-sponsored institutions (GSI) to provide a variety of support services and resources to the wine-making value chain, such as hazard insurance, training, research and development, and export promotion. While the government of Mendoza provided some financing, GSIs created a setting to define problems and search for solutions at the industry level. The government of Mendoza stayed away from unilaterally setting the technical agenda or taking charge of finding the technical solutions. “The GSIs incorporated two rules that have unleashed the knowledge accumulated over years in these wine regions: GSIs must be inclusive, open to anyone in the industry willing to participate, and those who participate must contribute to problem identification and solutions,” says Corredoira. “Participants that are unable to contribute to the collective problem solving are sent to workshops to develop those skills before being allowed to join the groups again.”

Mendoza’s GSIs created a combination of new knowledge and interactive relationships for solving product development problems. Because vineyards in geographical locations have quite different soils and climates, experimentation is contextualized, which makes it harder to share knowledge and apply it elsewhere. To upgrade their product, wineries require wider collective knowledge resources. Upgrading the wine industry required coordination within the value chain to promote information-sharing.

Localized industry associations already existed, but they didn’t facilitate this broad knowledge sharing, says Corredoira. Mendoza’s GSIs facilitated coordination and knowledge diffusion industry-wide, allowing a broad restructuring of the entire industry. Participating firms were incorporated into more diverse groups, with cross-cutting ties between different social and producer communities. The bridging quality of GSIs was institutionalized into their statutes by including members of both public and private entities on their boards. This combination of governance rules and network qualities gave Mendoza’s vineyards and wineries access to knowledge resources at a scale, scope and cost that had not existed before or in other provinces, and that no one association or government could provide individually.

San Juan’s government, on the other hand, rapidly imposed high-powered economic incentives to drive change in its wine industry. It privatized the largest winery and tried to attract new investment through a federally subsidized tax incentive. This strategy failed to overcome the barriers to knowledge flow and resulted in no broad-based product upgrades. Wineries and vineyards that had the resources took advantage of the tax breaks, but that didn’t lead to collaboration between players in the industry. Recognition of this failure came in 2002, when the San Juan government officially abandoned this approach and adopted Mendoza’s model.

The success of Mendoza’s efforts illustrates the impact thoughtful policy can have on an industry. “This is not a market approach—it is a government intervention,” says Corredoira. “And it was successful. But it’s important to note the way government approached it. They didn’t come in and say ‘here are the solutions.’ Instead, government provided support and a venue so the industry could solve problems itself.”

Public-private institutions may be a helpful mechanism for other nations looking to upgrade faltering industries or develop burgeoning industries—in clean technology, for example, or alternate energy sources.

“Public-private institutions are very good instruments to teach firms how to learn,” says Corredoira. “It is not just passing on knowledge. These institutions can play a crucial role in developing that knowledge, creating networks of firms to encourage information-sharing, and teaching them how to learn from others.”

“Public-private institutions as catalysts of upgrading in emerging market societies” was co-authored by Corredoira; Gerald A. McDermott, University of South Carolina; and Gregory Kruse, University of Pennsylvania. It was published in the Academy of Management Journal. For more information, please contactrcorredo@rhsmith.umd.edu.