REBUILDING TECHNOLOGICALLY COMPETITIVE INDUSTRIES: LESSONS FROM CHILE'S AND ARGENTINA'S WINE INDUSTRY RESTRUCTURING by Alejandro Walters Bachelor of Architecture, Faculty of Architecture, University of Buenos Aires (1986) Master of City and Regional Planning, University of Pennsylvania (1992) Submitted to the Department of Urban Studies and Planning in Partial Fulfillment of the Requirements for the Degree of DOCTOR OF PHILOSOPHY IN ECONOMIC DEVELOPMENT at the MASSACHUSETTS INSTITUTE OF TECHNOLOGY June 1999 C 1999 Alejandro Walters All Rights Reserved The author hereby grants to MIT permission to reproduce and to distribute publicly paper and electronic copies of this thesis document in whole or in part. Signature of Author Dpartment oUran-Sudies and PTanning May 20, 1999 Certified by Alice H. Amsden Ellen Swallow Richards Professor of Political Economy Thesis Supervisor Accepted by Frank Levy Chair, Ph.D. Committee Department of Urban Studies and Planning MASSACHUSETS INSTITUTE OF TECHNOLOGY JUL 1 9 1999 ROTCL LIBRARIES REBUILDING TECHNOLOGICALLY COMPETITIVE INDUSTRIES: LESSONS FROM CHILE'S AND ARGENTINA'S WINE INDUSTRY RESTRUCTURING by Alejandro Walters Submitted to the Department of Urban Studies and Planning on May 20, 1999, in Partial Fulfillment of the Requirements for the Degree of Doctor of Philosophy in Economic Development ABSTRACT The general question motivating this dissertation is how firms that are lagging technologically in newly liberalized economies can catch up to world standards and develop a capacity for continuous learning. Based on the uneven restructuring of the Chilean and Mendozan (Argentina) wine industries this research challenges the conventional views that market institutions and state tutelage automatically supply the kind of knowledge that firms need in order to achieve technological world standards. It hypothesizes that upgrading requires "learning institutions," where members of a professional community can rework and improve through application, received knowledge embodied in new capital equipment, production techniques and market information. The systematic, wide, unprejudiced discussion of tacit knowledge from production and marketing experience is what helps firms discover what works best for them locally, and allows them to map out a set of incremental standards they can aspire to meet to rebuild their competitiveness. This study suggests how learning institutions that generate such a discussion might be created. In Chile and Mendoza two natural experiments show how firms, knowledge professionals, and the state inadvertently are building fora for the discussion of tacit and received knowledge and the formulation of targetable production standards. One is a consortium of wineries with an evaluation committee; the other is a set of broad subregional wine evaluation panels. Both collectively rework and improve received knowledge based on making tacit experience explicit. Both set standards, monitor their members' progress, and recommend improvements. Both avail themselves of private sector knowledge and discrete public programs in coherent ways. Knowledge professionals play an important hand in organizing both initiatives. This does not seem accidental; as knowledge becomes more important to industrial competition the individuals and groups that carry it have grown in importance, especially when they have a strategic understanding of the value chain and of how conception and execution relate to each other. These findings suggest ways in which the state can induce the private sector to provide the kind of assistance firms need most, and in so doing, help reconstitute more competitive firms and promote more constructive interfirm relations and private-public sector relations. Knowledge professionals need not be the direct targets of these initiatives but their inclusion is likely to be crucial to their success. Thesis Supervisor: Alice H. Amsden Title: Ellen Swallow Richards Professor of Political Economy, Department of Urban Studies and Planning, MIT Thesis Advisors: Donald Lessard, Professor of Corporate Management, Sloan School of Management, MIT Michael J. Piore, Professor of Economics and Management, MIT ACKNOWLEDGMENTS Several institutions played an important role in the completion of this dissertation. I thank the MIT/Province of Mendoza Project for funding fieldwork that guided me towards my topic. I am especially grateful to the Social Science Research Council for awarding me an International Dissertation Research Fellowship that funded a year of fieldwork in Chile and Mendoza on the wine sector itself. I also thank the United Nations' CEPAL (ECLAC) in Santiago, Chile for providing me an office base for the duration of my stay. The individuals that helped me along in my work are many. At MIT I learned much from my committee--Alice Amsden, Don Lessard, and Michael Piore, as well as from Charles Sabel and Judith Tendler. At the Department of Urban Studies and Planning, many of the staff provided assistance and support, among them Brenda, Nimfa, and Sandy, and not least of all Rolf Engler, always creative when it came to paying the tuition bill. At CEPAL I am most grateful to Joe Ramos, Jorge Katz and Martine Dirven. Both in Mendoza and Chile, my very special thanks go to the many firm owners and managers, engineers and enologists, industry suppliers, sectoral specialists, and public sector officials who generously gave their time to answer my questions. For friendship and emotional support during fieldwork, my deepest gratitude goes to Mrs. Nilsa, her direct family, and the Las Encinas extended family in Mendoza, and to Greta and Domingo and their buddies in Santiago. During my time at MIT doing coursework and later during writing, I was lucky to have a wonderful group of friends in my cohort and outside it--Amy, Ani, Anu, Elizabeth, Kathleen, Lois, Lourdes, and Rodrigo. This is dedicated to Katrina and Aksel, who (im)patiently waited for me to finish up. Kat may have provided the ideal combination of support and monitoring to ensure I made steady progress through the final stages. Also thanks to her and Bob for patiently helping me with edits. Last, Dina my mother, and Desmond my father, are foremost in my thoughts for teaching me to set myself standards and ideals to pursue. TABLE OF CONTENTS CHAPTER 1 Understanding Technological Change: Tacit Knowledge, Professional Experts, and New Learning Institutions a. Introduction b. Hypothesis and Argument c. The Cases: Restructuring in the Southern Cone Wine Industries d. Structure of the Dissertation e. Research Design: The Decision to Focus on Technical Knowledge CHAPTER 2 Two Paths of Technological Catch Up a. Introduction: The High Road, the Low Road, and No Road b. Recent Evidence of Quality Improvement in Southern Cone Wines c. The Protagonists of the Restructuring (i.) Upgrading Convergence in Chile (ii.) Mendoza's Heterogeneous Restructuring Paths d. Those Left Out: The Chilean Secano and Eastern Mendoza's Bulk Producers e. Conclusion CHAPTER 3 The Breadth and Depth of Market Upgrading a. Introduction: Opportunities and Limits to Market Tutelage b. The Foundation of Catch Up: Turning Tacit Knowledge into Learning c. The Difficult Road to Progress: Catching Up to World Class Producers d. Limits to Comparative Advantage e. Help From Machinery Suppliers f. Buyer-Assisted Technological Learning g. Demand-Driven Vineyard Upgrading h. Consultant-Assisted Technological Learning i. An Example of a Successful Wine Supply Chain Upgrading j. Conclusion CHAPTER 4 Failures and Successes of State Tutelage and Beyond a. Introduction: State Tutelage, Bootstrapping, and New Learning Institutions b. First Wave of Public Policies: Extreme Approaches and Big Mistakes c. Second Wave of Public Policies: Activism Through Discrete Initiatives d. New Economic Development Institutions e. Professional Technicians' Activism CHAPTER 5 Conclusions Appendix A The Different Origins of Chilean and Mendozan Poor Quality Wines Appendix B The Origin of Eastern Mendoza's Low-Quality High-Volume Production CHAPTER 1 Understanding Technological Change: Tacit Knowledge, Professional Experts, and New Learning Institutions Introduction This dissertation concerns the role of knowledge in industrial restructuring and upgrading in developing countries.1 The importance of knowledge to development cannot be overstated. In its 1998/99 World Development Report (WDR) the World Bank suggests that... "For countries in the vanguard of the world economy, the balance between knowledge and resources has shifted so far toward the former that knowledge has become perhaps the most important factor determining the standard of living--more than land, than tools, than labor. Today's most technologically advanced economies are truly knowledge-based. And as they generate new wealth from their innovations, they are creating millions of knowledge-related jobs in an array of disciplines that have emerged overnight: knowledge engineers, knowledge managers, knowledge coordinators."2 While growth accounting has yet to provide precise measures of the role of knowledge in economic growth, it suggests that neither land, nor physical capital, nor education (human capital) per se satisfactorily explain all of total factor productivity growth (TFP). If knowledge can be 1I refer to the restructuring processes that were triggered during the 1970s and 1980s when structural adjustment programs (SAPs) were implemented in closed economy developing countries, with the purposes of getting the prices "right",