All through the 1980s, Argentina’s wine industry produced vast quantities of (mostly bad) wine and sold it only to Argentineans. By the end of the 1990s, Argentina was an innovation success story—a pioneer in new methods of viticulture and a trailblazer for new varietals and blends. Exports grew from a few million dollars in 1990 to $480 million in 2004. Critics raved.

The transformation happened in only one of two neighboring winemaking provinces, however. Although San Juan received more investment, “Mendoza begins to take off,” says Gerald McDermott, a professor of international business and politics at the University of South Carolina. “They’re the pioneer, and by 2001 they’re 90 percent of exports of wines.” The two provinces sit side by side; their provincial capitals are an hour or two apart by car. They have the same climate, the same number of civic associations per capita, the same political parties, says McDermott. The usual explanations about socioeconomic endowments—“you either have it or you don’t”—don’t hold.

What, then, fostered innovative capacity in Mendoza but not in San Juan? McDermott credits the creation of new public- private institutions, jointly governed partnerships between industry associations and government agencies “that function as social and knowledge bridges between different producer communities.” McDermott developed new methods to “map the knowledge networks, how knowledge flows, and who the key actors are for promoting learning and the diffusion of new knowledge.” These local bridges were vital to Mendoza’s success. Competitors “started to construct ways of finding common strategies and weren’t just after each other’s jugular.”

Businesses often impugn governments as barriers to innovation, but in the wine-growing regions of Argentina, government policies really made sure the grape industry grew. “Government has the ability to help bring together a lot of private knowledge that would stay separated normally, and in doing so they can create much more innovative resources,” says McDermott. Within five to eight years the public and private sectors had together created sophisticated training systems, databases, export promotion systems, and extension services for agriculture, things no single winery could have done alone. “You put things that are separated together, and you may get something new out of it.”

In fact, government-fostered cooperation is not unprecedented. “Smart governments are always looking to figure out ways to incentivize and encourage firms to do what they can’t do by themselves,” says Richard Doner, professor of political science at Emory University. “In any kind of innovation there are all kinds of market failures and market imperfections. There are huge risks in moving into new areas. You may not even know what you need; there may be new approaches to wine processing and wines marketing that you’ve never heard of.” In the United States, the Department of Agriculture has been supporting networks of innovation-spreading organizations for years. “American agriculture is what it is because of [government] ag extension [programs],” says Doner.

Gerald A. McDermott, Rafael A. Corredoira, and Gregory Kruse, “Public-Private Institutions as Catalysts of Upgrading in Emerging Market Societies,” Academy of Management Journal 52, 2009.

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