When Does Industrial Policy Work? Evidence from the Brazilian Ethanol Fuel Industry

By: Santiago Mingo and Tarun Khanna

Format:Print
| Language:English

Abstract

What is the impact of a state-led industrial policy program on entrepreneurial activity, industry evolution, and firm competitiveness? How and when is industrial policy an effective tool to spur the development of an emerging industry? To address these questions, we use the Brazilian ethanol fuel industrial policy program as a research setting. We exploit the fact that the creation of this program was a consequence of the oil crisis of the 1970s. Using a novel data set containing detailed information about Brazilian ethanol producers, we show that industrial units founded during the industrial policy period are currently more productive than those founded before the protected period. We also find that, after the industrial policy program ended, a significant number of units that were built during the period of subsidies were acquired. Based on our theory, we infer that acquisitions played an important role in increasing the operational performance of these industrial units. High quality entrepreneurs should have selected out many low quality entrepreneurs that were in trouble after the "protected" period ended. We conclude that using industrial policy to create an industry can work, but this depends critically on the presence of a "post-industrial-policy" business landscape that allows the industry to adjust and evolve into a more competitive equilibrium.