October 2014
Article
Industrial and Corporate Change

Industrial Policy and the Creation of New Industries: Evidence from Brazil's Bioethanol Industry

By: Santiago Mingo and Tarun Khanna

Format:Print

Abstract

Industrial policy programs are frequently used by governments to stimulate economic activity in particular sectors of the economy. This study explores how an industrial policy program can affect the creation and evolution of an industry and, ultimately, the long-term performance of firms. We examine the history of the Brazilian bioethanol industry, focusing on the industrial policy program implemented by the Brazilian government in the 1970s to develop the industry. We put together a novel data set containing detailed information about the history of bioethanol producers. Our findings show that plants founded during the industrial policy program tend to be, in the long run, more productive than those founded before the program was in place. Based on additional analyses and complementary fieldwork, we infer that the wave of acquisitions that occurred after the end of the industrial policy program had an important effect on the performance of the plants founded when the program was in place. Industrial policy, especially in conjunction with a competitive post-industrial policy business landscape, can succeed in nurturing competitive firms.