Co-evolution of industry strategies and government policies: The case of the Brazilian Automotive Industry.

AutorDuarte, Roberto Gonzalez


This study examines the evolution of the automotive industry in Brazil and its key drivers. We argue that the rules of the game--industry policies--are an outcome of exchanges between the host government and industry. These arise from changes in economic and political environments and interdependence between industry and the country's economy. To this end, we draw upon literature on institutions and co-evolution to understand the industry footprint over a 50-year period, as well as its relationship with changes in government policies. This study generates new insights on institutional and co-evolution political perspectives by showing that the rules of the game are not only the making of the government, but are also the result of interdependencies between industry and government.

Key words: co-evolution; government--industry interaction; emerging markets; automotive industry; rules of the game.


The literature on international business has largely demonstrated how host country institutions, through the actions of their governments, can influence multinational enterprises' (MNEs) choice of location (Lu, Liu, Wright, & Filatochev, 2014), mode of entry (Henisz & Zelner, 2005), and performance (Cuervo-Cazurra & Dau, 2009). In turn, home country government institutions, through formal and informal mechanisms, can foster the internationalization process of national MNEs (Bazuchi, Zacharias, Broering, Arreola, & Bandeira-de-Mello, 2013; Dunning & Lundan, 2008).

The political intricacies in relationships between MNEs and (host and home) governments (or the influence one side exerts over another) have chiefly been examined in by corporate political activity (CPA) literature (Bazuchi et al., 2013; Fernandes, Bandeira-de-Mello, & Zanni, 2012). Rajwani and Liedong (2015), showing that CPA adds value to the firm. Nevertheless, firm choices and political strategies are conditioned by the institutional environment. For instance, in contexts of institutional weakness, which are typical in emerging economies, these political strategies may be better understood through the concepts of social capital and political connections. From a broader theoretical viewpoint, Lawton, McGuire, and Rajwani (2013) argue that institutional theory can contribute in two ways to our understanding of CPA: firstly, "it can give an account of how different political, social and economic arrangements affect firm--government relations"; secondly, at the firm level, institutional theory can help us "to understand how firms adapt (or not) to alterations and evolution in the non-market environment" (p. 92). The latter issue, as the authors argue, is particularly important in emerging markets, "where economic development can place traditional institutional arrangements under strain" because "the evolution of a political system can present incumbent firms with difficulties, as their previous CPA is rendered less effective in the new context" (Lawton, McGuire, & Rajwani, p. 96). For these authors, a question that remains and must be further explored relates to understanding non-market activity in emerging economies. These prior studies on the relationships between institutions and firms, including MNEs, have empirically and theoretically illuminated how CPA can affect firm outcomes due to government regulations. In spite of the relevance of this literature in clarifying the political arena in which business and government interact, and how this interaction affects firm performance, they do not focus on the process of institution-building over long periods of time.

These studies have also looked more closely at the firm level than others, such as industry. In our study, we analyze how governments in emerging economies interact with local industries. The choice of industry as a unit of analysis is due to a number of reasons. First, government regulation does not address individual firms, but a collection of firms that are similar in the type of business or segment in which they operate. Second, firms in the same sector tend to respond isomorphically by imitating the practices and strategies of peers (DiMaggio & Powell, 1983; Kostova & Roth, 2002). Third, in some emerging economies such as Brazil, the state played a critical role in fostering the development of several industrial sectors, with business and governments maintaining close relationships. This closeness translates into large government subsidies and protection (Schneider, 2015). Fourth, the interaction between industry and successive governments of developmental states over time brings to the fore an issue that contributes to our understanding of the process of institution-building--that is, the interdependence between industry and a country's economy--and, more precisely, between industry outcomes and a country's economic performance. We argue that interdependence is a key driver of the co-evolutionary process, particularly regarding the definition of the rules of the game.

Drawing on institution and industrial policy literature, our research investigates how institutions, which are "the humanly devised constraints that structure human interaction" (North, 2001, p. 248), into being and influence the strategic choices and performance of the Brazilian automotive industry. More specifically, we look at formal industry constraints, such as the rules of the game (e.g., government regulations and policies). We understand rules of the game to mean actions and policies by governments that attract and regulate the development of an industry. We also analyze how these formal institutions change over time because, as North (1990) argues, "institutional change is shaped by (i) the lock-in that comes from the symbiotic relationship between institutions and the organizations that have evolved as a consequence of the incentive structure provided by those institutions" (p. 7).

Our purpose is to analyze institution-building within the context of a developmental state. As Scott (2008) states,

attention has been devoted to how institutions affect the structure and functioning of organizations, organizational populations, or organizational fields, but much less to understand how institutions are constructed, the actors implicated in this process, forces by which new types of institutions emerge and the mechanisms by which they are crafted (p. 93). Our purpose is to analyze institution-building within the context of an emerging economy where the state was a critical force for industrial development, and where interdependence can be seen as a mechanism that drove the rules of the game defined by the state.

Given that industrial policies vary within and across political mandates and economic circumstances in host countries, we used a co-evolutionary perspective to construct a framework that explains the context and mechanisms by which the rules of the game emerge and change. Even though most co-evolutionary studies have focused on individual firms and how they relate to their meso (industry) and macro (institutional) environments, some recent co-evolution studies have focused on the industry level (Breznitz, 2007; Funk, 2009; Murmann, 2013). These studies have sought to clarify how the interaction between government and industry over time can affect industry outcomes and explain government policy effectiveness--or, in the case of Murmann's study (2013), causal mechanisms that drive co-evolution.

Moreover, by examining the dynamics driving and shaping the interaction between government policies and industry strategies, our main aim is to advance a political perspective of co-evolution (Child, Tse, & Rodrigues, 2013; Dieleman & Sachs, 2008; Rodrigues & Child, 2003). The economic and political volatility exhibited in the history of emerging markets renders industry--institution co-evolutions an important and attractive subject for research. Yet, with a few exceptions (Child et al., 2013; Dieleman & Sachs, 2008; Rodrigues & Child, 2003), this has been somewhat overlooked in the co-evolution literature up to now. Such a perspective draws attention to the intentionality and importance of power of relevant actors. Since firms and other actors have their own interests, they consciously drive co-evolutionary processes through certain initiatives (Child et al., 2013). Our intent is to expand a political approach by looking at another aspect: how high or low interdependence affects the interaction between industry and government and, thus, the rules of the game defined by the latter for the former.

This study examines the Brazilian automotive industry and addresses the role of interdependence in the co-evolution of government and industry strategies. We selected the automotive industry for analysis due to four reasons: (a) usually this industry engages in CPA (Eden & Molot, 2002; Sun, Mellahi, & Wright, 2012; Zhao, Anand, & Mitchell, 2005); (b) the Brazilian automotive industry is entirely foreign owned (Shapiro, 1994); (c) the automotive industry is perceived as having a high degree of legitimacy due to its historical role in the country's industrialization process--automobiles have been at the center of Brazilian industrial policy for more than 50 years (Financial Times, 2013); and (d) the importance that the automotive segment has for the Brazilian economy as a whole--the sector, on average, has accounted for 15% of Brazilian industrial GDP over the last two decades. This importance has led, as Schapiro (2017) contends, to the automotive industry being a permanent client of different government incentive schemes, regardless of their ideological orientation.

We examine the industry's footprint and changes in industrial policies over a 50-year period. In this longitudinal case study on the Brazilian automotive industry, we develop a conceptual framework that recognizes interdependencies and interest-based exchanges; the nature of outcomes--the rules of the game; and industry choices regarding...

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