The Modern American Wine Industry

Market Formation and Growth in North Carolina

Ian M Taplin

• Publisher: Routledge
• Year: 2015
• Print ISBN:
  9781848931367
• Edition: 1
• eBook ISBN:
  9781317322832
• Topic: Economics
• Subtopic: Business History
• Index: Economics

This study is both a history of the American wine industry and an examination of its current structure and performance. In analysing market formation, Taplin focuses on a complex network of winery owners, winemakers and grape growers to see how relationships have shaped the evolution of this sector.

1 DISTRICTS, NETWORKS AND KNOWLEDGE BROKERING

In 2008, Princeton economist and New York Times writer Paul Krugman was awarded the Nobel Prize for economics. Ostensibly for his work on trade theory, the award nonetheless mentions how his ideas piqued interest in the economics of agglomeration. The notion is that firms can achieve operational efficiencies by co-locating in particular geographic areas. It builds upon the work of Alfred Marshall and Alfred Weber, who argued that regional clusters of firms can maximize the benefits of unique local resources, provide economies of scale across various facets of the operation, and access specialized labour markets and industry-specific infrastructures.¹ For Krugman, the geographical concentration of firms, even in high-wage economies where labour inputs are expensive, can endow advantages that otherwise might not be possible precisely because specialist activities concentrate talent and key resources.²

These ideas, alongside those of theorists on industrial districts and the architecture of emerging markets, complement the burgeoning literature on entrepreneurship and enable us better to conceptualize how new firms grow and stabilize, and how their interaction with competitors and suppliers is shaped by institutional parameters. Such a framework is particularly useful in analysing the emergence of the North Carolina wine marketplace. Having struggled for centuries to establish itself as an area of grape growing and winemaking, North Carolina’s success of the last decade has been centred on clusters of firms and a cooperative framework of information sharing. The dissemination of knowledge crucial to viticultural success, all too often lacking in previous times, and a social and institutional environment conducive to entrepreneurship, combined to facilitate industry growth. In this chapter I examine the notion of districts and the role that clusters of firms play in such settings; what forces shape the growth of clusters; and how clusters contribute to innovation. I then look at the networks of firms and individuals that are a constituent part of clusters, how actions are embedded within such networks, and the role that leader firms play in eventually shaping cluster governance. Rather than view entrepreneurship as simply a product of individualistic initiatives, I examine the context of such activity, particularly the construction of an institutional environment that ultimately shapes organizational forms.

In recent years much of the literature on these topics has examined how interaction between firms is structured and detailed knowledge necessary for production efficiencies transmitted. However, what are often overlooked are the mechanisms whereby new firms access requisite knowledge and how that access varies in accordance with resources and capabilities. Resource and capability variation is inevitable as firms, especially newcomers, have widely different sets of circumstances that they leverage for operational success. Furthermore, not only financial capital and operational knowledge condition ultimate success; it is also a function of social capital. By social capital I refer to the way relationships (networks) can be a valuable resource for individuals because they link them with key actors who over time can be indispensable sources of crucial knowledge.³ Understanding how social capital can both enable and constrain organizational performance is important for assessing the dynamics of cluster activity and why some firms appear better positioned to take advantage of knowledge acquisition than others. If we can grasp the ways that these various activities come together, then we can gain insights into how a new industry such as winemaking can emerge in a region such as North Carolina and what factors condition its successful growth.

Clusters and Industrial Districts

Studies that have built upon Marshall’s early work on the externalities of specialized industrial locations typically argue that when firms or industries co-locate in ways that complement each other and share common sets of resources it can lead to increasing returns to scale. Using the economic success of geographical districts such as Silicon Valley and Route 128 around Boston in the United States, Baden Wurttemberg in Germany, and the ‘Third Italy’ such studies have highlighted the innovative performance of clusters of firms in these areas.⁴ Inter-firm collaboration within such districts is made possible, it is argued, by the provision of a dedicated infrastructure, a pool of skilled labour and a relevant education system to sustain such a growth.⁵ Not only is knowledge and information transfer easier within such a setting because of face-to-face interaction, the potential for partnering between firms increases and the resulting growth of supplier firms in the area can lower operating costs.

Regional clusters of firms have existed for centuries, with far-flung examples such as the Prato textile industry in Italy and the Japanese silk industry having their origins in the Middle Ages, and the 300-year-old Geneva-based luxury watch industry in Switzerland. What they all had in common was an ability to attract skilled individuals and new ideas from outside the cluster which sub-sequently acted as a stimulus for public and further private investment.⁶ The dynamism and vitality of such regional economies was long ago seen as an engine of economic growth; the greater their success the more dominant they became locally and the more they became a focal point for innovative activity. Because they were often a fertile ground for new ideas they tended to attract precisely those who were not risk averse and stimulated local government investments in supporting activities that sustained such growth. Supplier firms recognized the benefits of acquiring skill sets that could service the cluster and were themselves often recipients of public investment incentives, effectively subsidizing their own location decision.⁷ Whenever suppliers or buyers play a crucial role in operational efficiency by virtue of geographical proximity, they can significantly add to innovative performance of core cluster firms.

Despite the apparent economic success of clusters, most studies tended to assume that the benefits of firm concentration were self-evident; that somehow significant advantages accrue from concentration and sharing of a common environment. In recent years a more sanguine understanding of the negative consequences of clusters has emerged. Sorenson, for example, recognized that proximity leading to network density can in fact intensify competition.⁸ As more and more firms locate in an area where similar firms already operate, they are also more likely to fail. Moreover, as networks structure and eventually stabilize interactions, such stability can ultimately have the effect of stifling innovation.⁹ This is especially likely when external conditions (e.g. consumer taste or institutional support) change.

Notwithstanding such reservations, the economic advantages of clustering are in the area of lowered transaction costs and the benefits of mutual policing.¹⁰ These can and often do outweigh the negative aspects mentioned above, especially when examining other wine regions such as those in Italy and Chile.¹¹ It is apparent that co-localization implies a climate of understanding and trust, voluntary information and tacit knowledge sharing, plus norms of cooperation and the enforcement of agreements that reduce malfeasance.¹² What is essentially a localized network of organizations thus takes on a life, and interests, of its own.

One of the key ideas in all of these discussions is the notion of trust as a public good. Since market order is necessary for the survival of firms, mechanisms that support interdependent relationships and with that co-operation, consensus and even solidarity are crucial. A minimal degree of predictability is essential for transactions to take place and this is invariably predicated upon established patterns of behaviour and a normative acceptance of rules of order. There is an extensive literature in the social sciences on the problem of social order because uncertainty, intolerance and instability have been commonplace in past societies.¹³ Institutionally mediated social relationships designed to forestall conflict are associated with the growth of the nation state, but trust as a social mechanism can reconcile individual motivations and structural constraints at the local level. Stability is achieved when predictability and reliability in relationships and transactions exist, which in turn are a function of normative mechanisms and general cooperation. Norms of reciprocity are crucial building blocks for collaboration and trust is the precondition for cooperation. Individual behaviour, therefore, is shaped by the perceptions of consistency in the behaviour of others, their predictability a function of a stable order.

At one level humans are quite perceptive when it comes to evaluating the trustworthiness of someone with whom they must interact. They do this by weighing the cost and benefits of trusting someone who in many cases is a complete stranger. As long as that trust in not betrayed, individuals instinctively will return favours. The more such individuals work with each other, the more inclined they are to embrace reciprocity as a guiding principle of such interaction, and the more exchange relationships become solidified.¹⁴ In other words behaviour conditioned upon sharing knowledge and information becomes institutionalized as interactions increase. Reputations develop and these become valuable resources for firms. Because newcomers to an industry or sector lack detailed knowledge it is more beneficial (and often less risky) for them to embrace trust than the alternative. As they do this they effectively accept self-policing of transactions since any betrayal of trust can be immediately recognized and acted upon. Eventually such informal mechanisms are reinforced by state institutions and formal associations that monitor transactions and provide rules and regulations for behaviour. But the effectiveness of such a regulatory framework is contingent upon a fairly smooth operational efficiency of daily transactions, and ipso facto a continued belief by individuals in the benefits of such transparency.

As more firms cluster in a particular location they can confer further stability to the social order of the local marketplace because trust based inter-relationships become de facto guarantors of collaboration. Local community based social relationships, and the rules of behaviour that are embedded in such relationships, help guarantee standards of behaviour which further engender trust and cooperation.¹⁵ The conditions for such collaboration are therefore rooted in the willingness of local actors to share and cooperate because to do otherwise would be inimical to the benefits of clustering. In turn this encourages further synergies between firms that subsequently foster innovation through collective learning. It also strengthens inter-firm networks and encourages the growth of formal institutions that help govern the cluster.

Once established, clusters can provide competitive advantages for firms because they are able to capitalize upon their unique collective assets.¹⁶ The competitive performance of firms in the cluster is a function of horizontal and vertical relationships – the latter consisting of the input-output relations with supplier and buyer firms.¹⁷ The horizontal relationships refer to the density of interaction between similar firms in a geographic location whose proximity permits constant and close monitoring of each other. Supplier and then subsequently buyer firms eventually choose to locate within the cluster because co-location reduces their costs of coordination. Traded and non-traded inputs that are industry specific can increase in number and at lower cost when co-location occurs.¹⁸ According to P. Maskell clustering therefore encourages further specialization, improves knowledge creation and generally overcomes problems of asymmetrical information.¹⁹

The spillover effects of knowledge can further the competitive advantage of the cluster, thus attracting new firms to the area who seek access to this collective resource. New entrants believe that they can benefit from access to local knowledge and take advantage of local suppliers. The more established and successful the cluster becomes, the more this perception motivates new entrants. Second, the growing legitimacy of the cluster and the absence of notable mortality rates for firms within it encourage entrepreneurial activity for those interested in starting a firm in this sector. The apparent success of small ventures stimulates action by individuals whose resources permit entry. If entry costs are low, as can be the case for a small winery, knowledge barriers can be overcome by gaining access to localized operating norms.

Recent research in the sociology of entrepreneurship has highlighted the role played by interpersonal networks, organizational structure and the broader institutional environment in shaping individual initiatives.²⁰ As a result of this work, we are better placed conceptually to understand the contextual and behavioural perspective of entrepreneurial behaviour and able to view organizational growth through the interaction of individual volition and broader socio-economic and cultural processes. The contextual factors associated with cluster growth provide conditions that encourage and facilitate entrepreneurial activity; what Glade describes as ‘opportunity structure’.²¹ Entrepreneurship is therefore context-dependent,²² with the result that individual agency is partly a function of available resources as well as conditioned by the perception of additional resources that become available following start-up. Entrepreneurial activity increases when a critical mass of firms within a cluster is established and a shared business culture emerges.²³ In turn this acts as a further catalyst for innovation that sustains cluster growth. While it is difficult to determine exactly what a critical mass actually constitutes, we do know from organizational ecology that founding rates for firms are strongly related to the size and distribution of organizational populations.²⁴ But even then, the absence of institutional supports, as Max Weber noted over a century ago, can severely hamper the efficiency of entrepreneurial activity.²⁵ Context and demand, social networks and trust, provide the multidimensional complement to social capital in explaining entrepreneurial success.

The joint actions of firms in the cluster trigger new initiatives and encourage further specialization of activities.²⁶ Such micro-level activity can involve assessments of human capital/motivation variables and their alignment with financial resources. Spin-off firms emerge as incumbents bring their specialized knowledge to pursue niche activities. This increases the division of labour but also permits collective organizational learning and sector upgrading. Because clusters facilitate information gathering, specialized knowledge is channelled through sets of reciprocal obligations and responsibilities among firms in the cluster. Such relationships structure ensuing market activities and become part of elaborate networks within the cluster.

Importance of Networks

Since clusters are predicated upon dense sets of relationships and norms of reciprocal obligation it is important to understand how such interactions are embedded in networks. Networks typically bind together individuals or firms through actions that are mutually beneficial. They can be formal or informal, strong or weak, and short-term versus long-term.²⁷ Central to their notion is the idea of trust and reciprocity, in which individual behaviour is conditional upon perceived benefits of cooperation and sharing. In other words, networks structure and coordinate relationships between firms (and individuals within those firms) in ways that promote further information and resource sharing. As Ulrich Staber states, networks bind ‘firms together into a co...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• Dedication
• List of Figures and Tables
• Preface
• Introduction
• 1 Districts, Networks and Knowledge Brokering
• 2 From the Beginnings to Prohibition
• 3 Post-Prohibition to the 1990s
• 4 Emergence of a Wine Cluster
• 5 Market Growth, Differentiation and Legitimacy
• 6 Cluster Consolidation: Networks, Quality and Wine Tourism
• Conclusion
• Appendix: Interview Questions for North Carolina Winery Owners/Winemakers
• Notes
• Works Cited
• Index