Economic Impact of Wine Industry Research Paper

Excerpt from Research Paper :

Economic Impact of the Malbec & Tannat Wines in Argentina

Wine Industry of Argentina

Role in exports

Improvement in labor market

Attraction of Foreign and local investors

Tourism development

URUGUAY

Wine Industry of Uruguay

Economic role of wine industry

Tourism industry and role of wineries

Exports of wine

Improvement of economy through wine industry

Argentine

Uruguay

Wine industry has played major role in the economic sustainability of both Argentina and Uruguay. Whereas Uruguay has much smaller economy as compared to Argentina, the wine industry in Uruguay is developed and provides much of the economic support for the militarized country. In Argentina, the bulk and retail buyers flock the famous wine market called Mendoza and San Juan in the southeast region of Argentina. During the past two decades, Argentina's wine producing firms have significantly promoted their "malbec-based red wines in the world market. Huge networks of farms growing grapes have been developed by the Argentinians; this has provided considerable employment in an otherwise problematic state. The International Organization of Vine and Wine (OIV) ranks Argentina as the fifth largest producer and ninth-largest exporter of wine, respectively. Not only the country is a large exporter of wines, the Argentinian population consumes wine domestically as well. Bedegas Luminis is the famous wine being marketed by the wine industry of Argentina. With majority of production concentrated in Mendoza area of Argentina, the area houses more than 900 wineries. The industry has also attracted considerable foreign direct capital (FDI) investments. Some of the major international companies that have lately invested in the wine industry of Argentina include Pernod Ricard of France, Trivento of Chile, and Finca Filchman of Portugal (GTSA, Gatewaysouthamerica.com).

This paper explores the economic impact of Malbec & Tannat Wines in Argentina and Uruguay. This paper is divided into subsections and each section deals with elaborated particular aspect of impact of wine industry created on the economy of both these countries. After the introduction, part II of this paper will highlight the economic impact of wine industry on the economy of Argentina. Part III describes the role of wine industry, specifically the Tannat wine producers in economic life of Uruguay. Part IV will highlight some aspect that can be used by Argentina and Uruguay to uplift their economies by utilizing wine industries of theirs. Part V will contain the conclusion of this paper by restating the overwhelming observations made through the study.

ARGENTINE

II- Economic Impact of the Malbec & Tannat Wines in Argentina

Wine Industry of Argentina

With $920 million worth exports of wine till February 2013, Argentina has posted 13% year over year (YOY) growth of wine exports during the past few years (GTSA, Gatewaysouthamerica.com). McDermott (p. 2) observed that despite weak institutional and social support system, Argentina has successfully improved the global presence of its wine industry and currently, over 2% of the $12 billion global wine market. Mendoza and San Juan provinces of Argentina provide considerable economic support for the country's financial position as both these provinces support thousands of wineries. Since 1990s, the main emphasis, McDermott (p. 2) observed was upon the improvement of products and processes and Mendoza province has accumulated much of the growth of wine industry by providing "constellation of institutions and networks." The main policy actions that were taken to improve the share of wine industry in global wine market were twofold. Firstly, the Argentine Congress and president signed the law that granted independence to the wine industry by administering it under a non-state body. The corporate body was comprised of research institutions, business associations, federal as well as provincial ministers. Currently, Mendoza province produces about 70% of the wine exported from Argentine. The years in which the world was facing the Global Financial Crisis (GFC), 2008, Argentina wine exports grew 29%. Both institutional support and a rigorous capital investment in the wine industry has increased the industry revenues and export volumes by manifold (ProsperAR, p. 3). The country has also experienced significant increment in glass bottled wine exports. The first quarter of 2009 saw 8.7% increase in exports of glass bottled wine of Argentine.

Role in exports

Exports are vital for the economic development of any country. Central American countries heavily rely upon exports for earning revenues. Argentina also relies on the exports of red wines to earn revenues from foreign countries. Canada and the U.S. are the largest importers of wine originating from Argentine. Although, in 2012 wine production in Argentine fell off to 1.3 billion liters, recent corporate reports such as those published by U.S. Foreign Agriculture Service hinted at an increasing production of wine in Argentine. In this regard, in 2013 it is estimated that 2.86 MMT of grapes will be produced as opposed to 2.2 MMT being produced in 2012. The wine production in Argentine is also estimated to increase as a result, touching he 2011 levels of 1.53 billion liters (Balbi, p. 2). The exports directly increases foreign capital inflows and spur the economic growth of a country. During the last one decade, exports of wine in Argentine has increased manifold and this has improved the macro-economic indicators of Argentine.

Along with aforementioned economic benefits that Argentine reaps from its growing export of red wines, the country has also improved its market competitiveness in the global wine industry. Currently, Argentine is positioned as being moderately competitive in the global wine industry after U.S., Australia, and Chile (Castaldi, Cholette & Hussain, p. 1). Some macro-economic institutional hindrances prevent Argentine from capturing the full potential of its wine industry but nonetheless, the country is effectively positioned to reap the benefits of growing demand of wine in domestic and international market in coming years. The role of Malbec exports was such considerable that the exports of this variety of wine in the U.S. market increased by 60% in 2008 disregarding the impact of GFC that hit U.S. (Latin Trade, 50). The rapid growth of Argentine's wine industry is attributed to the $1.8 billion investments in the wine industry of Argentine from 1999-2005 (Latin Trade, 50). Large scale companies have taken several steps to increase their capacity of producing wine in Argentine. For this purpose, the companies have used modern equipment and giant stainless-steel fermentation vats. This has considerably increased the capacity as well as the export revenues of the country.

Improvement in labor market

The most notable economic contribution of Argentine's wine industry has been the improvement in labor market. There has been a tremendous increase in employment levels in Argentine as compared to the previous decade when wine industry did not assume much importance in the exports of Argentine. The government of Argentine, during past few years, has supported the small wine grape producers through sustainable community programs aimed at increasing the production capacity of producers. Machinery donations, tax exemptions, and promotion of community support programs for the wine production has been significantly beneficial in this aspect.

Attraction of Foreign and local investors

While much has been mentioned by respective stakeholders of wine industry that land owning restrictions have slowed down the growth of Argentine economy, it is generally observed that in the wine industry of Argentine the local as well as the foreign investors have invested capital in purchasing wine resorts. These wine resorts are a combination of vineyards and retreats. The high demand of land in areas such as Valle de Uco has increased the property prices by manifold during the past five years. There is a general trend towards both expansion of capacity of existing wineries as well as new wine plants being initiated by foreign investors. It was also reported that during the fiscal year FY 2011, $24 million new investments were made in the wine industry of Argentine. This significantly improved the labor market growth and household consumption due to an increased earnings level of individuals. New investments, both local and foreign are estimated to reach a level of $50 million during 2012 and first two quarters of 2013 (Balbi, p. 6). Diageo is the world's largest drinks company that has invested significant amount of capital in Argentine. Despite restrictions on the ownership of land in Argentine, as the country restricts each foreign investor not to hold land beyond 1000 acres, Diageo has invested $14 million in the recent years in the wine industry of Argentine. The capital investment was intended to improve the production capacity of the company in Argentine. Finca Agrelo is the winery of Diageo that was opened in Mendoza province of Argentina back in 2009. The company has established the production facilities as well as initiated the establishment of distribution network outside Argentine to promote wine of Argentine origin.

Mendoza wines are increasingly attracting capital investments from abroad. The brands that have already established their operations in Mendoza province are increasing their investments to attain economies of scale. Argentine market was more known for its domestic consumption of wine but lately, the corporate brand having transnational presence have increased the exports of Malbec variety of wine from Argentine. The Argentine economy…

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