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The Effect of Foreign Direct Investment on the Supply Chain of Central and Eastern European Countries
Copyright © 2004 South-Western
Doc. Ing. Artan Qineti, PhD.Department of EconomicsFaculty of Economics and
Management Slovak University of Agriculture
in Nitra
Copyright © 2004 South-Western
„The existence of free markets sure does not exclude the role of government. To the contrary, the role of government is crucial as a forum for the definition of “the rules of the game”, as well as a referee for the interpretation and implementation of approved rules. Markets however, narrow the set of issues that have to be decided about, through political instruments, thus minimizing the scale of government direct participation in the game. “
Milton Friedman, Capitalism and Freedom
Copyright © 2004 South-Western
Introduction
One of the main problems of the agricultural sector and rural areas in CEEC and Central Asia during the transformation process was the disruption of relations and interlinkages between farmers on one side and input suppliers or wholesalers on the other. The consequent privatization and restructuring of farms and sectors in all segments of food chain caused serious deformations.
Copyright © 2004 South-Western
As a result (of this process), many farms and rural households have been exposed to restrictions and problems regarding input supplies (animal feed, fertilizers, varieties, capital, etc.) as well as selling their products. In addition to these problems, another negative factor has played an important role: inefficient (absenting) public institutions required to support market oriented transactions like for example respecting property rights and contracts.
Copyright © 2004 South-Western
With the absence of efficient public institutions, private contractual initiatives arise (often coming from large food and agro-food companies) with the objective to overcome mentioned obstacles. Large retailers, agro-food companies and food processors, often in the framework of their own restructuring or after the inflow of FDI start implementing contractual mechanisms with farms and rural households, as well as providing basic inputs in order to provide them with raw materials or supplies at the required quantity and quality. Such process of interlinked contracts has been growing fast in the agriculture sector and rural regions of CEEC and CA.
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Objective
In this lecture we try to partially analyze certain issues related to vertical coordination in agro-food chain of CEEC and CA, as well as identify certain alternatives leading toward improvement of policies, institutions and investment that could be implemented by governments and supported by international institutions, in order to improve the links within agrarian marketing, processing chain as well as to increase farmers access to input and output markets.
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Content
1. MODELS OF VERTICAL INTEGRATION AND COORDINATION
1.2.Theoretical and empirical models of vertical
integration of food supply chains.
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1.2.Models of vertical integration of food supply chains.
Figure 1.2.1 Triangular structure VC
Wholesaler / Processor
Bank
Agricultural farm
Triangular chain of vertical contracting
Example: Retailer / processor guarantee for bank loans to the supplier
Source: Swinnen (2006)
Copyright © 2004 South-Western
1.2.Models of vertical integration of food supply chains.
Figure 1.2.2. Mechanism on Special Utility
Wholesaler / Processor
Bank
Agriculture farm
Mechanism on Special Utility
Example: FDI is specialized on financing and the mechanism on special utility is set up to distribute the risk between partners.
Example: Group of farmers found a cooperative as a MSU.
MSU
Input Supplier
Source: Swinnen (2006)
Copyright © 2004 South-Western
1.2.Models of vertical integration of food supply chains.
Figure 1.2.3. Leasing of modern agriculture mechanization through Common leasing project
Processor
Provider of modern mechanization / techniques
Agriculture farm
Common Leasing Project with Processor
Source: Top Agrar, (2004)
Project
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1.2.Models of vertical integration of food supply chains.
Figure 1.2.4. Borrowing from partner food processor.
SpBracovateľ
Agriculture farm
Source: Van Berkum (2004)
Input supplier
Processor
Bank
Processor as a financial institution
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1.2.Models of vertical integration of food supply chains.
Figure 1.2.5. Four degree model of vertical coordination.
Brewery
Barley producer
Malting company
Vertical coordination in beer production
- Core business: beer production.- The need for vertical integration in order to secure high quality barley varieties from the seed provider.- The general strategy implemented differently in different countries according to local conditions.- Attracting foreign investors in order to increase the efficiency of non-core businesses of the firm, as well as setting up different programmes of assistance to farmers.- Programs for market interlinkages.
Provider of Variety
Source: Swinnen (2006)
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1.2.Models of vertical integration of food supply chains.
Table 1.1. The share of farms selling based on contracts.
Notes: RIF – registered individual farmers, NRIF – non-registered individual farmers.Source: Leuven ACE databases.
Czech Rep.
NRIF RIF Slov. Rep. Hungary Bulgaria
Individual farmers
Sales of plant production with contractsSales of animal production with contractsSales of live animals with contractsSales with contracts
Corporate farms
Sales of plant production with contractsSales of animal production with contractsSales of live animals with contractsSales with contracts
4125
3713746
79734996
294635
82837798
810-
17
8659-
94
53-7
4223-
43
Copyright © 2004 South-Western
1.2.Models of vertical integration of food supply chains.
Table 1.2. The share of Czech farms that receive inputs based on sales contracts (%)*.
Notes: * Share (%) of farms that used these inputs in 1999.Source: Leuven ACE database.
Individual Farmers
Input types Non-registered Registered Corporative farms
Varieties (seeds)Fodder cereals Grass forage or other animal feedIndustrial fertilizerChemicalsConcentrate fodderFuel for tractorsIrrigationOther inputs
0000000--
2200
21171700
15
62131666372442544
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1.2.Models of vertical integration of food supply chains.
Figure 1.3. The share of farms selling with contracts.
Source: White a Gorton, 2004.
Relations 1997 1999 2001 2003
Spot markets
All farmersSmall farmersLarge farmers
Contracts
All farmersSmall farmersLarge farmers Own farmsOther agents
27,225,015,6
41,336,237,0 6,416,7
43,541,325,5
61,743,858,3 8,328,6
47,144,225,5
73,146,269,217,846,2
50,047,223,1
77,449,173,626,449,1
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2. FDI AND RESTRUCTURING : DAIRY SECTOR IN CEEC
• vertical coordination has an increasing tendency in the whole CEEC region,
• its development is strongly determined by reform policies,
• vertical coordination starts in its early stage as forms of support in providing input supplies, extension services and simple loans, and later as the system of vertical coordination improves, it is realized in the forms of such instruments such as collaterals or provision of investment loans.
• vertical coordination plays a crucial role in the most developed CEEC and regarding other countries from the region, convergence is expected.
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2. FDI AND RESTRUCTURING : DAIRY SECTOR IN CEEC
Figure 2.1. Dairy production in selected CEEC, % 1984-89 100%*
40
60
80
100
120
1984-88
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Bulharsko
Maďarsko
Poľsko
ČR
SR
Rusko
Notes: * 1992 = 100 for Russia and 1984-88=1993 for SR and ČR. Source: : Swinnen, own calculation and FAOSTAT. data
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2. FDI AND RESTRUCTURING : DAIRY SECTOR IN CEECFigure 2.2. Yields in selected CEEC, % 1984-89 = 100%*
60
80
100
120
140
160
180
1984-88
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Bulharsko
Maďarsko
Poľsko
Albánsko
ČR
SR
Rusko
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2. FDI AND RESTRUCTURING : DAIRY SECTOR IN CEECFigure 2.3. Farm structure according to size – market research in Poland
0
5
10
15
20
25
30
35
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26Veľkosť stáda
Po
če
t fa
rie
m
rok 1995
rok 2000
Notes: * 1992 = 100 for Russia and 1984-88=1993 for SR and ČR. Source: : Swinnen, own calculation and FAOSTAT. data
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2. FDI AND RESTRUCTURING : DAIRY SECTOR IN CEEC
Figure 2.4. Effects of economic reforms on the development of retail in CEEC*
0
10
20
30
40
50
60
2 2,5 3 3,5 4 4,5Index reforiem EBRD
Po
die
l m
od
ern
éh
o v
eľk
ob
ch
od
u (
%)
1998
2002
Note: * 1992 = 100 for Russia and 1984-88=1993 for SR and ČR. Bulgaria, Croatia, Czech Republic, Hungary, Poland, Romania, Russia, Slovakia, UkraineSource: Swinnen ,own calculation FAOSTAT data.
Copyright © 2004 South-Western
2. FDI AND RESTRUCTURING : DAIRY SECTOR IN CEEC
Figure 2.5. Effects of economic reforms on support programs for farms in CEEC dairy sector*
0
10
20
30
40
50
60
70
80
90
2 2,5 3 3,5 4
Index reforiem EBRD
Po
dp
ora
zo
str
any
veľk
oo
bch
od
ov
(% r
esp
.)
Note: * 1992 = 100 for Russia and 1984-88=1993 for SR and ČR. Albania, Bulgaria, Poland, Slovakia
Source: Swinnen, own calculation from FAOSTAT data
Copyright©2003 Southwestern/Thomson Learning
Obrázok 2.6. Vývoj kvality mlieka vo východnej Európe. Top kvalita* Najhoršia kvalita 1. Poľsko 2. Bulharsko c) Rusko
0
20
40
60
80
100
1996 1998 2001
0
20
40
60
80
100
1996 1998 2001
0
20
40
60
80
100
1996 1998 2001
0
20
40
60
80
100
1996 1998 2001
0
20
40
60
80
100
1996 1998 2001
0
20
40
60
80
100
2000 2004
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2. FDI AND RESTRUCTURING : DAIRY SECTOR IN CEECFigure 2.7. The share of suppliers owning cooling tanks
0
10
20
30
40
50
60
70
80
90
100
1995 1998 2001 2003
Po
die
l d
od
avate
ľov s
vla
stn
ým
i ch
lad
.zar.
(%
)
Mlekpol
Low icze
Mazow sze
Kurpie
Source: Swinnen, own calculation from FAOSTAT data.
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2. FDI AND RESTRUCTURING : DAIRY SECTOR IN CEEC
Effects of introducing vertical coordination and restructuring in dairy sector:
• Payment delay
• Deliveries and productivity
• Quality
• Investment and access to loans
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3. THE POSITION OF RETAILERS AND THEIR EFFECT ON AGRO-FOOD SECTOR
OF CEEC
Table 3.1: Main characteristics of each stage of retail transformation
Characteristics
Stage
Communism Transformation Globalization
Concentration in retail sectorMain source of capitalFDIShare of modern retail chainsShare of large multinational retail chainsLocation of modern chains
HighDometic
-LowLow
-
LowDomestic
Purchase of exist. subjectsLowLow
In the cities
HighForeign
GreenfieldHighHigh
Everywhere
Source: Dries a kol. , 2004
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3. THE POSITION OF RETAILERS AND THEIR EFFECT ON AGRO-FOOD SECTOR
OF CEECRetail system during communism was organized in three phases:• since the 50-ies state retail chains owned regional distribution
centers, that sold mainly processed products,• Since the beginning of the 80-ies agro-combinats opened retail
sales centers, selling own products (Podravka, Voce a Dona – agro-combinats with processed vegetables),
• State retail chains had very few or did not have at all fresh vegetable products, mainly they were sold in private markets and small shops. Private subject and state storage centers provided fresh fruits and vegetables from non-formal traditional wholesale subjects, that transported supplies from rural areas directly from farmers, who produced and sold at market. Some suppliers provided some products (in limited quantities and variety) imported (tropical fruit) from other socialist countries.
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3. THE POSITION OF RETAILERS AND THEIR EFFECT ON AGRO-FOOD SECTOR
OF CEECThe transition stage • In the first half of 90-ties state and collective subjects
of retail systems in region ceased to exist. This process was faster and more complete in the case of centralized retail systems in developed countries of the region (like Czechoslovakia). Privatization in this case meant immediate sale of centralized retail system to private wholesalers. At the same time it meant closure of state controlled retail. This process of system dismantling developed with a delay in countries of second and third wave. During this period private food wholesale subjects started to appear in the region, substituting for state or collective wholesale subjects.
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3. THE POSITION OF RETAILERS AND THEIR EFFECT ON AGRO-FOOD SECTOR
OF CEECGlobalization stage • Retail sector transformation have been supported by deep
transformation of procurement systems in retail chains. Changes in procurement systems were determined by the motivation to succeed in the ever growing competition of larger supermarkets and foreign investors. For this purpose, it was necessary to reduce costs, trade with consistent amounts and standard products as well as with higher quality and differentiated assortment with the objective to gain trade advantage. On the other hand, the capacity for organizational change and technological opportunities of retail systems was increased based on the transportation of larger quantities and technological know-how transfer of foreign retailers.
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3. THE POSITION OF RETAILERS AND THEIR EFFECT ON AGRO-FOOD SECTOR
OF CEECIn order to satisfy the needs of retailers looking for
alternatives to existing wholesale subjects and in line with achieving comparative advantages and reducing costs with increasing quality, leading retail in CEEC during last years tended to introduce new procurement systems characterized by 6 key pillars:
• Return to centralized procurement systems• Orientation toward cross-border system• Orientation on specialize wholesale subjects• Using globalized logistics of multinational companies
in order to improve rapidly procurement system• Orientation on systems of preferred suppliers• Orientation on private standards
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3. THE POSITION OF RETAILERS AND THEIR EFFECT ON AGRO-FOOD SECTOR
OF CEECObrázok č. 3.1: Koncentrácia v sektore maloobchodu a dodávateľsko-odberateľských vzťahov
ČR/SR spracované
potr. výrobky
ČR/SR čerstvé potr. výrobky
Chorvátsko čerstvé
potr. výrobky
Chorvátsko spracované
potr. výrobky
D O D.
O D B.
V Z Ť A H Y
vysoká
vysoká
nízka
nízka SEKTOR MALOOBCHODU
Source: Dries a kol. , 2004
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3. THE POSITION OF RETAILERS AND THEIR EFFECT ON AGRO-FOOD SECTOR
OF CEECFigure. 3.2: Development of modern retail market share
0
10
20
30
40
50
60
1998 1999 2000 2001 2002 2003
rok
%
ČR
SR
Chorvátsko
*Modern retail sector includes hypermarkets and supermarkets.
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3. THE POSITION OF RETAILERS AND THEIR EFFECT ON AGRO-FOOD SECTOR
OF CEECFigure 3.3: Retail chain share on the total retail turnover
0
10
20
30
40
50
60
ČR Maďarsko Poľsko SR Chorvátsko Rumunsko Bulharsko
%
rok 1999
rok 2002
Source: Dries a kol. , 2004
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3. THE POSITION OF RETAILERS AND THEIR EFFECT ON AGRO-FOOD SECTOR
OF CEECFigure 3.4: Number of foreign supermarkets in CEEC, in 2002
0
50
100
150
200
250
300
350
400
Ahold Spar Rewe Delhaize Cora JuliusMeinl
Reitan IGA Carrefour Tesco Iné
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3. THE POSITION OF RETAILERS AND THEIR EFFECT ON AGRO-FOOD SECTOR
OF CEECFigure 3.5: Number of foreign hypermarket in CEEC, in 2002
0
10
20
30
40
50
60
70
80
Tesco Ahold Carrefour Metro Auchan Globus Lidl Casino Leclerc Rewe Iné
Source: Dries a kol. , 2004
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3. THE POSITION OF RETAILERS AND THEIR EFFECT ON AGRO-FOOD SECTOR
OF CEECFigure 3.6: FDI share in top 50 retail chains (%)
0
10
20
30
40
50
60
70
80
90
1993 1994 1995 1996 1997 1998 1999 2000 2001
rok
%
ČR
SR
Source: Dries a kol. , 2004
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3. THE POSITION OF RETAILERS AND THEIR EFFECT ON AGRO-FOOD SECTOR
OF CEECFigure 3.7: FDI share on total retail turnover (%)
0
5
10
15
20
25
30
35
40
1993 1994 1995 1996 1997 1998 1999 2000 2001
rok
%
ČR
SR
Source: Dries a kol. , 2004
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3. THE POSITION OF RETAILERS AND THEIR EFFECT ON AGRO-FOOD SECTOR
OF CEECFigure 3.8: Development of the number of hypermarkets in Czech Republic
Počet hypermarketov
0
20
40
60
80
100
120
IV1996
I1997
II1997
III1997
IV1997
I1998
II1998
III1998
IV1998
I1999
II1999
III1999
IV1999
I2000
II2000
III2000
IV2000
I2001
II2001
III2001
IV2001
I2002
Source: Dries a kol. , 2004
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3. THE POSITION OF RETAILERS AND THEIR EFFECT ON AGRO-FOOD SECTOR
OF CEECFigure 3.9: The hypermarkets share in modern retail sector
05
101520253035404550
1998 1999 2000 2001 2002 2003
rok
%
ČR
SR
Source: Dries a kol. , 2004
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3. THE POSITION OF RETAILERS AND THEIR EFFECT ON AGRO-FOOD SECTOR
OF CEECFigure 3.10: Modern retail share on total retail turnover and GDP per capita .
0
10
20
30
40
50
60
0 1000 2000 3000 4000 5000 6000 7000 8000
HDP/obyv. v USD
po
die
l re
ťazco
v
Source: Dries et. al. , 2004, Bulgaria, Croatia, Czech Republic, Hungary, Poland, Romania, Russia,Slovakia, Ukraine
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3. THE POSITION OF RETAILERS AND THEIR EFFECT ON AGRO-FOOD SECTOR
OF CEECFigure 3.11: Modern retail share on total retail turnover and the reform index in CEEC.
-10
0
10
20
30
40
50
60
2 2,5 3 3,5 4
index reforiem EBRD
po
die
l re
ťazc
ov
Source: Dries a kol. , 2004, Bulgaria, Croatia, Czech Republic, Hungary, Poland, Romania, Russia,Slovakia, Ukraine
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Conclusion
Our analysis and other studies show that modern retail invest in the enlargement f local capacities especially in sub-sectors like fresh fruit and vegetable. Similar support packages are offered mainly multinational chains. Competition among retailers for high quality suppliers forces other retailers (including domestic ones) to follow the attitude of modern multinational chains in order to secure sufficient supply basis.
Copyright © 2004 South-Western
Conclusion
Many specialists emphasized the weak side of food supply chain in CEEC that affected the worsening trade balance between EU and CEEC in the last 20 years. Retailers investment and their induced changes within food supply chain can play a very important role in improving the competitiveness of agro-food sector in CEEC within EU.
Copyright © 2004 South-Western
Conclusion
Modern retail investment can and will have an effect not only on agriculture producers but also in a broader context on rural development. This includes better access to food products of higher quality and other product for rural households, as well as creation of job opportunities out of agriculture sector or indirectly linked to food supply chain. Investment in packaging, quality control, extension services probably will lead to creation of new job opportunities, but on the other hand tougher competition from retailer chains may lead to the exclusion of traditional sales subjects from the market.