FoodReview, September-December 2001, Volume - AgEcon Search

FoodReview, September-December 2001, Volume - AgEcon Search

Global Food Trade U.S. Food Companies Access Foreign Markets Through Direct Investment Christine Bolling 202-694-5212 [email protected] U .S. f...

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Global Food Trade

U.S. Food Companies Access Foreign Markets Through Direct Investment Christine Bolling 202-694-5212 [email protected]

U

.S. food processing firms use exports to reach foreign markets and consumers, but foreign direct investment (FDI) is more effective at generating overseas revenues. FDI by U.S. food processors generated an estimated $150 billion in sales in 2000, compared with $30 billion generated by U.S. processed food exports (fig. 1). FDI refers to investment in a foreign entity or affiliate in which a parent firm holds a substantial, but not necessarily a majority, ownership interest. Ownership of assets in a foreign affiliate enables the parent firm to exercise control over the use of those assets. The U.S. Department of Commerce defines FDI as ownership of 10 percent or more of a firm by a foreign firm. More than fourfifths of U.S. food processing affiliates in foreign countries were majority owned by U.S. parent firms in 1998. FDI has created prominent multinational corporations. For example, Campbell Soup, General Mills, Ralston Purina, PepsiCo, and Tyson Foods are U.S. companies with a strong presence abroad. Similarly, foreign-owned multinational food processing companies, such as Nestle, Unilever, Parmalat, and Danone, have invested in the U.S. food processing industry. The authors are agricultural economists with the Market and Trade Economics Division, Economic Research Service, USDA.

Agapi Somwaru 202-694-5295 [email protected]

FDI is often a cost-effective way to reach foreign markets. For some food products, it is economically advantageous for a firm to invest capital in overseas production rather than ship the product from a domestic source. Companies use FDI to circumvent trade barriers, gain access to less expensive resources, and tailor products to local tastes in other markets. These factors are especially important to the processed food industry. Trade barriers, such as tariffs (taxes on imports) or import quotas, encourage companies to set up manufacturing plants in the countries

whose markets they are trying to reach. For example, Canada has high trade barriers for dairy products, and large European companies, such as Nestle, Danone, and Parmalat, have entered the Canadian dairy product market through Canadian affiliates. Similarly, U.S. trade barriers for foreign wines and dairy products have led European companies to purchase wineries and build dairy plants in the United States. Lower input costs, whether for raw materials or labor, also attract food companies to FDI. For example, sugar is less expensive in Canada

Well-known U.S. brands produced in other countries must sometimes be tailored to appeal to local tastes and cultural differences. Credit: Photos provided by Kellogg Company. All rights reserved. ©2001 Kellogg Co.

September-December 2001

23

Global Food Trade Figure 1

Processed Food Sales From U.S. FDI Exceed U.S. Food Exports Billion dollars 150 Food processing sales from FDI 120

90

60 Processed food exports

30

0 1982

84

86

88

90

92

94

96

98

2000

Note: 1999 and 2000 FDI sales are estimates. Source: U.S. Department of Commerce, Bureau of Economic Analysis.

and Mexico than in the United States, making it advantageous to produce confectionery and other bakery products in those countries rather than in the United States. Similarly, low labor costs in Mexico, Argentina, and Brazil have attracted foreign investment. Also, raw materials, such as wheat flour, soybean oil, and tropical products, often cost less in these countries, leading foreign firms to invest in food processing plants. The need to tailor products to local tastes and cultural differences is another reason to locate manufacturing plants in other countries. For example, in Mexico, Japan, and Korea, recipes for well-known U.S. brands must sometimes be changed to appeal to local consumers.

Trade Agreements Spur Foreign Investment Foreign food processing affiliates of U.S. companies generated $150 billion in sales in 2000 (table 1). U.S. FDI in foreign food processing companies grew from $9 billion in 1980 to $36 billion in 2000. U.S. compa-

nies see FDI as an opportunity to expand their markets beyond the continental United States, and liberalized investment rules that are often included in regional trade agreements allow food companies to expand their markets. The United Kingdom, Mexico, and Canada had the most sales from U.S. FDI in food processing in 2000 (table 2). In the latter half of the 1990s, sales from FDI were especially strong in Mexico. The 1994 North American Free Trade Agreement (NAFTA), which lowered or eliminated tariffs and promotes market integration between the United States, Canada, and Mexico, boosted investor confidence. Sales from U.S. FDI in food processing in Brazil and Argentina also increased sharply during the 1990s. These two countries, along with Paraguay and Uruguay, formed MERCOSUR (Mercado Comun del Sur) in 1991. MERCOSUR is a freetrade agreement similar to the European Union and NAFTA. Brazil and Argentina have traditionally been limited markets for U.S. food products because they produce many of FoodReview • Volume 24, Issue 3

24

the same agricultural and food products as the United States, often at lower costs. U.S. multinationals, however, used FDI as an opportunity to enter the expanded MERCOSUR market. MERCOSUR and NAFTA have caused U.S. processed food companies to retarget their investments. FDI by U.S. food companies in the European Union grew 124 percent from 1990 to 2000, but U.S. FDI in other Western Hemisphere countries grew 183 percent. U.S. companies also increased FDI in China in the 1990s as that country liberalized foreign investment rules and prepared itself for full membership in the World Trade Organization. FDI is likely to increase in the near future. The year 2000 was a busy one for mergers and acquisitions by U.S. and foreign multinational food companies. Unilever, jointly headquartered in the United Kingdom and the Netherlands, purchased three U.S. companies: Slim Fast Foods for $2.3 billion, Bestfoods for $8.6 billion, and Ben and Jerry’s for $0.4 billion. Fosters Brewing, headquartered in Australia, purchased U.S. Beringer Wines for $1.1 billion, and Cadbury-Schwepps of the United Kingdom purchased Triarc (maker of Snapple) for $0.7 billion. U.S. acquisitions included General Mills’ purchase of Pillsbury from Diageo (a United Kingdom food and beverage conglomerate) for $5.1 billion.

Most Output Remains in the Host Country Although U.S. multinational food processing firms establish affiliates abroad primarily to serve the host markets, there are clear exceptions. In 1998, 74 percent of the sales of U.S. affiliates remained in the host countries, while 22 percent were exported to other countries. Only 4 percent of sales ($4.8 billion) were exported back to the United States.

Global Food Trade Of the $4.8 billion in total sales by U.S. food processing affiliates sent back to the United States, Canada accounted for 44 percent, Latin America for 37 percent, and Europe for 15 percent. Interestingly, in the United States and Canada, manufacturing plants of the same multinational firm supply products to two

countries. For example, Nabisco in Ontario, Canada, makes cookies sold in both the Eastern United States and Eastern Canada; pasta and confectionery products are marketed the same way. Cargill and IBP in Alberta, Canada, market beef products in Western Canada and the Western United States.

Foreign Firms Also Invest in the U.S. Food Industry Foreign food companies also invest in the U.S. market, but this inward FDI is at a scale much smaller than U.S. FDI abroad. Following a high of $8 billion in 1996, FDI in the U.S. processed food

Table 1

Sales From FDI by U.S. Food Firms Are Highest in Food Processing Sector

1982

1987

1992

1997

1998

2000 est.

Billion dollars Food processing

39.2

50.1

89.2

128.3

133

150

Food wholesaling

6.2

9.2

14.4

21.4

24

30

Retail food stores and eating and drinking places

8.7

9.7

21.2

NA

NA

NA

54.1

69.0

124.8

NA

NA

NA

Total, all U.S.-owned affiliates in food marketing

Note: NA = not available. Retail food stores’ sales are no longer reported because of the presence of hypermarkets and nonfood retailing. Source: U.S. Department of Commerce, Bureau of Economic Analysis.

Table 2

Sales by U.S.-Owned Food Processing Affiliates Abroad Grew 56 Percent Between 1987 and 1997

Country/region

1982

1987

1992

1997

1998

Share of 1998 total Change, affiliate sales 1987-97

Million dollars

Percent

Total, all countries

39,023

50,067

82,238

128,274

133,141

100

156

Europe United Kingdom Germany Netherlands

18,974 5,696 2,660 2,706

29,044 7,124 6,160 4,753

53,752 12,274 8,465 7,270

66,055 15,176 9,132 9,382

67,388 17,485 9,162 8,852

51 13 7 7

127 113 48 97

Canada

5,258

5,522

NA

13,181

14,166

11

138

Asia and Pacific Japan Australia China

5,432 2,363 1,441 NA

8,559 4,442 1,438 NA

13,712 4,055 3,569 NA

22,598 5,893 4,697 1,626

20,487 5,708 4,392 1,443

15 4 3 1

164 32 226 NA

South America Argentina Brazil

5,133 630 2,535

3,911 758 1,869

6,794 2,040 2,874

14,098 3,604 6,095

15,149 3,409 6,862

11 3 5

260 375 226

Central America Mexico

2,951 2,556

2,176 1,596

5,163 4,460

10,070 9,209

13,000 12,305

10 9

363 477

Note: NA = not available. Source: U.S. Department of Commerce, Bureau of Economic Analysis.

September-December 2001

25

Global Food Trade industry decreased to $1.5 billion in 2000, mostly due to the divestiture of a large, family-owned, Canadian corporation. Japanese multinationals also decreased FDI in U.S. food processing plants. Mexican companies, however, increased their investments to over $1 billion. GIBSA, a large bread-baking company, and Gruma, a corn-processing company, invested in bread-baking, corn-processing, and tortilla companies in the United States. Estimated sales from total FDI in U.S. food processing companies are $65 billion, of which only $3 billion are exported out of the United States, mostly to

Japan and the United Kingdom. The largest foreign investments are in grain and oilseed milling, dairy products, bakeries, tortilla-making plants, and beverages. European companies still dominate FDI in U.S. food manufacturing, with over 70 percent of total sales, mostly from the United Kingdom (table 3). Sales from Japaneseowned affiliates decreased in 1998 after peaking in 1997. European investments in the United States are broad based. Products of U.S. affiliates of European companies include wine, dairy products, chocolate products, frozen

and canned foods, grain products, and bottling plants. European companies with large interests in the United States include Nestle, Unilever, Cadbury-Schwepps, and Danone. Japanese companies have purchased or built U.S. affiliates that mostly produce ethnic foods, such as noodles, surimi, soy sauce, and dry soup mixes. The Japanese have also invested in livestock and meat processing, and water bottling plants. Mexican companies also mostly invest in U.S. companies that make ethnic foods, but they have added bread-baking companies to

Foreign-Owned Food Stores’ Sales Exceed Food Processing Sales FDI in U.S. food retailing increased rapidly in the second half of the 1990s to nearly $13 billion in 1999 (see figure). Several wellknown grocery chains in the United States, including Albertson’s, A&P, Food Lion, Ahold (which owns several supermarket chains), and Shaw’s Supermarkets, are owned by foreign firms (see table). Four of these food chains are on the list of the 10 largest food retailers in the United States. Their sales increased sharply during the 1990s as some parent companies built new stores and others acquired other U.S. supermarket chains. The $70 billion in sales by foreign-owned food stores in the United States is much larger than the sales of foreign food processing affiliates.

FDI in U.S. Retail Food Stores Took Off in the Mid-1990s Billion dollars 14 12 10 8 6 4 2 0 1981

83

85

87

89

91

93

95

97

99

Source: U.S. Department of Commerce, Bureau of Economic Analysis.

Many U.S. Food Retailers Have Foreign Ties Firm

U.S. grocery stores, 1999 Rank Sales

Foreign investor

Country

Theo Albrecht Ahold Delhaize, Le Lion Tengelmann Aldi Group

Germany Netherlands Belgium Germany Germany

Billion dollars Albertson’s/American Stores Ahold, U.S.A. Food Lion/Hannaford Bros. A&P Aldi, U.S.A.

2 4 7 9 19

34.0 23.4 13.6 10.4 2.4

Source: Kaufman, Phil R., Charles R. Handy et al. Understanding the Dynamics of Produce Markets: Consumption and Consolidation Grow, Agricultural Information Bulletin 758, U.S. Department of Agriculture, Economic Research Service, August 2000.

FoodReview • Volume 24, Issue 3

26

Global Food Trade their investments. Canadian investments in U.S. food manufacturing are mostly concentrated in fruit juices and frozen foods. For example, McCain’s is a large Canadian company that has investments in frozen potato processing. Sometimes, ownership itself is unclear. For example, Cargill was one of the original investors in Brazil’s orange juice concentrate industry, along with France’s Louis Dreyfus and Brazil’s Cutrale Citrus and Citrosuco Paulista. During the 1990s, these Brazilian companies invested in Florida citrus groves and processing plants. Brazilian companies are now responsible for about 40 percent of the juice processed in Florida. Foreign companies also invest in other parts of the U.S. food chain, especially food retailing (see box). Sales from foreign-owned food retailers exceed sales of foreign-

owned food processing companies in the United States (table 4).

Has Foreign Investment Displaced Trade? USDA’s Economic Research Service examined the reasons behind the increases in FDI by U.S. food companies and in U.S. exports of processed foods. The levels of consumer incomes largely explain why U.S. processed food exports are highest to Europe, Japan, and Canada (see “Consumer Preferences and Concerns Shape Global Food Trade” elsewhere in this issue). The strong dollar, which makes it more costly for foreign consumers to import U.S. goods, has largely driven U.S. food companies to invest in firms abroad. A strong dollar also makes the purchase of assets in foreign countries less expensive. When domestic capital sources decline,

which is common when a country’s currency depreciates, countries often seek foreign capital to spur economic growth. The relationship between a strong dollar and increased U.S. FDI is especially evident in NAFTA countries. Whether FDI complements or competes with exports depends on the country and the product. Products made by foreign affiliates of U.S. companies often compete with U.S. exports. For example, when beer and soft drink plants open in other countries, U.S. exports of those products to these countries decline. In many cases, however, FDI complements U.S. processed food exports. For example, the United States exports syrups and malt for soft drinks and beer that are manufactured abroad. The United States often exports soybean oil and high-fructose corn syrup that are used as ingredients in

Table 3

Value of Shipments by U.S. Food Manufacturing Affiliates of Foreign Firms More Than Doubled During 1987-97

Country of origin

1982

1987

1992

1997

1998

Share of 1998 total Change, affiliate sales 1987-97

Million dollars Europe Canada Japan Other Total

10,527 2,218 564 1,538 14,847

17,967 3,174 612 1,109 22,862

32,994 5,113 5,131 3,561 46,799

Percent 35,873 3,477 5,680 5,228 50,258

38,209 4,570 5,308 5,417 53,405

72 9 11 10 100

100 10 828 371 120

Source: U.S. Department of Commerce, Bureau of Economic Analysis. Table 4

Food Retailing Accounts for the Largest Share of FDI in the U.S. Food Marketing System

Sector

1982

1987

1992

1997

1998

Share of 1998 total 2000 est. affiliate sales

Billion dollars Food processing Food wholesaling Retail foodstores Eating and drinking places Total, all foreign-owned U.S. affiliates in food marketing

Percent

14.8 7 18.8 NA

22.9 14 24.3 0.5

46.8 19 48.2 4.9

47 44 67.7 7

49.8 40 70.7 9.1

50 42 73 11

29 24 42 5

40.6

61.6

118.8

165.7

169.6

176

100

Note: NA = not available. Source: U.S. Department of Commerce, Bureau of Economic Analysis.

September-December 2001

27

Global Food Trade processed foods like bread, bakery products, frozen dinners, and breakfast foods produced by Sara Lee, Kraft Foods, and Kellogg in other countries. Archer-Daniels-Midland, Ralston Purina, and Cargill often use U.S. agricultural products as ingredients in livestock feeds produced in their foreign plants. As farming technology abroad has improved and U.S agricultural products have become less cost competitive, U.S. food processing affiliates have sought non-U.S. sources of agricultural commodities. Agricultural production in South America grew more than 30 percent during the 1990s, providing an important source of wheat, corn, and soybeans for U.S. manufacturing abroad. While foreign investment benefits parent companies, it also has important economic consequences for host countries. FDI can result in increases in new employment opportunities, salaries, and gross domestic product. Foreign affiliates of U.S. companies employed 551,500 persons, earning $13.6 billion, in 1998. Likewise, 188,000 persons, earning nearly $7 billion, were employed by foreign-owned food and beverage companies in the United States. The host countries also gain in less quantifiable ways. The country receiving foreign direct investment gains from the investing firm’s knowledge of technology, market-

ing, management, finance, and information services. Even when FDI occurs by acquisition, the parent firm typically upgrades the acquired firm’s production processes and equipment, quality and environmental controls, procurement practices, packaging, and distribution systems. FDI has become an increasingly important strategy for the U.S. food industry to expand abroad. In many instances, FDI has proved to be more economically feasible than exports as a means to access foreign markets. The value of foods produced by U.S. affiliates abroad have exceeded the value of U.S. processed food exports since the 1960s and this trend will continue in the near future.

References Bolling, Christine, and Agapi Somwaru. “U.S. Foreign Direct Investment in Foreign Food Processing Industries,” Paper presented at American Agricultural Economics Annual Meeting, August 2000. Bolling, Christine, Steve Neff, and Charles Handy. U.S. Foreign Direct Investment in the Western Hemisphere Processed Food Industry, Agricultural Economics Report No. 760. U.S. Department of Agriculture, Economic Research Service, March 1998. Gopinath, Musinamy, Daniel Pick, and Utpal Vasavada. “The Econom-

FoodReview • Volume 24, Issue 3

28

ics of Foreign Direct Investment and Trade With an Application to the U.S. Food Processing Industry,” American Journal of Agricultural Economics, Vol. 81, May 1999, pp. 442-52. Handy, Charles R., Phil Kauffman, and Steve Martinez. “Direct Investment Is Primary Strategy to Access Foreign Markets,” FoodReview, Vol. 19, Issue 2, May-August 1996, pp. 6-12. Mergerstat Review 2001. Global Mergers and Acquisitions Information, Applied Financial Information LP, 2001. Somwaru, Agapi, and Christine Bolling. “Macroeconomic Factors Affecting Growth in U.S. Foreign Direct Investment,” Paper presented at American Agricultural Economics Annual Meeting, August 1999. U.S. Department of Commerce. Foreign Direct Investment in the United States, Operations of U.S. Affiliates of Foreign Companies, U.S. Department of Commerce, Economics and Statistics Administration, Bureau of Economic Analysis, selected annual reports. U.S. Department of Commerce. U.S. Direct Investment Abroad, Operations of U.S. Parent Companies and Their Foreign Affiliates, U.S. Department of Commerce, Economics and Statistics Administration, Bureau of Economic Analysis, selected annual reports.