Sources of Firm Performance Differences in the US Food Economy

Researchers in economics and strategy have long been interested in understanding the determinants of firm performance. We apply the relatively novel approach of hierarchical linear modelling (HLM) to a large panel of food economy firms to shed new light on the long‐standing debate about the relative importance of industry, corporate parent and business unit effects on firm profits. Our results suggest that business unit and corporate effects are more relevant than industry effects in explaining firm performance differences in the food economy. In addition, we also explore the effect of specific strategic factors on performance within each level of analysis. In particular, we find that business‐segment size, industry barriers to entry, corporate diversification, R&D intensity, capital intensity and resource availability are significant predictor variables that explain firm performance differences. Given the relatively important role of corporate effects and the positive influence of corporate strategic variables on business unit performance, our findings suggest that the environment provided by corporate parents significantly affects business unit profitability. In other words, corporate strategy does matter and thus should continue to draw attention from scholars interested in explaining profitability in the food economy.     

The Persistence of Profitability among Firms in the Food Economy

The persistence of industry, firm-specific, and corporate-parent effects on firm profitability in the food economy are calculated and further analyzed within its four major sectors: food processing, wholesale grocery, retail supermarket, and restaurant. Profits are more persistent within an industry than within a corporation. The retail supermarket sector has had stable profits as has individual retail supermarket firms relative to the other three sectors.     

Implications of the Comprehensive Economic and Trade Agreement for Processed Food Markets

Canada and the European Union (EU) recently completed the Comprehensive Economic and Trade Agreement (CETA) to liberalize bilateral trade. Processed food trade between Canada and the EU is one of the fastest growing markets, in spite of large trade restrictions due to high tariffs and egregious nontariff barriers (NTB). The processed food sector is characterized by firms which differ in size, productivity, produce differentiated products, and engage in monopolistic competition. We implement a four‐region (Canada, the EU, the United States, and the Rest of the World) model of the processed food industry, incorporating these firm characteristics to study the effects of CETA. The results show Canadian and EU bilateral trade flows expand, the number of exporting firms rises, and net welfare in both these countries increases. Though CETA does not liberalize NTBs, we examine the impacts of a 40% cut in NTBs to highlight the benefits that would have accrued had CETA also covered NTBs. Under this scenario, the trade flows would have expanded significantly, and, more importantly, Canadian and EU welfare would have risen by 11.8‐ and 39.4‐fold, respectively. Since CETA excludes the United States, the U.S. processed food industry loses due to greater competition in Canadian and the EU markets, and the net U.S. welfare declines.     

Melitz Meets Milk: The Impact of Quota Abolition on EU Dairy Export Competitiveness

Previous studies of EU milk quota abolition usually assume perfect competition (PC) in the dairy industry, despite evidence to the contrary. We use a global computable general equilibrium framework with an imperfectly competitive (IC) model variant, which offers insights into structural change (i.e. scale of output, firm entry/exit) and varietal diversity in the dairy industry. A heterogeneous‐firm Melitz extension enriches our analysis by endogenising the decision‐making process of domestic firms when exporting (or not) to specific foreign markets. The results from a PC CGE model variant are found to be consistent with respected market outlooks and official data. Furthermore, PC and IC variants generate broadly similar trends – a result corroborated in a previous study of Italian dairy firms. Our IC model prediction of a ‘shakeout’ among EU dairy firms is tentatively supported by actual observations. Finally, as an industry characterised by significant product innovation, increased extra‐EU export orientation by remaining dairy firms increases varietal choice, which further boosts EU dairy exports compared with the PC model variant.     

Country‐Specific Determinants of Horizontal and Vertical Intra‐industry Agri‐food Trade: The Case of the EU New Member States

Intra‐industry trade (IIT) has become a widespread phenomenon with a growing role in international trade, though agricultural trade is usually neglected in empirical works. This article identifies the determinants of horizontal and vertical intra‐industry agri‐food trade between New Member States (NMS) and the EU‐27 in 1999–2010, by applying static and dynamic models with different specifications to panel data. Results show that IIT is mainly of a vertical nature in the NMS, though the majority of NMS export low quality agri‐food products to EU‐27 markets. Factor endowments are negatively related to agri‐food horizontal intra‐industry trade (HIIT), but positively to vertical intra‐industry trade (VIIT). Economic size is positively and significantly related to both types of IIT, while distance and IIT are found to be negatively related in both cases. Results also suggest that HIIT and VIIT are greater if a New Member State exports agri‐food products to another NMS while EU accession has had positive and significant impacts on both HIIT and VIIT, suggesting that economic integration fosters IIT.     

EU Requirements for Food Safety and Quality Systems in Turkey: Determinants of Perceptions

Abstract

The European Union (EU) is one of Turkey’s most important trade partners. A large number of Turkish agri-food processors, however, are still unable to produce in accordance with the EU specifications. Furthermore, it is uncertain how Turkish food producers perceive the EU regulations. Based on a questionnaire survey of 99 Turkish agri-food enterprises from various industry subsectors and a conceptual framework including knowledge, personal and economic perspectives, this article assesses perceptions of the EU requirements regarding food safety and quality systems in the Turkish agri-food industry. The results indicate that those perceptions vary widely among the processors depending on education level, firm size, and legal form of ownership. Moreover, subjective information related to the perceptions regarding advantages, requirements, and costs of food safety and quality practices significantly contributes to the perceptions examined. The findings have manifold implications which should be taken into account when adapting Turkish legislation to reflect EU regulations.     

On the Segregation of Genetically Modified,Conventional and Organic Products in European Agriculture: A Multi‐market Equilibrium Analysis

Evaluating the possible benefits of the introduction of genetically modified (GM) crops must address the issue of consumer resistance as well as the complex regulation that has ensued. In the European Union (EU), this regulation envisions the co‐existence of GM food with conventional and quality‐enhanced products, mandates the labelling and traceability of GM products and allows only a stringent adventitious presence of GM content in other products. All these elements are brought together within a partial equilibrium model of the EU agricultural food sector. The model comprises conventional, GM and organic food. Demand is modelled in a novel fashion, whereby organic and conventional products are treated as horizontally differentiated but GM products are vertically differentiated (weakly inferior) relative to conventional ones. Supply accounts explicitly for the land constraint at the sector level and for the need for additional resources to produce organic food. Model calibration and simulation allow insights into the qualitative and quantitative effects of the large‐scale introduction of GM products in the EU market. We find that the introduction of GM food reduces overall EU welfare, mostly because of the associated need for costly segregation of non‐GM products, but the producers of quality‐enhanced products actually benefit.     

Drivers of vertical intra‐industry trade: the case of the Hungarian agri‐food sector

This article investigates the drivers of vertical intra‐industry trade (VIIT) in Hungarian agri‐food trade with the European Union (EU). It identifies three possible ways to measure intra‐industry trade (IIT) flows (GHM, FF, and N methods) and defines six hypotheses to test for the drivers of VIIT with three panel data models (static, dynamic, and FEVD). The results suggest that factor endowments are negatively, while economic size is positively and significantly related to VIIT. Distance and VIIT were found to be negatively related as is commonly the case in the standard gravity model. It was also found that VIIT is greater if a New Member State (NMS) is exporting agri‐food produce to an NMS, while EU accession has ambiguously influenced the share of VIIT. In general, it seems that our results are independent from model estimations and interestingly they do not differ considerably as we a priori expected. Moreover, our results seem surprisingly robust across various measurements of ITT.     

CAP Subsidies and Productivity of the EU Farms

The paper investigates the impact of the Common Agricultural Policy (CAP) subsidies on farm total factor productivity (TFP) in the European Union (EU). We employ a structural semi‐parametric estimation algorithm directly incorporating the effect of subsidies into a model of unobserved productivity. We empirically study the effects using the Farm Accountancy Data Network (FADN) samples for the EU‐15 countries. Our main findings are clear: subsidies impact negatively on farm productivity in the period before the decoupling reform was implemented; after decoupling the effect of subsidies on productivity is more nuanced and in several countries it turned positive.     

Size and industry effects in the performance of agricultural cooperatives

The objective of this study is to determine if there are important size and industry effects on financial performance of agricultural cooperatives. The performance of 43 dairy, food, grain, and farm supply cooperatives in the U.S. was analyzed over the period 1970-1987 using financial ratios derived from accounting data. The analysis revealed significant size and industry effects. Large regional cooperatives are more efficient in utilizing their assets to generate sales, while small regional cooperatives have higher profitability. The findings suggest that the emphasis on growth may not always produce beneficial results among agricultural cooperatives. Among the four industries studied, the dairy regional cooperatives appear to be the strongest performers, while the food marketing cooperatives are characterized by the lowest performance measures. Since both dairy and food cooperatives engage in value-added processing, this difference in performance makes it difficult to reach clear conclusions about possible advantages of disadvantages or vertical integration relative to traditional cooperative activities. Trend analysis indicates that the profitability of the agricultural cooperatives in all industry and size categories declined in response to the downturn in U.S. agriculture after 1980. While the decline in profitability was at similar rates for both large and small cooperatives, the variation of efficiency and leverage was in opposite directions. Large cooperatives may be expected to continue improving their asset utilization without relative improvement in profitability, and increasing the level of their debt in relation to equity.     

Finnish food industry in 1989-2002: an output-oriented input-output analysis

Ten years in the EU (European Union) have passed and structural changes have taken place in the food sector, but it is a common opinion that as far as production is concerned the food sector has managed better than expected. In this paper, we study structural changes in the Finnish food industry in 1989-2002, with the focus on the use of domestic and imported inputs and value-added formation before and after joining the EU. An input-output (I-O) analysis output approach will be applied, as this enables to trace the multiplier effects of an industry's total output. The results confirm an increase in imported inputs as well as in demand of the domestic service industries; and conversely, a decrease in the food industry's (own) value added. It is concluded that outsourcing, labour reduction and increased imports have improved the efficiency of the Finnish food industry and contributed to its stable development after accession to the EU.     

Are In‐House and Outsourcing Innovation Strategies Correlated? Evidence from the European Agri‐Food Sector

We analyse European agri‐food firms’ choices about innovation in‐house or through outsourcing and provide empirical evidence about the correlation between these strategies. The relationship between the innovation strategy and firm‐, industry‐ and innovation‐specific characteristics is analysed through a bivariate probit model, which uses firm data from the EFIGE Bruegel‐UniCredit dataset. Transaction cost, resource base and knowledge governance arguments are used to explain the choice of innovation strategy. Our results show that the decisions to innovate in‐house or through outsourcing are independent from each other. In addition, we find that several organisational characteristics such as communication systems, human resource practices and specialisation are likely to influence both strategies. Conversely, organisational characteristics such as the allocation of authority and the business network do not seem relevant in determining the innovation strategies of the European agri‐food sector.     

The Determinants of Employment in Foreign Firms in the UK Food Manufacturing Sector: A Note

This paper seeks to evaluate the factors that have given rise to the large presence of foreign firms in the UK food and drink manufacturing sector. Foreign Direct Investment (FDI) in food and drink manufacturing is very high – the second highest for any manufacturing sector in the UK economy. An empirical model is tested on 48 5‐digit sectors in the food industry and we find that brands, skills and a low propensity to export positively affect employment in EU‐owned firms. Alternatively, employment in non‐EU owned firms is affected by propensity to export factors and by the effective tariff rate.     

Exploring costs and benefits of compliance with HACCP regulation in the European meat and dairy sectors

A Hazard Analysis and Critical Control Point (HACCP) Program was introduced as a mandatory measure in the EU in the 1990s. Despite its impact on the food industry, only limited literature addresses the issue of cost and benefits of HACCP at the firm level in Europe. This paper illustrates the results of a pilot study on case studies in Italy, UK and The Netherlands, providing a first assessment of the order of magnitude of costs of compliance and a qualitative illustration of the main benefits perceived by producers.     

Regional trade agreements and trade in agri-food products: evidence for the European Union from gravity modeling using disaggregated data

The proliferation of regional trade agreements in recent years has intensified the debate on the desirability of these agreements in themselves and their coexistence with multilateral free trade under the WTO. This study contributes to this debate by analyzing trade creation and trade diversion effects of the European Union on trade flows of six major agri‐food products from 1985 to 2000. An extended gravity model is estimated employing pooled data and generalized least squares methods. The results show that the developments in the EU since the mid‐1980s have served to boost agri‐food trade significantly among the members. Some of the growth in intra‐EU trade in agri‐food products came at the expense of nonmembers as the EU reduced the degree of relative openness to trade with nonmembers during this period and diverted trade from the rest of the world into the intra‐EU channels.     

EU‐wide Economic and Environmental Impacts of CAP Greening with High Spatial and Farm‐type Detail

In this paper we analyse the economic and environmental impacts of CAP greening introduced by the 2013 CAP reform using the CAPRI model. CAPRI captures the farm heterogeneity across the EU and it allows to depict the implementation of the greening measures in high detail while integrating the environmental effects and the market feedback of the simulated policy changes. The simulated results reveal that the economic impacts (land use, production, price and income) of CAP greening are rather small, although some farm types, crops (fallow land and pulses) and Member States may be affected more significantly. The CAP greening will lead simultaneously to a small increase in prices and a small decrease in production. Farm income slightly increases because the price effects offset the production decline. Similarly to economic effects, the environmental impacts (GHG emissions, N surplus, ammonia emissions, soil erosion, and biodiversity‐friendly farming practices) of CAP greening are small, although some regions may see greater effects than others. In general, the environmental effects at EU level are positive on a per hectare basis, but the increase in UAA can reverse the sign for total impacts. Overall, simulated GHG and ammonia emissions decrease in the EU, while the total N surplus, soil erosion and biodiversity‐friendly farming practices indicator slightly increase due to the CAP greening.     

Pricing‐To‐Market Analysis: The Case of EU Wheat Exports

The EU is a major player in the global wheat market. This paper examines the pricing behaviour of EU wheat exporters using a pricing‐to‐market (PTM) analysis. Wheat is an exemplary product for testing PTM theories as it is widely and frequently traded, and largely unbranded. We estimate the relationship between export unit values and exchange rates using quarterly panel data for 11 EU export destinations for 2000–2013. Results show that there is a meaningful long‐run relationship between export unit values and exchange rates, but there is little evidence of differential mark‐ups between EU export markets. Belarus and Iceland are exceptions where exporters from the EU appear to exercise local currency price stabilisation.     

Imported Intermediate Inputs and Firms’ Productivity Growth: Evidence from the Food Industry

Imported goods play a central role in determining the gains from trade. Using detailed trade and firm‐level data for Italy and France, we investigate the relationship between trade integration, imported intermediate inputs and firm performance in the food industry. Our main findings show that an increase in import competition spurs firm‐level productivity growth. Furthermore, the productivity growth effect attributable to imported intermediate inputs is significantly stronger than the effect due to imported final products. In addition, we find that new imported inputs are of particular importance, especially for Italian food firms, though less so for the French firms. Finally, the productivity growth effect of trade integration tends to be asymmetric across firms: more productive firms gain more from trade integration. These stylised facts have interesting policy implications.     

Profitability of incremental generic promotion of Australian dairy products

The motivation for this study rests on two factors. First, Australian dairy farmers spend around $20 million annually on generic promotion and estimates of the returns from this expenditure are required to facilitate efficient investment decisions. Second, while the Australian dairy industry has been highly regulated, there has been a substantial reduction in assistance over the past decade and farm‐gate milk prices were deregulated on 1 July 2000. The profit potential of promotion may vary with the degree of regulation, so past estimates of the returns from promotion may not hold in the competitive environment of the future. Hence, the aim of this study is to examine the effects of government intervention on the profitability for dairy farmers of incremental changes in generic dairy promotion expenditure using a perfectly competitive market as a reference point. Competitive market price and quantity outcomes for the Australian dairy industry are estimated. The impacts of increments in dairy product and competing product generic promotion expenditures on dairy farmers’ profits are assessed using equilibrium displacement modelling. Finally, graphical procedures are used to examine the effects of dairy industry regulation on the profitability of dairy promotion.     

Trends in Approval Times for Genetically Engineered Crops in the United States and the European Union

Genetically engineered (GE) crops are subject to regulatory oversight to ensure their safety for humans and the environment. Their approval in the European Union (EU) starts with an application in a given Member State followed by a scientific risk assessment, and ends with a political decision‐making step (risk management). In the United States (US) approval begins with a scientific (field trial) step and ends with a ‘bureaucratic’ decision‐making step. We investigate trends for the time taken for these steps and the overall time taken for approving GE crops in the US and the EU. Our results show that from 1996–2015 the overall time trend for approval in the EU decreased and then flattened off, with an overall mean completion‐time of 1,763 days. In the US in 1998 there was a break in the trend of the overall approval time. Initially, from 1988 until 1997 the trend decreased with a mean approval time of 1,321 days; from 1998–2015, the trend almost stagnated with a mean approval time of 2,467 days.