Analysis

of the size and

distribution of the
impacts of agricultural
trade at the firm and
industry levels in
developing countries
Analysis
of the size and
distribution of the
impacts of agricultural trade
at the firm and industry levels
in developing countries
Edited by
Manitra A. Rakotoarisoa
Trade and Markets Division
Economic and Social Development Department

Food and Agriculture Organization of the United Nations

Rome, 2015
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ISBN 978-92-5-108963-7

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Photo credits
Front cover: ©FAO/Joan Manuel Baliellas
©FAO/Christena Dowsett
©FAO/Simon Maina
©FAO/Giuseppe Bizzarri
Back cover: ©M. Namundjebo
 iii

Table of contents
Foreword vii
Acknowledgements viii
Executive summary ix

PART ONE

CHAPTER 1: Introduction 3

1.1 Motivations 3
1.2 Objectives
1.3. Approach
1.4 Organization and overview of this report 6

CHAPTER 2: Trade and R&D spillover effects: implications for firm level analysis
in the agricultural sector 9

2.1 Introduction 9
2.2 R&D spillover: Macro-level analysis 10
2.3 Conclusions: Part I 19
2.4 R&D spillover: Micro-level analysis 21
2.5 Conclusions part II 32
2.6 Conclusions and implications for future research and agricultural trade 33
Appendix A: Measuring stocks of knowledge 37
Appendix B: Grossman and helpman on weighting international information flows 38
References 39

CHAPTER 3: Investigating the structures of agricultural trade industry in

developing countries 49

3.1 Introduction 49
3.2 Agriculture, agri-business and trade 50
3.3 Agro-industry trade structure: global perspective 53
3.4 Developing country perspective 62
3.5 Agro-industry trade structure: causes and consequences 67
3.6 Conclusion 74
References 76
iv

PART TWO

CHAPTER 4: Analysis of trade impacts on the fresh pineapple sector in Ghana 83

4.1 Introduction 83
4.2 Evolution of the pineapple export industry in Ghana 85
4.3 Structure/organization of the pineapple export industry 90
4.4 Some quantitative analyses of trade impacts 95
4.5 Policy and trade environement 99
4.6 Strengths weaknesses, opportunities and threats (SWOT) analysis 106
4.7 Conclusions and recommendations 107
References 110

CHAPTER 5: Market structure and distribution of benefits from agricultural

exports: The case of the Philippine mango industry 113

5.1 Introduction 113

5.2 Philippine mango industry: review of past trends and studies 114
5.3 Method 121
5.4 Results 123
References 132

CHAPTER 6: Conclusions 133

6.1 Main findings 134

6.2 Implications for the promotion of agro-industry growth 137
6.3 Looking ahead 139

LIST OF BOXES

Box 3.1 Other rice trading companies 60

Box 3.2 Other major vegetable oil traders 60
Box 3.3 Sime Darby Berhad 63
Box 3.4 The case of CP foods 64
Box 5.1 The Philippines 115
 v

LIST OF TABLES

Table 2.1 Typology of goods 13

Table 2.2 Trader’s entry and exit 25
Table 2.3 Distribution of US exporting firms 28
Table 3.1 Share of agriculture and agribusiness in GDP, selected developing
countries, recent years (%) 50
Table 3.2 World merchandise exports, total and selected item, 1995–2010 52
Table 3.3 Concentration ratios in selected food industries in the US (%) 53
Table 3.4 Schema for characterizing the structure of global agro-industry 54
Table 3.5 Size indicators of top global input suppliers, 2007 (USD million) 55
Table 3.6 Concentration indicators in agricultural input industries, global markets,
1994 and 2009 55
Table 3.7 Top twenty companies with agricultural production as core business, 2007 56
Table 3.8 Share of global packaged food retail sales, by manufacturer, 2007 (%) 57
Table 3.9 Four-firm concentration ratios (CR4) in selected food products, 2007 (%) 58
Table 3.10 Revenues and business activities of top global agricultural logistics companies (2008) 59
Table 3.11 Annual sales of top ten global retailers, in $ billions, 2006 61
Table 3.13 Marketing boards for importables in selected developing countries 67

Table 4.1 List of Interviewees 85

Table 4.2 Fairtrade certified pineapple exporters 89
Table 4.3 List of major fresh pineapple exporters 91
Table 4.4 Land size and staff strength of current exporters of fresh pineapples 93
Table 4.5 Comparison of some production indicators Ghana vs. Costa Rica 94
Table 4.6 Correlation 95
Table 4.7 Impact of MD2 shock on export volumes (in pallets) 97
Table 4.8 Impact of MD2 shock on export quantities (a deeper look at the effect
of MD2 conversion) 97
Table 4.9 Impact of MD2 shock on export shares 98
Table 4.10 Impact of MD2 shock on export shares (a deeper look at the effect of
MD2 Conversion) 99
Table 4.11 Determinants of export per worker 101
Table 4.12 Determinants of export volume 101
Table 4.13 Determinant of export shares 102
Table 4.14 Determinant of capital intensity (Land size/Number of worker) 102
Table 4.15 SWOT analysis of the pineapple industry in Ghana 106

Table 5.1 Production cost of mango, 2010 117

Table 5.2 Distribution of mango farmers by size of farm and type of tenure, 2001 (percent) 117
Table 5.3 Price margins for mango by market level, in percent, 2002 119
Table 5.4 Marketing costs and farmgate price of mango in selected provinces, in P/kg (2001) 119
Table 5.5 Net margins by stage of marketing chain, selected locations 120
Table 5.6 Distribution of respondents 121
Table 5.7 Characteristics of enterprises average and enterprise heads 126
Table 5.8 Summary statistics of the enterprise variables 128
vi

Table 5.9 Pairwise correlation coefficients of selected enterprise variables 128

Table 5.10 Results of least squares regression on unit revenue 129
Table 5.11 Results of log-linear least squares regression on logarithm of unit revenue 130
Table 5.12 Results of log-linear least squares regression on logarithm of RKG (Pctexp dropped) 130

LIST OF FIGURES

Figure 2.1 Growth and productivity measurement 11

Figure 2.2 Knowledge spillovers: the narrowing information channel 17
Figure 2.3 Griliches (1963) Distribution of US commercial farms by sale 21
Figure 2.4 Firm’s entry and exit 24
Figure 2.5 A flow-chart interpretation of the Melitz model 26
Figure 2.6 Distribution of a 10% liberalization on French firms by size decile 32

Figure 3.1 World agricultural exports, 1961-2009, in constant $, (1984=100) 51

Figure 3.2 Top ten agricultural exporters , by country category, 2009 ($ billions) 52
Figure 3.3 Figure 3.3: Shares in the global food retail market by type of retail outlet, 2009 61
Figure 3.4 Export supply chain concentration ratios, selected countries 65

Figure 4.1 Export volumes of sea and air freighted pineapples from Ghana (1994 – 2011) 86
Figure 4.2 Number of fresh pineapple exporters in Ghana 89
Figure 4.3 Value chain map of fresh Pineapple exports 91
Figure 4.4 Contribution of exported pineapple volumes to total horticultural
volumes in Ghana 1998 - 2010 92
Figure 4.5 Percentage contribution of horticulture to agricultural exports from Ghana 92
Figure 4.6 Destination ports in Europe receiving sea freighted pineapples from Ghana 93
Figure 4.7 Destination of fresh pineapple exports from Ghana 93
Figure 4.8 Profitability analysis Ghana vs. Costa Rica HA 105

Figure 5.2 Area (in ‘000 ha) and yield (t/ha) of mango, 1990 – 2010 115
Figure 5.2 Mango production in the Philippines by island group, 1990 - 2011 (‘000 t) 115
Figure 5.3 Area (in ‘000 ha) and yield (t/ha) of mango,1990 – 2010 116
Figure 5.4 Mango production in the Philippines by island group, 1990 - 2011 (‘000 t) 116
Figure 5.5 Average farm size of mango farms by region, 2002, in ha 117
Figure 5.6 Marketing channels for the mango value chain 118
Figure 5.7 Exports under the reference and alternative scenario, ‘000 t 124
Figure 5.8 Production under reference and no-export scenarios, ‘000 t 124
Figure 5.9 Exports under the reference and alternative scenario, ‘000 t 124
Figure 5.10 Production under reference and no-export scenarios, ‘000 t 124
Figure 5.11 Exports under the reference and alternative scenario, ‘000 t 125
Figure 5.12 Production under reference and no-export scenarios, ‘000 t 125
Figure 5.13 Scatterplot diagram between unit revenue (RKG) and enterprise assets 127
Figure 5.14 Scatterplot diagram between unit revenue(RKG) and enterprise assets, in natural
logarithm 127
 vii

Foreword

Linking agricultural production to export markets developing countries. The case studies highlight
is viewed as one of the best means to increase the strong correlation between the organization
farmers’ market and income opportunities. and behavior of firms in the agro-export industries
Because agro-trading firms are often the main and the size and distribution of trade impacts.
interface between local farm production and The impacts on upstream input owners such as
foreign markets, understanding how these firms firm workers, and especially farmers, are also
are structured and how they behave in identifying examined. What mainly stands out from the
trade opportunities and sharing trade benefits is analyses is that beside the necessary actions
highly important from various perspectives. to improve market access, efforts to provide a
This book compiles a series of studies on stable supply of high-quality agricultural products
the structure and behavior of agro-trading to agro-industries are key to capturing trade
industries in developing countries, with the aims opportunities.
of investigating the size and distribution of trade The numerous findings reported in this
impacts among agro-trading firms and providing book represent an important contribution and
implications for agricultural and industrial constitute a basis for further applied studies,
policies. It offers a blend of theoretical reviews offering pointed policy implications for enhancing
and empirical case studies, combining analytical trade benefits through more efficient and
techniques with primary survey data on farmers, effective links between agricultural and trade
workers and agro-exporters in a number of policies.

Boubaker BenBelhassen
Director
Trade and Markets Division
Economic and Social Development Department
Food and Agriculture Organization of the United Nations
viii

Acknowledgements

This study is the outcome of the fruitful case studies. Authors thank the participants at
collaboration between FAO and the Government the Seminar ‘Agro-Trading Firms and Industries
of Australia on a project aimed at finding ways in Developing Countries: Size and Distribution of
to enhance the benefits from agricultural trade Trade Impacts’ (20-21 September 2012, Manila)
in developing countries. Authors thank Kari for their valuables comments and suggestions.
Heerman for her valuable insights in designing The project benefits from the valuables secretarial
the questionnaires and her efforts to review support provided by Malou Santos, Antonia
the relevant literature. Ramesh Sharma and Caggiani, Joy Masongsong, and Noemi Siquig.
Jamie Morrison helped initiate the project. The Technical support from Rita DiIorio, Rita Ashton
African Center of Economic Transformation and especially Ettore Vecchione who patiently
(Accra, Ghana) and the Philippine Institute for and skillfully formatted this report is gratefully
Development Studies have largely contributed to acknowledged. Remaining errors are the editor’s
the conduct of the surveys and analyses in the and authors’ own.
 ix

Executive summary

The size and distribution of the impacts of firms in the case studies (especially in Ghana
agricultural trade matter to traders and, more and the Philippines) focused generally not
important, to upstream links, including farmers and on controlling prices but on taking collective
workers whose income depends on agricultural actions to negotiate for better export prices and
trade revenues. Because it is generally firms, favourable export policies (especially low export
not countries, that practice trade, the size and tax) with their buyers and local governments.
distribution of the impacts of agricultural trade Agro-export industries in the case studies had
in developing countries are better examined at benefitted from trade expansion (even for the
the firm and industry level. The main purpose of pineapple export industry of Ghana, contrary to
the studies compiled in this report was to analyse prior fears that the industry would disappear).
the size and distribution of trade impacts among Firms with large financial and physical capital
heterogeneous agro-trading firms in developing assets got the largest trade benefits, in the forms
countries, with special attention given to the role of of market share and profit margins. Benefits
the organization and behaviour of these firms. The from exports were also found to be positively
studies included reviews of theories and evidence correlated with the skill level of employees, the
regarding trade impacts at the firm and industry education level of workers/managers, the total
level, as well as four case studies examining the size number of years in business, firms’ ability to link
and distribution of trade impacts for selected agro- with other firms, and their proximity to the export
industries. The aim was to provide suggestions markets.
for targeted policies and efforts to enhance trade There were however a few surprises. One
benefits among firms and input owners (farmers surprise was that although tariff and non-tariff
and workers) in upstream links. barriers still held export back, they were not the
The reviews of the literature and preliminary primary concern of the managers. The main
investigations pointed to the difficulties of applying concern was that these agro-exporting firms had
the macro-economic theories of trade impacts, many export opportunities but could not keep up
such as R&D spillover effects of trade, at the firm with the high and rising export demand. The main
and industry levels. Evidence about the size and reason was that the firms could not find stable
distribution of trade impacts and the role of the supplies of good quality raw materials. Another
organization and behaviour among trading firms in surprising result was the resilience of small- and
developing countries, remained scarce. Many agro- medium-sized firms. This seemed to have come
trading industries in developing countries, however, from their flexibility to manage risk by hiring and
were found to be concentrated on a few large firing inputs quickly. In some cases, these small-
firms; these firms were not necessarily colluding and medium-sized firms were found to be as input
but did engage in various forms of cooperation to productive as the large firms. Low productivity
enhance trade gains. These early indications had and high landing costs seemed also to be common
to be confirmed in the case studies. causes of lack of competitiveness of the firms.
The case studies covered the exports of These findings have led to important
pineapple in Ghana, horticultural products implications, with the main priority to enhance
in Indonesia, mango in the Republic of the agricultural trade benefits by raising the amount
Philippines, and cashew nut in the United and quality of raw materials. Technical and
Republic of Tanzania. These agro-processing institutional supports to production of raw
and exporting industries were found to be materials and swift decision to correct the often
concentrated in a few large firms holding large inconsistent and erratic production and trade
export shares. Cooperation among the larger policies would be needed to achieve this end.
 PART
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 Chapter 1: Introduction 3

Chapter 1:

Introduction

1.1 Motivations 1.2 Objectives

The size and distribution of the impacts of The main purpose of the studies compiled in this
agricultural trade matter to traders and, more report was to analyse the size and distribution
important, to upstream links, including farmers of trade impacts among heterogeneous agro-
and workers whose income depends on trade trading firms in developing countries, with special
revenues. Because it is generally firms, not attention given to the role of the organization and
countries, that practice trade, the size and behaviour of these firms. These studies adopted
distribution of the impacts of agricultural a broad definition of “heterogeneity” but mainly
trade in developing countries are often better emphasized the firms’ characteristics (size,
examined at the firm and industry levels. age, operating costs, etc.) and their strategies
However, trading firms are heterogeneous, and decision in facing market challenges and
i.e. they are not symmetric but differ on the opportunities. The focus was on selected agro-
bases of their characteristics (cost, lifespan, export industries that contributed significantly to
market share, asset size, etc.), decisions and the countries’ agricultural export revenues. The
strategies; such heterogeneity may define how results of the analysis were aimed at drawing
trade impacts are distributed among them and implications for the size and distribution of trade
the farmers and workers linked to them. This benefits at levels of the firms and industry, the
heterogeneity and the overall trade impacts upstream links, and ultimately the input owners.
of these trading firms are likely evident in the The study had three specific objectives, described
firms’ organization within their industry and next.
the ways they handle trade opportunities and
challenges. The first objective was to review the theory
Little is known, however, about the and evidence regarding the structure of the
distribution of trade impacts among firms, agro-trading industry in developing countries,
and information about the organization and which included each of the following aims:
behaviour of agro-trading firms in developing
countries is particularly scarce. To fill this void, • To define and to describe a typology of the
the Australian Government and the Food organization/structure of the agricultural trade
and Agricultural Organization of the United industry in developing countries.
Nations launched a series of in-depth studies • To identify the prevailing structure(s) of the
on the theory and evidence linking the role of agricultural industry in developing countries.
organization and behaviour of heterogeneous • To analyse and to compare, based on the
agro-trading firms to the size and distribution of main types of industry structure, how new
trade impacts. The aim was to provide guidance trading opportunities might affect the industry
for targeted policies and efforts to enhance structure, and how trade benefits are likely
agricultural trade benefits among firms and to be distributed among firms within the
input owners in upstream links. agricultural industry.
4 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
industry levels in developing countries

• T o identify technical challenges and proposed policies (subsidy, taxation, regulations) for
solutions in the estimation of the distribution domestic markets, and to document how these
of trade benefits for agro-industries in policies affect (or might be expected to affect)
developing countries. industries’ and trading firms’ behaviour.
• To identify the factors influencing the entry • To analyse how the trading environment
and exit of trading firms, specifically the and the firms’ responses might affect the
levels of entry barriers and other possible distribution of trade benefits.
hindrances such as regulation, limit pricing,
operating cost, and level of access to raw The third objective was to provide
materials. quantitative analyses of the main
• To discuss the links between the main causes determinants of the size and distribution of
of the industry structure and the distribution trade, which included each of the following
of potential trade benefits. aims:

The second objective was to analyse the • To define valid and tractable indicators of
organization and behaviour of selected agro- trade benefits that arise from the data.
export industries in developing countries and • To discuss all possible factors, including
their trading environments, which included organization and behaviour, that influence the
each of the following aims: level and distribution of trade benefits among
the heterogeneous firms.
• To identify the size of the export industry (in • To describe how trade benefits spill from the
comparison with other agricultural exports) trading firms to their upstream or downstream
as well as conditions affecting export within domestic links.
the industry, such as regulations, comparative • To provide implications of the findings for
advantage, or abundance in factor endowment. the distribution of potential trade gains on
• To identify exporting firms as well as upstream and downstream links.
their input and output markets, degrees • To use quantitative methods to determine
of integration, input sources, market what influences the level and distribution of
destinations, and market shares. trade benefits among firms and industries,
• To determine the levels of industry with particular focus on the role of
concentration, competition among firms, organization and behaviour of trading firms;
market power, and entry and exit rates. and
• To identify the exporters’ strategies to ‘win’ • To discuss the implications of the findings for
versus the importers, their strategies when enhancing the ability of trading firms and their
dealing with inputs and service providers, and upstream and downstream links to capture
the size and distribution of trade gains. trade benefits and opportunities.
• To document past successes of these
exporters’ strategies, effectively enhancing
trade gains for exporting firms and influencing 1.3 Approach
the distribution of trade benefits.
• To explore the evidence for productivity effects The study relied on investigations of the
(R&D spillover effects) of processed product heterogeneous firms’ activities to collect
export on the domestic country’s R&D stock information that would provide the bases for
and on the industry’s R&D. quantitative analyses on the trade impacts at firm
• To identify trade policies and barriers in foreign and industry levels. In the determination of the
markets. size and distribution of trade impacts, the main
• To perform a rapid assessment of current concern was to provide a standard methodology
and past policies, including agricultural trade to ease the comparisons among these industries
 Chapter 1: Introduction 5

without losing sight of their specificities. The increasingly involved in international trade in
study proceeded in three phases. recent years.
3. The presence of at least one processing
• Phase 1. Preliminary and background stage (e.g. treatment, storage, or packaging)
research within the export industries to illustrate the
link between export firms and upstream links
This first phase consisted of a thorough and and to capture intra-industry trade.
comprehensive literature review to identify 4. Data availability and reliability.
the knowledge gaps in past studies on the 5. Geographical and regional diversity,
distribution of trade impacts among agro-trading preferably spreading the studies between
firms in developing countries. Specifically this Africa and Asia.
phase included overviews of the theories and
evidence of the structure and behaviour of the • Phase 3. Case studies
agro-trading industry in developing countries,
to examine how such structure and behaviour The third and most important phase was the case
affect the size and distribution of trade benefits. studies themselves. Their main purposes were (i)
For instance, this background research addressed to gather information on heterogeneous firms in
how to define a trade-impact indicator among agro-industries that had been involved in exporting
firms, how trade impacts such as research and or importing agricultural products in recent years,
development and technology spillover from and (ii) to analyse the determinants of the size and
trade could be estimated, and what information distribution of trade impact, focusing on the role
was missing in the literature to perform such of organization and behaviour of the trading firms.
estimation. More important, this phase aimed to The four countries and agro-industries selected for
specify relevant hypotheses to be tested in the the case studies were:
case studies and to refine the topics, activities
and information needed for the survey and case • Ghana’s pineapple processing and export
studies. industry.
• Indonesia’s horticultural (vegetable and
• Phase 2. Survey design and preparation for tropical fruit) export industry.
the case studies • the Philippines’s mango processing and export
industry, and
This second phase involved secondary data • Tanzania’s cashew nut export industry.
collection on firms and industries and preliminary
surveys of key stakeholders. The aim of this All case studies started with formal surveys
second phase was to refine the approach and of key stakeholders. The surveys were carried
specify resources needs to make the investigation out at three levels: the institutional (e.g.
feasible. This second phase included the design marketing boards, officials at the ministry of
of the case studies, preparation of the survey industries or trade), industrial (e.g. associations
questionnaires, and especially the selection of of traders, Chambers of Agriculture or Industry),
case studies. The selection of the industries and and individual firm levels. Particular focus
countries for the case studies was based on the was put on the roles of the organization and
following criteria: behaviour of the trading firms. The surveys
of individual firms included detailed inquiries
1. The importance of the agricultural trade about the firms’ production costs and output
industry in the country’s agricultural trade sales (including export revenues), as well as
revenues and economy. their strategies and interactions with other firms
2. The presence of an agro-industry featuring as they sought to benefit from arising trade
heterogeneous firms that have been opportunities.
6 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
industry levels in developing countries

The data obtained from the surveys were conception, the collection of studies sought to
analysed using quantitative methods to estimate cover a wider range of commodities including
the size and distribution of trade impacts. The livestock products and food grains, but the
model took into account the heterogeneity of the preliminary investigations concluded that tropical
trading firms and the role of their organization products were more suitable. The three main
and behaviour. The analysis also highlighted the reasons discovered at the preliminary phase were
interactions of the decisions among trading firms that (i) data on the structure and level of exports
and between the industry and other stakeholders for these tropical products at the firm levels are
(including the government) in capturing and more tractable than that for other commodities
distributing trade impacts. (such as livestock products); (ii) these commodities
often involve more distinct, hence, more tractable
processing stages before exports; and finally
1.4 Organization and overview of (iii) the agro-export industries for these tropical
this report products had been least studied in the past
and deserve greater attention because of their
Following this introductory chapter, Chapter significant contribution to the local and national
two by Roehlano Briones provides a broad economies.
overview of information about agro-processing Chapter four opens the series of case
and agro-trading firms in developing countries. studies and focuses on the pineapple export
It mainly emphasizes the link between the in Ghana. This study on pineapple export was
organization of agro-business firms and agro- performed by Julius Kariuki and his research
trading firms, demonstrating that agro-trading is team from the Accra-based African Center of
often concentrated on few firms. It also reveals Economic Transformation. This work chooses
some of the key impact indicators commonly used export (volume and value) shares as trade-impact
in the literature. Chapter three by David Skully indicators and attaches much importance to
analyses how the macro and trade theory on the the link between the varietal shift of pineapple
R&D spillover effect of trade can be considered to export since 2004 and pineapple export impacts
fit firm- and industry-level analyses. This chapter (benefits and losses) in Ghana. It delves into
reviews the theories on growth and international how the structural changes in the pineapple
trade in the literature and details the problems export market marked lasting effects on the
of applying these theories to the measure organization of producers and exporters of
of productivity and R&D spillovers on agro- pineapple. Chapter five by Roehlano Briones
firms. These first two chapters, along with this and his team at the Philippines Institute of
introduction chapter, constitute Part one of this Development Studies analyses the size and
report. Taken together, they reveal that despite distribution of the impacts of mango exports
all interests in agro trade in developing countries, from the Philippines. The authors use both
there is strikingly little information for decision market shares and export unit margins as trade-
making. This background work motivates the case impact indicators. This chapter analyses the
studies. link between vertical integration of the leading
Part Two of this document consists of a companies and the impacts that such structure
series of syntheses of the four case studies. By has on the industry. The authors also looked into
coincidence, all the agro-industries chosen for the how external shocks in the world mango demand
analysis were tropical fruits (pineapple in Ghana, and prices may affect the Philippines’mango
horticultural products in Indonesia, mango in production and export.
the Philippines and cashew in Tanzania)1. In its Chapter six summarizes the main findings of
the overall study and shows that there are many
similarities among the case studies in both the

1
The Indonesia and Tanzania studies will be reported in a
separate report. structure of industries and the determinants of
 Chapter 1: Introduction 7

trade impacts. The last chapter also emphasizes

the policy implications of the findings and
hints at the direction that future studies should
consider.
 Chapter 2: Trade and R&D spillover effects: Implications for firm-level analysis in the
agricultural sector 9

Chapter 2:

Trade and research and development spillover effects:

implications for firm-level analysis in the agricultural sector *

2.1 Introduction part of the paper concludes with an assessment

of the research to date. The assessment is that
This paper provides a critical review of the although the empirical evidence is consistent
economic literature on the relationship between with the existence of trade-related R& spillovers
international trade and research and development hypothesized by endogenous growth theory,
(R&D) spillovers with the aim of finding ways to the macro-level data do not provide sufficient
track the spillover effects of agricultural trade at information to determine how R&D spillovers
firm and industry levels. The term R&D spillover occur. Because of the limitations of macro-level
refers to the spread or diffusion of knowledge data, in the last 10 years economists have turned
between countries, industries, or firms. New to the construction of micro-level data and the
technological and managerial information can application of micro-level statistical methods to
be used by firms to increase efficiency, which investigate how trade influences productivity.
leads to improved aggregate income and welfare. The second part of the paper turns to the
Innovation and the application of knowledge is micro-level analysis of productivity change
the central engine of economic growth in both where the individual firm is the unit of analysis.
the growth theory of the 1950s and 1960s and in It focuses on heterogeneous-firm models of
endogenous growth theory, which emerged in the international trade. The starting point of this
late1980s. literature is the fact that firms differ: they have
The first part of the paper focuses on the different productivity levels. This is contrary to the
empirical macro-level analysis of international macro-analytical assumption that the economy
R&D spillovers, in which the country is the unit is composed of multiple representative firms
of analysis. The key relationship is between that are homogeneous in equilibrium. Firm-level
macro-level productivity and R&D, domestic and analysis reveals that relatively few firms engage
foreign. The central question is whether and how in international trade; and those that do tend to
international trade causes or influences macro- be larger and more productive than the average
level productivity growth through international firm. Similarly, relatively few firms engage in
R&D spillovers. The discussion opens with a R&D, and those that do are typically large and
description of the seminal empirical analysis, highly productive. A central empirical question is
Coe and Helpman (1995). Subsequent sections whether engaging in international trade causes
provide the larger theoretical context (growth firms to become more productive. The literature
theory) and discuss the measurement of the key finds some evidence that engaging in trade leads
variables: total factor productivity, the stock of to higher firm productivity through “learning
R&D capital and estimating spillovers. The first effects” both post pre-trade and post-trade. But

* This chapter was written by David Skully (FAO Consultant) and Manitra A. Rakotoarisoa (Economist, Trade and Markets Division, FAO).
This chapter expresses the personal opinions of the authors.
 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
10 industry levels in developing countries

the preponderance of evidence is for “selection One of the first empirical tests of the many
effects”: high-productivity firms choose or self- propositions derived by Grossman and Helpman
select to engage in international trade. Trade (1991) is a paper by Coe and Helpman (1995),
is correlated with productivity growth, but the “International R&D Spillovers.” The hypothesis
causal chain is primarily through trade inducing is that technological knowledge, measured as
heightened competition and market selection; R&D, developed in one country spills over to other
that is, by less productive firms exiting the countries. The spill-in of knowledge can result in
market and the reallocation of resources among increased productivity and growth in the recipient
surviving and entering firms. Thus, the potential country. Coe and Helpman (1995) test two related
contribution of international R&D spillovers is hypotheses: first, whether such R&D spillovers
greatly diminished when the trade-productivity exist and second, whether R&D spillovers are
relationship is examined at the firm level. positively related to trade. They estimate the
The third part of the paper summarizes the following equations for a cointegrated panel of
review and discussion, and anticipates some 22 developed countries for the years 1971-1990.2
implications for future research. The application The first equation expresses a country’s total
of the theory underlying the R&D spillovers of factor productivity (in a given year, time subscripts
international trade in the agriculture sector in are suppressed) as a function of the country’s
developing countries has remained puzzling. This own (domestic) stock of R&D capital and the
review explores ways to assess the R&D spillovers of combined stocks of R&D capital of the other 21
trade at sector and firm levels and contributes to the (foreign) countries. The coefficients for these two
analysis of the size and impact of agricultural trade variables are found to be positive and significant.
at firm and industry levels in developing countries. The former is consistent with a country’s own
R&D contributing to its TFP growth; the latter is
consistent with the existence of international R&D
2.2 Research and development spillovers.
spillovers: Macro-level analysis
Introduction [1] TFP
=i β i0 + β id ( R & Ddomestic ) + β i f ( R & D foreign ) + ε i

The 1980s witnessed two related innovations

in economic theory. First, new trade theory [ 2] TFP
=i βi0 + βid ( R & Ddomestic ) + βim ( mi * R & D foreign ) + ε i
emerged at the beginning of the 1980s. It
introduced concepts from industrial organization The second equation multiplies the foreign
into traditional trade theory; imperfect or R&D term by m , the country’s imports of goods
i

monopolistic competition and scale economies and services as a proportion of its gross domestic
play a central role. Second, building on the product; this is a measure of a country’s import
insights of new trade theory, new or endogenous intensity. The coefficients for both variables are
growth theory emerged toward the end of the found to be positive and significant. For the
1980s. Monopolistic competition is also central to import-intensity-weighted foreign-R&D variable,
endogenous growth theory: it provides a coherent this finding is consistent with the hypothesis that
incentive for innovative activity, commonly there is a positive relationship between trade,
measured as R&D (research and development). measured as import intensity, and international
Grossman and Helpman’s (1991) book, Innovation R&D spill-ins.
and Growth in the Global Economy, is a synthesis The next several sections are devoted to
of new trade theory and new growth theory; it de-constructing Coe and Helpman (1995) and
remains the canonical text, although subsequent
empirical research has induced some changes in 2
The paper also includes other specifications. Note: variables in
theory. the estimation equations are in logarithms.
 Chapter 2: Trade and R&D spillover effects: Implications for firm-level analysis in the
agricultural sector 11

placing the paper in its larger theoretical context; a function of all inputs (x); everything is in per
in particular, explaining why R&D spillovers are capita terms. Suppose point A represents an
important in endogenous growth theory. Also economy at time zero and that several years
discussed are problems in measuring the variables later its output increases to the level of points C,
in the equations above: total factor productivity, S, G, and B. There are numerous growth paths;
stocks of knowledge or R&D capital, and the consider the two extreme cases. The path from
empirical representation of R&D spillovers. A to B represents growth solely through factor
accumulation. Current savings are invested in
TFP – total factor productivity and growth capital and education. More inputs yield more
theory output, but there is no TFP growth: the ratio
of y to x is unchanged. The path from A to C is
Total factor productivity (TFP) occupies a central pure TFP growth. Inputs are constant, but output
place in economic growth theory. Productivity is a increases from A to C: all growth comes from
measure of the relative efficiency of a production the increase in the ratio of y to x; the economy
system. The concept is simple: one calculates the combined inputs more efficiently. Solow (1957)
ratio of output to input. A higher ratio (more analysed the contributions of factor accumulation
output per input) indicates greater efficiency and TFP for the US economy from 1909 to 1949.
or higher productivity. Total factor productivity He concluded that TFP growth accounted for
(sometimes called multifactor productivity) seven-eighths of the observed growth in per
measures the combined productivity of all factors capita output; factor accumulation accounted for
of production: capital, labour, energy, and one-eighth. This path would run from A to point S
materials.3 in the figure.
Solow, modeling the economy as if it were
Figure 2.1: Growth and productivity measurement a single production unit, used a Cobb-Douglas
production function restricted to have constant
returns to scale (the sum of βk and βl equals
GROWTH AND PRODUCTIVITY MEASUREMENT one in equation [3]). Any growth in output not
stemming from increases in capital or labour
is attributed to changes in ‘A’, representing
C S G B a change in the efficiency with which factors
Y – OUTPUT

are combined. Solow referred to changes in

‘A’ as technological change and asserted that
productivity growth is technological and finds its
A
origin in innovative activity or R&D.

[3] Yt = At K tβk Lβt l

X – INPUTS

[ 4] y=
t β 0 + β k kt + βl lt + ε t
Source: Authors

The figure above illustrates the relationship [ 5] tfpt = ( t=) β 0 + ε=t t − β k kt − β l lt

between growth and TFP. It plots output (y) as
TFP growth is, in fact, a residual: it represents
everything that is not measured as input growth
3
TFP is preferred to single-factor measures, such as labour (see equations [4 & 5]). If factors are not quality-
productivity because single-factor productivity varies with the
adjusted or if they are not valued properly (e.g.,
use of other inputs. For example, labour productivity may be
raised by more intensive use of capital. if observed factor prices do not equal marginal
 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
12 industry levels in developing countries

products) then TFP measurement will be biased. Jorgenson and Griliches (1969, 1972) acted on
In the Cobb-Douglas construction, the benefits Griliches’ diagnosis. Adjusting inputs and outputs
of increased ‘A’ are distributed proportionately for changes in quality and factor-utilization and
across all factors in the economy. This is not depreciation rates, they found that at least 70
how technological change manifests itself in percent of measured U.S. output growth could
the economy. Solow (1960, 1962) proposed be attributed to factor accumulation. These
the concept of ‘vintage capital’ to represent the adjustments shift the growth path rightward to
stylized fact that new model capital equipment point G in the figure. Jorgenson and Griliches
is more productive than earlier vintages. But emphasized that attributing growth to measured
heterogeneous capital proved difficult to reconcile changes in input quality does not explain how
with an aggregate production function; the or why the changes in quality occurred. But it
concept went dormant and was revived in the clarifies the task of explaining growth because it
1980s in the microlevel research discussed in the distinguishes between measured contributions
second part of this paper. to growth and unmeasured contributions.
There is a tension between accounting for They argued that only the latter, unmeasured
productivity and explaining productivity. Growth (or immeasurable) elements belong in the
accounting is intimately related to national productivity residual.
income accounting; without national income Debates over whether and how to adjust
accounting data it is impossible to measure inputs for quality changes continue. For
macro-level productivity. Economists concerned example, the information and communication
with national income accounts are appropriately technologies (ICT) sector is R&D intensive and
obsessed with proper measurement of inputs and exhibits large annual quality improvements.
outputs: accounts must balance: something does The average $1 000 2012 laptop computer
not come from nothing. A persistent problem is is over 100 000 times more powerful than
properly accounting for changes in the quality the mainframe computers of the early 1960s,
and variety of inputs and outputs. Solow’s (1957) which cost more than $10-million 2012
estimates were not based on quality-adjusted dollars. If the exponential decline in computing
input or outputs; Solow considered quality costs is not factored into the measure of ICT
improvements to be a form of technical change. capital, then ICT capital is understated and the
Griliches (1963) identified several potential productivity residual is erroneously increased.
sources of error in aggregate TFP measurement. Despite efforts to harmonize national income
Equation [6] expresses TFP growth in terms of accounting systems, OECD countries still differ
growth rates; s represents the factor share of in methods of quality adjustment for national
capital, and (1-s) the factor share of labour.4 The income accounts. For the 1990s, the U.S. ICT
sources of error are: the quantity and quality deflator averaged -20 percent annually, the U.K.
of labour (l); the quantity and quality of capital deflator was -13 percent and for Germany, -8
services (k); the relative factor share (s) measure; percent. ICT prices are global: they differ little
unmeasured inputs; and economies of scale.5 between countries; differences in ITC deflators
result in enormous cumulative differences in
measured factor accumulation.6 Thus, national
[ 6] tfp= y − sk − 1 − s )l differences in accounting methods contribute
to differences in reported productivity residuals.
Similarly, differences in tax systems can bias
measured factors shares. In sum, the productivity

4
That is, k is the growth rate of capital, etc. This equation residual, besides being the repository of
assumes constant returns to scale and no other productive
factors than capital and labour.

5
Griliches’ (1963) notion of economies of scale is discussed in
6
See Schreyer (2002) on ITC bias and Schreyer (2001, 2009) on
part II of this paper. OECD measurement standards.
 Chapter 2: Trade and R&D spillover effects: Implications for firm-level analysis in the
agricultural sector 13

measurement errors, also contains essentially Table 2.1: Typology of goods

arbitrary information resulting from different
national fiscal and accounting conventions. Even Excludable Non-excludable
among OECD member nations TFP comparisons Rival Private goods Common goods
are fragile; and data quality tends to be more Non-rival Club goods Public goods
problematic outside the OECD. Source: Authors
Jorgenson has continued research on TFP
measurement; Jorgenson and Vu (2011), information and information differs from most
for example, calculate a variant of equation private goods in that it is indivisible, non-rival, and
[6] that includes factor quality and quantity generally nonexcludable. Table 2.1 reproduces
and distinguishes between IT (information the two-by-two typology of goods found in most
technology) capital and other capital for economics textbooks. Inventions and innovations
122 countries. Better growth accounting and fall into the lower-right cell with public goods.
factor measurement reduces the productivity There is a cost of innovation to the innovator,
residual: Jorgenson and Vu find that input but once a product is innovated, the cost of
growth (factor accumulation) is by far the transmitting the new idea is approximately zero.
most important determinant of economic And information, once transmitted, cannot be
growth: the share contributed by TFP varies returned: it is difficult to “unknow” something
from country to country and period to period once it is known, particularly if the information
but it generally accounts for between 15 and is useful or valuable. Because innovators cannot
20 percent of growth. This is almost the exact fully appropriate the gains from their efforts,
complement of Solow’s initial calculations that Arrow argued that competitive market economies
TFP accounts for over 85 percent of growth. under-invest in innovative activity. This provides an
Although significant advances have been made argument for public support for basic (scientific)
in the conceptualization and measurement research. Patents, trademarks, licensing and
of TFP, our measurements, particularly at the trade secrecy are means and protecting creating
aggregate level, lack precision; this limits their property rights in information and preserving
value in econometric analysis. Independent of incentives for private innovation: there are
the challenge of measuring TFP and quality institutional means of making innovations quasi-
changes in inputs and outputs is the challenge excludable. Also, even if information is free, it is
of explaining why change occurs. In the not costless to interpret and put into use: reverse
Solow growth model “technical change” is engineering and imitation require skills, effort and
exogenous: it is caused by forces external to financing; some absorptive capacity is necessary.
the economy. The problem for what is now Private innovative activity can lead to aggregate
called “exogenous” growth theory (the growth productivity because adopting a new innovation
theory of the 1950s and 1960s) was to devise an costs less and is a less uncertain investment than
aggregate-level economic theory of innovation, the initial innovation. Innovation by one firm can
thus making “technical change” endogenous. result in positive externalities for other firms. Thus,
Romer (1990: S72):
Knowledge, innovation and research and
develpment spillovers Once the cost of creating a new set
of instructions has been incurred, the
There was considerable economic research at the instructions can be used over and over
micro-level on the economics of innovation and again at no additional cost. Developing
inventive effort in the 1950s, but Arrow (1962) new and better instructions is equivalent
is regarded as the seminal contribution. Arrow to incurring a fixed cost. This property is
identified the central problem in the economics of taken to be the defining characteristic of
innovation: innovation is the generation of new technology.
 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
14 industry levels in developing countries

Research on the economics of innovation and defined by 1979. The means of appropriating
R&D expanded in the 1960s and 1970s. Griliches R&D had been investigated by Levin et al. (1987)
and his students at Harvard and collaborators and Levin and Reiss (1988) but a consistent
through NBER were central to this research incentive mechanism for undertaking R&D was
program.7 Griliches (1979) modified the Solow still missing.
model, rewriting equation [3] as:
Endogenous growth theory

[7] Yit = At X it(1− β ) Ritβ Sitγ The key to endogenizing innovation in growth
theory was the revival of Chamberlin’s concept of
In [7], for the i-th firm in an industry, the monopolistic competition by Spence (1976) and
variable X represents all conventional inputs Dixit and Stiglitz (1977). Dixit and Stiglitz devised
(capital and labour, properly measured and a model of consumer demand for variety: it
quality-adjusted); R represents the stock of provided an elegant mathematical representation
R&D knowledge produced by the firm; and S of the proliferation of similar yet distinct branded
represents the stock of ‘outside’ knowledge that products (e.g., shampoos, breakfast cereals,
the firm can draw upon, specifically, the R&D running shoes). In their model, a firm developing
produced by other firms in the industry. Griliches a new variety can expect to recoup its costs
imposed constant returns to scale on the firm’s and earn a reasonable profit from the premium
own inputs (X and R) to emphasize that the charged to consumers. Such markets are not
knowledge spill-in of S can result in increasing perfectly competitive; rather, each firm producing
returns. The summation of R&D in the industry, a distinct product enjoys a limited monopoly;
by construction, equals S; and the industry thus, monopolistic competition.
production function can be written as [8]: New applications of their model were quickly
realized.9 Krugman, Brander, Lancaster and Ethier
(among others) employed the model to explain
[8 ] Yt = At X t(1− β ) Stβ +γ the existence of intra-industry trade, which had
been an annoying anomaly in modern trade
This yields “an aggregate production function theory. Krugman (1979, 1980) showed the link
with the coefficient of aggregate knowledge between variety and scale economies.10 Ethier
capital being higher (β + ϒ) than at the micro (1982) applied the demand for variety model to
level (β only), since at the aggregate level it trade in intermediate inputs: when firms have a
reflects not only the private but also the social longer menu of inputs to choose from they have a
returns to research and development.”8 (Griliches greater chance of realizing productivity-improving
(1979[1998:29]) Thus the R&D spillover was well- input combinations; thus trade in intermediate
goods is a potential source of TFP growth.
In the mid-1980s Romer (1986) and Lucas

7
Much of this work is collected in Griliches (ed.) (1984) and (1988) reignited interest in growth theory.
(1998); Terleckyj (1974) and Mansfield et al. (1977) are
important contributions from this period. Using competitive market assumptions, both

8
Griliches continues, setting out the research program that is
authors proposed a source of positive aggregate
now being realized: “The above formula provides a framework
for reconciling micro and macro results in this area. Of course,
this formula is rather simplistic and is based on a whole
9
Wilfred Ethier (2004: 149) describes the Dixit-Stiglitz model
string of untenable assumptions, the major ones being: the as providing a versatile “tool”. Dasgupta and Stiglitz (1980a,
assumption of constant returns to scale with respect to Xi 1980b) address the incentives for R&D under imperfect
and R, and the assumption of common factor prices for all competition.
firms within an industry. These assumptions could be relaxed.
This would add a number of “mix” terms to the equation, 10
Economies of scale are a potential source of TFP growth but
indicating how aggregate productivity would shift if the share one excluded by the constant returns to scale assumption of
of, say, the larger firms, were to increase (as in the case of Cobb-Douglas aggregate production functions used in growth
economies of scale).” theory.
 Chapter 2: Trade and R&D spillover effects: Implications for firm-level analysis in the
agricultural sector 15

growth externalities. Lucas’s model is based on There are two variants of endogenous growth
externalities from increases in human capital; models – horizontal and vertical – based on the
Romer’s model is based on externalities from assumptions made about the innovation process.
increases in the stock of knowledge. The Horizontal models, such as Romer’s, are based on
conceptual synthesis came with Romer’s (1990) Dixit-Stiglitz assumptions about product variety:
article, “Endogenous Technical Change”, which innovation results in additional products that are
synthesized growth theory and monopolistic used in combination with existing products.13 An
competition. increasing number of products and an increasing
stock of knowledge give rise to increasing growth
First, nonrival goods can be accumulated externalities. Vertical models are based on a revival
without bound on a per capita basis, of Schumpeter’s concept of creative destruction:
whereas a piece of human capital such as innovations result in higher-quality products or
the ability to add cannot. Each person has processes that render earlier products and processes
only a finite number of years that can be obsolete.14 In contrast to horizontal models where
spent acquiring skills. When this person dies, the key variable is the number or quantity of product
the skills are lost, but any nonrival good varieties, the key variable in vertical models is the
this person produces … lives on after the average quality of products and processes. Vertical
person is gone. Second, treating knowledge and horizontal models are formally parsimonious:
as a nonrival good makes it possible to talk they represent the endogenous innovation in an
sensibly about knowledge spillovers, that is, aggregate model with two parameters: one for
incomplete excludability. These two features the degree of monopolistic competition and the
of knowledge—unbounded growth and other for stock of innovation, measured vertically or
incomplete appropriability—are features that horizontally, respectively.
are generally recognized as being relevant for
the theory of growth.11 In both models, agents invest resources to
acquire the exclusive ability to manufacture
Endogenous growth models explicitly include a new product. Moreover, the R&D activity
knowledge, a nonrival input, in the aggregate generates inappropriable spillovers in both
production function of the economy. This relaxes cases. In the variety-based growth model,
the constant-returns-to-scale assumptions of the R&D externality is quite explicit. Each
Solow (exogenous) growth theory: the aggregate completed product development project lowers
economy exhibits increasing returns to scale.12 the cost of later R&D efforts. In the quality-
Endogenous growth models have three sectors: based model, the externality is implicit. When
the core is a monopolistic-competitive durable one improvement project succeeds, other
inputs sector that makes inputs that are used to researchers can quit their efforts to achieve
make consumer goods by a competitive consumer that same innovation and begin to work on the
goods sector (the second sector). The third sector next improvement. In both instances we have
is the competitive R&D sector; it is hired to design assumed that by observing the results from
new technologies for the durable inputs sector. one innovative success, researchers can learn
The monopolistic premiums earned by durable scientific and engineering facts that are useful in
input producers provide the funds (and incentive) their own research endeavours.15
for contracting R&D work.
13
Romer (1986, 1990) is the classic horizontal formulation. See
also, Chapter 3 of Grossman and Helpman (1991a).

11
Romer (1990: S75).
14
The initial formulations of the vertical model are Segerstrom,

12
Formally: let A be nonrival inputs and X be rival inputs, then Anant and Dinopolous (1990), Aghion and Howitt (1992) and
F(A, λX) = λF(A,X) and F(λA,λX) > λF(A,X); the production Chapter 4 of Grossman and Helpman (1991a).
function F (◦) is not homogeneous of degree one: it exhibits
increasing returns to scale. Romer (1990:S76). 15
Grossman and Helpman (1991b: 54).
 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
16 industry levels in developing countries

The rate of growth of the stock of knowledge Measuring research and development and
is the critical variable in the model. Here is research and development spillovers
Romer’s (1990: S83) explanation of the innovation
process driving the model. Equation [9], adapted from Levin and Reiss (1988),
builds on Griliches’ formulation [7] and helps to
If the researcher possesses an amount of clarify the chain of empirical challenges in measuring
human capital Hj and has access to a portion R&D and R&D spillovers. The impact of R&D in a
Aj of the stock of knowledge implicit in production function is determined by the firm’s
previous designs, the rate of production of own R&D (R), the R&D of all other firms (S), and the
new designs by researcher j will be δHjAj, degree of non-excludability of all others’ R&D (β):
where δ is a productivity parameter.

[9 ] Rα ( β S )
λ
At the aggregate level, the rate of growth in A 0≤ β ≤ 1
is the summation over all Hj engaged in R&D: δHA.
That higher knowledge growth follows from more The more other firms keep innovations secret
human capital employed in R&D is no surprise; or otherwise inhibit appropriation the lower the
what is novel is that a larger stock of knowledge, A, proportion of S that can be appropriated; this is
results in a higher rate of growth in A. Again, Romer represented by a lower value of β. This equation
(1990: S84): is a micro-level version of the Coe and Helpman
(1995) equations discussed in the introduction.
Linearity in A is what makes unbounded growth In the context of international R&D spillovers,
possible, and in this sense, unbounded growth the equation requires some elaboration. The
is more like an assumption than a result of the coefficient β represents the proportion of S
model. … Whether opportunities in research that could be appropriated by a given firm.
are actually petering out, or will eventually do The coefficient λ indicates how the stock of
so, is an empirical question that this kind of appropriable knowledge (βS) is utilized by the firm
theory cannot resolve. The specification here, and realized as changes in cost reduction or TFP
in which unbounded growth at a constant growth. In practice, it is difficult to measure the
rate is feasible, was chosen because there is degree of non-excludability. Levin and Reiss (1988)
no evidence from recent history to support had in-depth survey data with which to construct
the belief that opportunities for research are plausible micro-level measures of β, but such data
diminishing. are an exception. Also, there are other factors that
reduce the effective stock of S to a given firm.17
Subsequent empirical research has tested this
proposition and found that there is no evidence
[10] Rα ( β1β 2 β3 β 4 S )
λ
for the strong scale effects hypothesized by the 0 ≤ βi ≤ 1
initial wave of endogenous growth models. A
second generation of “semi-endogenous” growth
models that includes diminishing return to R&D These factors are enumerated below following
has developed in response; the research program the spillover channel from source to spill-in
continues but this goes beyond the topic of the destination. These factors are formalized in [10] as
current paper.16 a series of information or transmission filters, their
joint product is the effective information available
to spill-in to a recipient firm. Figure 2.2 illustrates
the process and it organizes the discussion.

16
The seminal refutation is Jones (1995); for surveys of the
subsequent debate see Jones (2005) and Gustafsson and
Segerstrom (2010), which incorporates heterogeneous firms.
17
Thus, in estimation, errors in measuring β influence the value
On econometric issues see Durlauf et al. (2005). of λ: the two parameters are difficult to distinguish.
 Chapter 2: Trade and R&D spillover effects: Implications for firm-level analysis in the
agricultural sector 17

Figure 2.2: Knowledge spillovers: the narrowing The reported stock of R&D (how this is
information channel measured is discussed in Appendix A) is merely
an indicator of the stock of knowledge. Much
innovation occurs beyond what is officially
reported as R&D. Of the factors that limit the
transmission of the stock of knowledge, the
first, the degree of non-excludability has been
discussed above (Levin and Reiss).

Contact and communication

The second limiting factor is that there must

Reported Stock of Non- Known Understood Utilized be some way for a firm to be aware that the
R&D knowledge excludable
outside R&D exists; this involves contact and
Reported Source Destination
communication. The earliest applied work on
technological spillovers occurred in the 1940s
Source: Authors, adapted from Levin and Reiss 1988 in the U.S. Corn Belt where farm-level data
was abundant and technological change was
Determining the relevant subset of knowledge rapid and observable. Ryan and Gross (1943,
1950), rural sociologists, observed that farm
First consider S, the stock of knowledge: in operators differed in their willingness to try
principle the entire cumulative stock of human or adopt new farming practices. Few would
knowledge could be included in S; in practice one adopt immediately; a minority would adopt
limits S to some relevant subset of all knowledge. in the second or third season; the majority
Griliches (1998: 257ff) frames the problem as would adopt later; and a small remnant would
devising an appropriate weighting or distance never adopt. This pattern was observed across
function. For example, a firm producing paints communities and innovations and led to a
is most likely to find the R&D of other paint general model of the diffusion of innovation
producers of greatest potential value; varnish (Rogers 1962). The social status of the early
and lacquer producers would also qualify as close adopters and their success or failure influenced
neighbors; and the segments of the chemical the rate of diffusion in the community (Rogers
industry engaged in dyes and solvents would also and Beal 1958).
be highly relevant. Other chemical segments and Griliches (1957) provided an economic
fluid-processing engineering are likely of slightly explanation of the diffusion process for
less value; but they would merit a positive weight. the adoption of hybrid corn. Hybrid corn
R&D in microprocessors and pharmaceuticals was a break-through innovation, resulting
would probably be of little value and could be in large yield increases and improving the
imputed a weight of zero. Thus, the relevant effectiveness of mechanized harvesting
pool of outside R&D for a firm or industry is a equipment. The new technology (genetics)
weighted summation of neighboring industries. was embodied in hybrid seed. Because
These weights can have some empirical grounding data on the area planted to hybrids and
(input-output tables, econometric studies) but traditional corn were available at the micro
they inevitably contain arbitrary elements and level Griliches could track the spatial diffusion
value judgments.18 of hybrid corn. He could observe hybrids

18
The work following Coe and Helpman’s (1995) example uses agricultural R&D (public and private) although non-agricultural
only ‘business sector’ R&D; that is, they exclude public R&D. R&D obviously influences agricultural production: see, e.g.,
In agricultural economics, the convention is to include only Alston (2002).
 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
18 industry levels in developing countries

developed in Iowa spilling over into Nebraska explicit the relationship between human capital
and into Illinois, for example. 19 and technology adoption. Benhabib and Spiegel
In empirical work communication is (1994, 2005) empirically verify the importance of
represented by some indicator of the probability these two roles of human capital in determining a
or flow of contact. For example, geographic country’s TFP growth.
distance is often used; this is the basis of gravity The fact that human capital influences growth
models, it is also the basis of agglomeration through two channels, innovation and learning
theory, an idea that dates back to Alfred Marshall adaptation, poses a conceptual problem for
and which was revived in the 1990s.20 Measures measuring R&D spillovers. The Griliches-Romer
of the value of bilateral or unilateral trade capture sense of an R&D spillover is limited to outside
similar information; this is the variable favoured knowledge that is utilized in the formal R&D
in the literature following from Coe and Helpman activities of firms and organizations. The goal
(1995). of such R&D is the innovation of new products
and inputs or improved production processes.
Human capital Endogenous growth theory explicitly limits itself
to formal R&D innovation; this is its source of
There is enough evidence to give validity to the TFP and its engine of growth. Learning beyond
hypothesis that the ability to deal successfully with the walls of the R&D facility is embodied in the
economic disequilibria is enhanced by education skill set of a particular person, which is rival-in-
and that this ability is one of the major benefits use (see Romer quotation above on page 15).
of education accruing to people privately in a Such learning is an augmentation of the stock
modernizing economy. - T.W. Schultz (1975: 843). of human capital and should be accounted as an
Human capital is the essential ingredient in increase in factor quality: it does not belong in the
innovation. Schultz, who invented the concept TFP residual. In practice, it is difficult to maintain
of human capital, viewed its primary economic this distinction; for example, Solow (1994: 177):
function as the ability to adapt to change, to
innovate and to learn. In Romer’s model of Bits of experience and conversation have
endogenous growth the R&D sector has one suggested to me that it may be a mistake
factor of production: human capital. The capacity to think of R&D as the only ultimate source
of a country to generate domestic R&D depends of growth in total factor productivity. I don’t
directly on its accumulation of human capital, in doubt that it is the largest ultimate source.
particular human capital above a critical technical But there seems to be a lot of productivity
threshold. Human capital is the key variable improvement that originates in people and
in innovation diffusion models: it is positively processes that are not usually connected with
related to access to information, social status, R&D.
and the capacity to comprehend and utilize
information. Nelson and Phelps (1966) made One interpretation of Solow’s comment,
consistent with the Griliches-Romer distinction,

19
Traxler and Byerlee (2001) apply this method to wheat spillovers is that when non-R&D learning and adaptation
within India. For a survey of earlier industrial applications see results in new knowledge that is non-rival it
Nasbeth and Ray (1974); also see Jovanovic and Rob (1989).
Keller (2004) is a literature survey of international diffusion of
may contribute to innovation and TFP growth;
technology. Conley and Udry (2010) focuses on information otherwise, when it is rival, it must be counted
flows through social networks among pineapple growers in as an increase in human capital. The practical
Ghana.
problem is that these distinctions are difficult to

20
Krugman (1991) initiated the revival; Glaser et al (1992)
provided an additional boost. Fujita and Thisse (2002) is the
measure. In theory, an employee that spills-in
standard survey and text. On R&D spillovers and geography outside knowledge and becomes more productive
see Jaffe et al. (1993) and Audretsch and Feldman (2004).
receives a proportionately higher wage (because
Greenaway and Kneller (2008) examine the relationships
between exporting, agglomeration and productivity. wage equals marginal product in theory); the
 Chapter 2: Trade and R&D spillover effects: Implications for firm-level analysis in the
agricultural sector 19

increased wage bill measures the increase in factors all influence the allocative efficiency of
human capital and thus is not counted in the the economy.21
TFP residual. In practice, the increment in labour Legal systems, for example, vary in the
productivity is difficult for the employer to rights provided to minority shareholders and to
observe and individual wages are not so readily creditors. Common law systems provide more
changed; very likely the increase in human capital rights than civil law systems and this allows
is unmeasured or under-estimated and all or some greater opportunities for corporations to raise
of the increase is counted as TFP growth. capital (La Porta et al. 1999). Bloom and van
Although the role of human capital is Reenen (2007) find that countries with a tradition
universally recognized, there is less agreement of primogeniture have a high proportion of
over how best to measure and represent it at the inefficiently managed family-owned firms. If
aggregate level. The average years of schooling the executive candidate pool is limited to eldest
measure has intuitive appeal; but in practice there sons or immediate blood relations the likelihood
are national differences in reporting accuracy of recruiting a competent executive is greatly
and school quality, which must be accounted diminished. Similarly, employment protection laws
for. Wößmann (2003) surveys the literature; can result in labour market rigidities that reduce
Cohen and Soto (2007) advance an improved the ability of firms to adapt to changing market
comparable measure of human capital, which conditions and reduce the likelihood of innovation
includes differential mortality rates, an important (Saint-Paul 2002, OECD 2002b, Botero et al.
factor that had been neglected. 2004.)

Institutional context
2.3 Conclusions part I
The operating environment of the firm
bounds its ability to utilize absorbed outside The empirical literature on trade-related R&D
knowledge in production, procurement and spillovers since Coe and Helpman (1995) has
distribution. Local and national customs, updated and expanded the database, improved
laws and regulations, for example, can inhibit the econometrics,22 and tested alternative
or prohibit implementing innovations. The weighting systems for foreign R&D stocks. It has
“new institutional economics,” advanced also incorporated additional explanatory variables,
by Douglass North and Oliver Williamson in reviewed in the previous section. In estimation,
the 1970s and 1980s, has been incorporated the basic equation of Coe and Helpman (1995)
into formal economic theory by younger (equation [2] above) is augmented with additional
economists. Daron Acemoglu is perhaps variables; the basic specification is:
the one individual most responsible for this
contemporary synthesis. Acemoglu argues [11] lnTFP=i βi0 + βid ( l d ) + βi f ( mi ) ( )
ln S −f + βih ( ln H i ) + βiZ Z ln S −f + ε i
that institutions, formal and informal, are key nS
determinants of economic growth, primarily
through their ability to encourage or inhibit
the efficient allocation of factors. Barriers to 21
Acemoglu et al. (2001) is the breakthrough article in this
area. Acemoglu et al. (2005) is an excellent literature survey.
matching factors of production with firms Recent contributions directly relevant to R&D spillovers
can trap resources in low-valued uses and include: Acemoglu et al. (2006) and Acemoglu et al. (2007).
limit the optimal division of labour. Thus the Helpman (2008) is an edited volume devoted to institutions
and trade. Barbosa and Faria (2011) is a recent overview of
structure of legal systems, the efficiency of the links between institutions and innovation. Braguinsky et
public administration and law enforcement, al. (2011) is a timely study of the impact of restrictive firing
laws in Portugal on the size distribution of firms and stagnant
the level of inter-personal trust, and ethnic, productivitygrowth.
racial, gender and age discrimination (formal or 22
For more on innovations in panel data econometrics see Hsiao
informal), among many other “non-economic” (2003) or Baltagi (2008).
 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
20 industry levels in developing countries

Stocks of R&D are represented by S where the they favour import-weighting of external R&D
subscript indicates d – domestic and f – foreign. stocks.23 Funk (2001) uses the form of equation
The superscript on the foreign R&D term indicates [12] with bilateral export weights and finds that
the weighting system used to aggregate the it performs as well as bilateral import weights.
R&D stocks of country I’s trading partners into a Xu and Wang (1997), argue that imports of
single R&D stock value. As in the 1995 paper, Sf capital goods may be more closely related to R&D
is interacted with mi, the ratio of imports to GDP. spillovers than noncapital goods imports. They
Human capital, represented by H, is invariably use the form of equation [12] but with capital
positive and significant and is now a standard in goods imports in place of total imports and find
empirical application. that it yields a significantly larger coefficient than
The additional variables are usually interacted for the total imports ratio. Seck (2012), applying
with foreign R&D stocks, represented in equation the analysis to developing countries, also finds
[11] by the variable Z. The additional variables that the capital-goods-import ratio performs
are indicators of institutional quality: the ease better than total imports.24 Seck (2012) also finds
of doing business as measured by the World significant effects for equation [12] using FDI to
Bank index; the quality of tertiary education; total investment; and finds varying significance for
the strength of intellectual property rights; and private, public and university R&D stocks.
the origins of the legal system. These measures These weighting schemes are designed to
are usually divided into high and low scores, or represent the relative likelihood of spillover
into high, average and low scores, and included from the many potential R&D sources being
as dummy variables. The variables are generally aggregated. Contact is the most important
significant and in the directions suggested in the component of this likelihood. All of the measures
literature. The ease-of-doing business term, for discussed above are partial measures of contact;
example, interacts positively and significantly thus one expects each of them to be significant
with human capital; Coe et al. (2009) interpret if used as the sole indicator of contact. Importing
this result to indicate that a more business- and exporting each provide opportunities for
friendly environment, ceteris paribus, increases contact; Grossman and Helpman (1991: 165ff)
the capacity of human capital to realize R&D are explicit on this point in their discussion of
spillovers. “international information flows”.25 They suggest
There are several rival weighting schemes that total (X+M) bilateral trade is the most
for foreign R&D stocks. A bilateral-import appropriate measure and, following Arrow’s idea
weighting [12] is the most common form used of learning-by-doing, that it should be calculated
in the literature for aggregating foreign R&D cumulatively. Grossman and Helpman, however,
stocks. A bilateral import-to-GDP measure [13] is limit their discussion of information flows to
advanced by Lichtenberg and van Pottelsberghe activities linked directly to international trade.
de la Potterie (1998) as an alternative. In the Commercial trade is only one of many potential
expressions below Sj is the stock of R&D of the Jth means of contact between firms in different
country, Mij are I’s imports from J, and Y is GDP. countries.
The central argument of this part of the paper
M ij is that aggregate measures of national-level
[12] Bilateral imports SiBi − M = ∑ Sj total factor productivity and national stocks of
j ≠i Σi ≠ j M ij

M ij
[13] Bilateral imports toGDP
Coe et al. (1997) examines North-South R&D spillovers; which
Sim /Y = ∑
23

Sj may account for preferring imports to exports.

j ≠i Yj

24
It is possible that the capital-goods weighting captures
distortions in capital and credit markets in the importing
Coe et al. (2009) find little difference between country which are erroneously counted as TFP growth.
the import weighting-scheme regressions, but
25
The relevant passage is reproduced in appendix B of this paper.
 Chapter 2: Trade and R&D spillover effects: Implications for firm-level analysis in the
agricultural sector 21

R&D capital are not precise measures; they are growth in the 1950s; farms increased their use of
highly aggregated, averaged and smoothed in capital services and purchased inputs and reduced
multiple dimensions. They are informative at an the amount of labour employed; specifically,
aggregate level, but one cannot expect them to the number of farms and farm operators fell
support empirical analysis at a fine level of detail. dramatically between 1950 and 1959. Agricultural
The body of empirical aggregate level work is economists had noted that most farms were
consistent with the existence of international R&D too small, given the farms’ capital and human
spillovers and that they are positively related to capital endowments. Griliches’ (1957) work on
many alternative measures of bilateral trade. That hybrid corn and Roger’s (1962) work on diffusion
multiple indicators of international contact are of innovations documented the heterogeneity
correlated with R&D spillovers is consistent with of apparently similar mid-western corn farms.
there being multiple communication channels, Some farmers were simply better at farming
but it is difficult to extract more information from than others; some were quick to adopt new
aggregate data. Economists are overcoming the technologies and plant varieties, others adopted
aggregate measurement impasse by shifting the much latter or never. Farm-operator heterogeneity
analytical focus to the micro-level: this is the is a source of observed productivity growth. Less-
subject of part two. capable operators are more likely to leave full-time
farming while more-capable operators are more
likely to buy or rent-in the land from former farm
2.4 Research and development operators. Thus there is a transfer of farmland
Spillovers: Micro-level and equipment from less-capable to more-
capable farm operators.26 Figure 2.3 is constructed
analysis from data in Griliches (1963: 339): it plots the
distribution of commercial farms by sales class in
Introduction the 1950 and 1959 U.S. Cencuses of Agriculture
(these are the “actual” values; all figures are in
In macro-level productivity analysis the implicit 1954 dollars). It also plots a “1959 predicted”
assumption is that the economy is one large
firm or a set of identical representative firms
all of which operate equally efficiently at the Figure 2.3: Distribution of US commercial farms by sale
productivity frontier. When productivity increases,
the efficiency frontier shifts and all firms move 50 1950 actual
with the frontier. In reality, firms differ; few are
40
at the efficiency frontier; the rest lag behind. In 1959 predicted
aggregate measures it is difficult if not impossible 30
1959 actual
to distinguish between movements of the
20
efficiency frontier and interior movements toward
the frontier: both are measured as TFP growth. 10
At the micro level it is possible to observe these 0
$250 $2,500 $5,000 $10,000 $25,000+
differences.
$250 $2,500 $5,000 $10,000 $25.000+
The work of Zvi Griliches is central to the
1959 actual 21 23.6 25 21.5 8.9
development of micro-level or heterogeneous- 1959 predicted 33.4 22 25.6 12.8 6.2
firm approaches to productivity analysis and R&D 1950 actual 39.8 25.4 20.8 11 3
spillovers. In his diagnosis of the measurement
problems common in aggregate-level productivity Source: Griliches (1963)
analysis Griliches (1963) included economies of

26
The reallocation of resources in U.S. agriculture from less-
scale at the firm level. Griliches observed that the
capable to more-capable managers continues; see Hoppe et al.
U.S. agricultural sector exhibited rapid productivity (2010).
 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
22 industry levels in developing countries

distribution: this is constructed by applying the with a Minnesota farm panel; Mundlak (1961)
21 percent rate of U.S. agricultural productivity worked with an Israeli farm panel. They proposed
growth rate observed for 1950-59 uniformly what is now called the fixed-effects model; this
across the 1950 distribution. Contrasting the is a way of controlling for unobserved individual
1959 actual and predicted indicates that observed differences in farms, firms or individuals.
productivity change was not evenly distributed: Hoch referred to the unobservable variable as
the share of larger farms grew more than differential managerial ability or farm-specific
predicted and the share of farms in the smallest technical efficiency; Mundlak likewise referred to
class declined more than predicted. individual differences in management and viewed
When black box of aggregate productivity fixed effects as a means of estimating production
analysis is opened and one examines the dynamics functions “free of management bias.”28 What
of individual firms, one finds exit, entry and Hoch and Mundlak identified and attempted to
reallocation: less successful firms tend to contract control for is the heterogeneity of firm (or farm)
or exit; more successful firms tend to expand; new productivity. It was obvious by 1960 that the only
firms emerge; and most factors in the industry way to understand the fundamental, firm-level
are reallocated within the industry. Productivity basis of productivity change was to construct and
growth is not scale-neutral; it is not uniformly analyse panel data sets.
distributed across incumbent firms. Measuring Constructing panel data sets is expensive
and understanding these processes is the core of and often can only be accomplished by public
heterogeneous firm analysis. authorities. One of the challenges to applied
research is the confidentiality of much official
Micro-level analysis of productivity survey and census data. In the United States the
NBER has cooperated (after much negotiation)
Micro panel data with the U.S. Bureau of the Census which
allows analysis to be published so long as
Heterogeneous-firm analysis developed to explain the confidentiality of individual respondents
the commonly observed distributions of the size, is preserved. National governments differ in
productivity and growth of firms within industries. the degree and terms of access offered to
These consistent patterns attracted the attention researchers.29 Data development, data access and
of statisticians and economists as quality data panel econometrics developed in conjunction in
became available in the late 1800s. Early research the 1970s and 1980s.
focused on devising plausible stochastic (random) By the early 1990s several stylized facts had
processes that would generate the observed size been established.30 First, there are large and
distributions and rates of firm exit, entry and persistent differences in firm productivity within
growth.27 industries. Using Markov transition matrices,
It required the construction of panel or the common pattern observed is that highly
longitudinal data sets, where a specific cross- productive firms tend to remain highly productive
section of individual firms or respondents is and less productive firms tend to remain less
surveyed in multiple periods, to observe and
analyse individual firm dynamics, particularly the
28
The bias resulting from the endogenous choice of inputs was
decisions to expand or contract production and first identified by Marschak and Andrews (1944). For more
on the development of panel data econometrics see Nerlove
to enter or exit an industry. The pioneering work (2002).
on panel data econometrics involved panels of

29
Norway is unusually open in this regard and early empirical
farms: Hoch (1955, 1958, and 1962) worked work used Norwegian data: Griliches and Ringstad (1971).

30
The seminal article is Baily et al. (1992). Bartelsman and Dom
(2000) is an excellent survey on panel data analysis particularly

27
See Sutton (1997) for a literature survey; this was an active as it relates to total factor productivity. Syverson (2011) covers
issue in economics in the 1950s and early 1960s: Adelman the many subsequent innovations in the literature. Tybout
(1958), Simon and Bonini (1958), Mansfield (1962). (2000) surveys the literature on developing countries.
 Chapter 2: Trade and R&D spillover effects: Implications for firm-level analysis in the
agricultural sector 23

productive. Second, the risk of exit is inversely One of the key questions in this emergent
related to the level of productivity: that is, less field, and the focus of this paper, is what
productive firms are the most likely to exit. Third, accounts for the positive correlation between firm
entering firms, on average, have productivity productivity and export status. Does exporting
levels similar to the average of incumbent firms. (or importing) cause a firm to become more
Fourth, despite considerable exit and entry of productive? Perhaps trading firms have more
firms, factors (particularly labour) tend to remain contact with other countries and this provides
in the industry; that is, former employees of greater access to information and thus leads to
exiting firms generally find employment with greater R&D spillovers which are then manifest
surviving or entering firms in the same industry: in higher productivity. Or, perhaps trading firms
the reallocation of factors from less to more are able to exercise greater market power than
productive firms is a primary driver of productivity non-traders or to realize economies of scale not
change at the industrial level. There are, of course, available to non-traders. These are the leading
inter-industry factor movements, particularly out hypotheses underlying the causal arrow from
of industries in secular decline and into industries trade to productivity. The causal arrow running
in secular growth; but these flows are small the opposite direction, from productivity to
relative to intra-industry reallocation. trade, rests on selection, or self-selection: high-
A series of papers by Bernard and Jensen productivity firms are more likely to become
(1995, 1999) analysed micro data on firms that exporters than low-productivity firms. All of
export, focusing on firm productivity and entry-exit these hypotheses are plausible and they are not
dynamics. Several important stylized facts emerged. logically mutually exclusive: they could be valid
Exporting (and importing) is relatively rare: few simultaneously, and this complicates empirical
firms engage in it.31 Firms that trade tend to have hypothesis testing. In the empirical literature
higher productivity than firms in the same industry reviewed below the trade-causes-productivity
that only produce for the domestic market. path is modeled as a series of learning effects and
Firms that trade also tend to be larger and better the productivity-causes-trade path is modeled as a
capitalized than non-exporters. These empirical series of selection effects.
findings, among others, are forcing fundamental The next section discusses some of the
changes in international trade theory. Prior to empirical tools employed in the analysis of firm-
this seemingly anomalous empirical evidence, level dynamics within an industry; the extensions
international trade theory implicitly assumed that of these methods to firms that trade are discussed
all firms in an industry were homogeneous; if in the subsequent sections.
Portugal has a comparative advantage in wine
production, relative to English cloth, then all wine Heterogeneous firm dynamics:
producers in Portugal were implicitly assumed empirical methods
to export to England. In fact, the distribution of
exporting is concentrated in a minority of relatively There are two stages in the analysis of productivity
high-productivity firms. There is a now a “new with panel data. First, one needs to measure
new” trade theory, heterogeneous-firm trade productivity for each firm in each time period.
theory, that is attempting to construct a theoretical Given these measures one can then analyse firm
framework that corresponds to the empirical productivity dynamics; this section discusses
patterns about firms that trade.32 productivity dynamics first and then turns to the
measurement of productivity at the firm level.
Bernard et al. (2009): in 2000, 3.1 percent of U.S. firms
31

exported; 2.2 percent imported; and 1.1 percent both imported

and exported. Trade by value is highly concentrated: the largest
1 percent of exporters accounts for 81 percent of export sales; theory: Redding (2010) is a recent, concise survey of theoretical
the analogous share for importers is 78 percent. developments. Bernard et al. (2009) provides a statistical
‘portrait’ of U.S. trading firms; it gives due attention to

32
The last decade has been turbulent for international trade importers. The literature to date has emphasized exporters.
 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
24 industry levels in developing countries

Productivity decomposition, learning and selection Figure 2.4: Firm’s entry and exit

Productivity decomposition identifies and

measures the relative contribution of different
sources of productivity change in an industry. 1 Incumbents
There are several productivity decomposition
Entrants
methods33 but their common starting point is
the fact that industry-wide productivity is the
2 Exits Incumbents
weighted average of the productivities of the
individual firms in the industry. Industry-level
productivity change can be decomposed into θ
five components. Three components relate to 3 Exits Incumbents Exits Surv.
surviving, continuing firms: 1) changes in within-
firm productivity (holding market share constant); γ Control α λ
2) changes in market shares (holding productivity
constant); and 3) the interaction of productivity Source: Authors (based on Melitz and Polanec (2009) and
Baily et. al. (1992)
and market share changes. These effects are often
called within-firm, between-firm, and cross-
firm effects, respectively. The fourth and fifth Pit = + γ IncmbExitit + α EntExitit + λ EntSurv(3)
components are the contributions of entering
Pit = firms,
and exiting γ IncmbExit
+ respectively. α measured
it +are
Both EntExitit + λ EntSurv(3)it + θ EntSuvr (2)it + δ Yearit + ϵ it
relative to industry-level productivity in the base
or end period because there is insufficient data to α <γ <0≤θ <λ
calculate within-firm productivity change.
Regression analysis can be employed to
distinguish selection and learning effects. The These findings are consistent with the
dependent variable is firm productivity (Pit) emergent stylized facts about heterogeneous
for firm (i) at time (t). The panel of firms is firm dynamics. The non-strict inequality (0 ≤ θ)
unbalanced, that is, there are exits and entries. indicates that the average productivity of entrants
The focus is on all firms that were active at that survived to period 3 is greater than the
the time of survey 3. Entrants, in this context, average productivity of incumbents (in period 2)
are those firms that entered the industry after but the difference is not statistically significant.
survey 1 but before the survey 2; and exits are The inequalities (α < ϒ < 0) indicate: 1) that
firms that left the industry after survey 2 but entrants that exit had a significantly lower
before survey 3. Figure 2.4 illustrates the different average productivity (in period 2) than incumbents
subsets of firms distinguished by dummy variables who exit; and 2) that incumbents who exit
in the regression equation. The dummy variable had a significantly lower average productivity
for year controls for average productivity changes (in period 2) than surviving incumbents
between surveys 2 and 3. (surviving incumbents are not distinguished
This example is based on the analysis in Foster by a dummy variable and serve as the control
et al. (2006: 754ff.), which finds the following, for the regression). These results are evidence
where strict inequalities indicate a significant of selection: the average productivity of the
difference (F-test): industry increases because lower-productivity
exiting firms are replaced by more-productive
expanding incumbents and new entrants. The
inequality (θ < λ) indicates that surviving entrants

33
Melitz and Polanec (2009) is a recent critical survey. Baily et al.
had a significantly higher average productivity in
(1992) is seminal work in this area and provides the basis of the
discussion in this paragraph. period 3 than they did in period 2. This last result
 Chapter 2: Trade and R&D spillover effects: Implications for firm-level analysis in the
agricultural sector 25

is evidence of learning, even after controlling for is an important consideration when the focus
year effects. Foster et al. (2006: 755) remark: of analysis turns to firms that trade as they may
“This pattern implies the surviving entering cohort differ from firms that produce but do not trade.
exhibits more rapid productivity growth than Olley and Pakes (1996) devised an estimation
more mature surviving incumbents over this same algorithm that addresses both the simultaneity
period. That is, these results are consistent with and selection biases. The intuition behind
post-entry learning-by-doing effects playing a the Olley-Pakes algorithm is that one can use
nontrivial and statistically significant role.” observed information about a firm’s current
and past investment decisions (net changes in
Measuring firm productivity with panel data and capital) as an indicator of the firm’s unobserved
selection productivity level. Including this derived measure
in the regression takes care of the simultaneity
Estimating productivity at the firm level with panel bias. And, based on the plausible assumption
data involves many of the same measurement that the probability of survival is increasing in
problems encountered at the aggregate level; productivity, the derived indicator also accounts
it also introduces problems that are masked by for selection bias.
aggregation: simultaneity bias, selection bias Underlying Olley-Pakes and its various extensions
and omitted price bias.34 The binding constraint is a dynamic optimization process governing a firm’s
is always the breadth and quality of the data. investment programme and its discrete choices
Firm-level data is often insufficient to estimate about entry and exit. This provides a transition
or calculate TFP. Data are often collected on to a discussion of the discrete choice of whether
revenue or sales; without sales price data revenue a non-exporting firm becomes an exporter and
cannot be converted into physical unit terms. viceversa. The starting assumption is that there is a
Multi-product firms require a firm-specific price fixed sunk cost (F) for a non-exporter to become an
index. Similar measurement problems exist in exporter. The table below collapses and simplifies
factor measurement. A common solution is to use expected net present value calculations into a set
labour productivity.35 of inequalities. The two rows contrast the decisions
Simultaneity bias emerges because a firm’s of exporters and non-exporters, both of which are
choice of variable input use is influenced by assumed to be incumbent producing firms in the
factors not observable to the econometrician, same industry. In the exit column, both exporters
such as the firm’s knowledge of its productivity and non-exporters choose to exit if expected profits
level and its expectations of market conditions. (π) are negative. If expected profits are positive
In estimating firm-level production functions exporters continue as exporters. Non-exporters
the error term can be correlated with variable with positive profits have the option of becoming
inputs and thus bias the estimated coefficients; exporters, but this is only economically rational if the
this, in turn, results in biased productivity expected discounted flow of future profits exceeds
measurements. the fixed cost of becoming an exporter.
Selection bias exists because the set of firms
one observes is an outcome of a selection process. In reality these decisions are not as crisp and
One does not observe firms that have chosen mechanical as portrayed in the table or in the
to exit the industry; nor does one observe firms models on which it is based (e.g., Roberts and
that have chosen not to enter the industry, this
Table 2.2: Trader’s entry and exit

34
Van Beveren (2012) is a recent survey of the econometrics of Initial state Exit Remain Export
TFP estimation with panel data; it is a good starting point for
new variants of the Olley-Pakes algorithm. Exporters π<0 0<π

Foster et al. (2008) explore three variant measures of firm-level

35 Non-exporters π<0 0<π<F F<π
TFP and evaluate their strengths and biases. Source: Authors
 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
26 industry levels in developing countries

Tybout [1997]); these decisions are often modeled are those who have made the expected net
empirically in a probit framework. In this context, a present value profit calculation and found that its
probit model would express the probability that a expected value is positive.
non-exporter becomes an exporter as an increasing When productivity assignments are made,
function of value of [π-F], among other variables. aspirant exporters re-calculate their expected
profits: those assigned lower productivities
Heterogeneous trading firm dynamics withdraw from the process and remain as
non-exporters (less the fixed cost incurred).
The theoretical watershed in heterogeneous- Those assigned higher productivities proceed
firm trade theory is the Melitz (2003) model. to become new exporters and begin exporting.
The Melitz model is driven by a selection process Their profitability in the first exporting period
similar to those described above (Foster, et al., is determined by their productivity assignment
Olley and Pakes and Roberts and Tybout) and and a market-wide stochastic element. The
embedded in a differentiated-product trade shaded cone at the right of the figure is meant
model. The Melitz model is the starting point to represent a distribution of profit outcomes for
for contemporary trade theory; this is an active the cohort of new exporters. Each firm decides,
area and there are numerous extensions. This based on its realized performance, whether to
section provides an intuitive description of its continue exporting. The horizontal line illustrates
selection process with an emphasis on the model’s a potential cut-off point, threshold below which
implications for the analysis of learning and firms revert to non-exporter status.
spillovers. The exit threshold is not fixed: it is determined
Figure 2.5 is a flow chart of the transition to by market conditions. For example, an export
exporter status. The central feature of the model “boom” induces a rapid increase in output as
is represented by the oval labeled “productivity well as proportionally rapid increases in derived
assignment.” Aspiring exporters select themselves factor demands. This drives up factor rental rates.
from active non-exporters in a given industry. An Depending on the relevant elasticities in product
aspiring exporter must incur a fixed sunk cost to and factor markets a boom could raise or lower
be assigned a productivity level. Each aspirant’s the exit threshold.
productivity assignment is randomly drawn from The important point is that given parameter
a probability distribution. Aspiring exporters values one can simulate the evolution of the
productivity distribution of the export industry.
Figure 2.5: A flow-chart interpretation of the Melitz Similarly, one can derive the expected changes in
model the industry distribution following innovations in
trade policy (e.g., tariff changes, domestic and
or foreign) and innovations in factor and product
markets.36 Any argument in an exporting firm’s
profit function can shift the exit threshold.
The original (2003) Melitz model assumes that
Pay sunk aspiring entrants are identical: the productivity
New Export
cost: F Higher assignment mechanism (i.e., the underlying
exporters performance
Pareto distribution) is the initial source of exporter
Aspiring Productivity productivity heterogeneity; this initial distribution
exporters assignment is then truncated (by low-productivity immediate
Lower

36
For example, Trefler (2004), examining the effects of Canadian
Non-exporters tariff reductions, finds that high-productivity exporters expand
market share and low-productivity firms contract or exit.
Bernard et al. (2006) find a similar distribution of selection
Source: Authors effects following a decline in transport costs.
 Chapter 2: Trade and R&D spillover effects: Implications for firm-level analysis in the
agricultural sector 27

exits) and modified by subsequent rounds of López (2005, 2009) advances an alternate
market selection and entry. These assumptions reading of the cost trajectories of entering
simplify the model: in reality firms self-select into exporters. He argues that the decision to
becoming exporters.37 Figure 2.5 is constructed export occurs several periods before a firm
to include self-selection: this is represented by the actually exports. Firms planning to export take
arrow linking non-exporters and aspiring exporters. productivity-improving actions prior to exporting.
López refers to such actions as learning-to-export,
Selection, learning, innovation and as distinct from learning-by-exporting, which
exporting firms refers to post-entry increases in firm productivity.39
The López narrative asserts two causal channels
Clerides et al. (1998) helped frame the empirical between exporting and productivity pre-entry and
question of the relative importance of selection post-entry learning. Self-selection still plays an
and learning in accounting for the observed important role in this story because some firms
positive correlation between a firm’s export choose to plan to export and others choose not
status and its productivity. From panel data to.40
they constructed characteristic cost trajectories The standard empirical approach to
for non-exporters and entering, exiting and investigating learning and selection is analogous
continuing exporters. They found that the unit to the analysis outlined above by Foster et al.
costs of entering exporters decline for several (2006). An important difference is that the
periods before they start exporting. At entry, primary movement is between non-exporting
entrants have approximately the same costs as and exporting. One can generally assume that
continuing exporters and they are more efficient exporting firms can be observed as active non-
(lower-cost) than exiting exporters. This is the exporting firms before they become exporters and,
same pattern found by Foster et al. (2006) if they cease exporting, that they often remain
discussed above. They found little significant active in the domestic market rather than cease
evidence that the post-entry cost profiles of operations completely. Consequently it is possible
entrants and continuing exporters differ, that is, to measure an exporting firm’s productivity pre-
little support for post-entry learning.38 If there entry, post-entry (if it survives) and post-exit (if it
is no post-entry learning then the narrative can does not survive as an exporter). Such firms can
be reduced to a pure selection-driven stochastic be compared with cohorts of non-exporters who
process, such as the Melitz model: if a non- do not become exporters. A sizeable empirical
exporting firm experiences a random productivity literature exists on this topic and there are two
shock that shifts its productivity above a critical good literature surveys: Wallace (2007) and
threshold then the firm starts to export with Greenaway and Kneller (2007); and in 2008
probability ‘p’; otherwise, it does not export. ISGEP (International Study Group on Exports
One can estimate the parameters governing the and Productivity) published a pooled study
distribution of productivity shocks and closely of 14 countries. There is clear evidence of an
replicate the observed distributions of exporting
firms by productivity and by size. 39
Learning-by-exporting is analogous to Arrow’s learning-by-
doing. Following Arrow, the proper measure of a firm’s export
experience for learning-by-exporting is not the length of time
37
The simplification is effectively parsimonious as the observed since entry (as it is usually measured in the empirical literature)
distribution of exporting firms corresponds closely to a Pareto but the cumulative volume of the firm’s exporting activity at a
distribution. The Pareto distribution is governed by one given moment. Fernandes and Isgut (2005) on Colombia is an
parameter; this allows changes in the distribution of firms to be exception: they follow Arrow and use a cumulative measure.
tracked in one dimension. This is a powerful simplification and
it seems to be emerging as “useful tool” in theory construction
40
A major empirical problem is that one must observe when
similar to the Dixit-Stiglitz mechanism. a firm decides to start preparing to export. To make valid
comparisons one must also observe those firms that make
38
Bernard and Jensen (1995) is the seminal paper in this area. preparations to export but never export. On self-section in
Bernard and Jensen (1999) find very strong selection effects exporting see the Olley-Pakes discussion on pages 21-22
and no learning ffects for U.S. exporters. above.
 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
28 industry levels in developing countries

“exporter productivity premium”: exporters have destinations.41 The typical or modal U.S. exporting
higher productivity than non-exporters; there is firm exported one product to one country. The
also uniformly strong evidence of self-selection, median is two products and one destination
consistent with pre-entry learning; the evidence for country. U.S. exporters are not atypical; similar
post entry learning is weak, however. distributions are found for France and for
One limitation of the standard approach is Colombia.42 In Colombia, where there is data on
that it does not fully control for selection effects; the number of customers an exporting firm has,
it measures the difference between the average the typical exporter exports one product to one
outcomes for non-exporters and new exporters. customer in one country.
The ideal counterfactual for an exporting firm is These statistics indicate that most entering
the performance of the identical firm had it not exporters probably have a relationship with a
become an exporter, an alternative reality that specific foreign customer or customers prior
one cannot observe. A close approximation is to exporting. Consistent with the learning-to-
to match otherwise similar exporters and non- export argument, such firms are likely to have
exporters and examine the pair-wise differences in made investments or undertaken some process
productivity trajectories. or managerial improvements to meet contractual
Arnold and Hussinger (2005) use matching and specifications for the new client. Some firms
find zero post-entry learning effects for German may take a speculative approach and attempt to
exporters. Girma et al. (2004) use matching and export without a prior sales commitment; but this
find positive evidence of post-entry learning for is rather risky given the costs involved.
U.K. exporters. Yang and Mallick (2010) use Recent studies examine the distinction
matching and find significant post-entry learning between exporting generally and exporting to a
effects in the second year of exporting for Chinese specific destination or destinations. Trofimenko
exporters. Generalization are not possible without (2010) and Park et al. (2010) find that exporting-
a large body of similar studies, the limiting factor to firm productivity gains are more likely and
the expansion of this promising empirical research stronger for firms exporting to rich, developed
program is the availability of quality micro data. countries than for firms that export to lower-
The statistical portrait of U.S. trading firms by income developing countries. These findings are
Bernard et al. (2009) merits intensive study: the
facts are illuminating and shed light on learning- 41
Bernard et al. (2009) tables 14.4 and 14.6; Data are for 2000
to-export. Table 2.3 shows the distribution and are rounded. The distributions for importing firms are
of exporting firms in 2000 by number of similar to those for exporting firms.
products exported and by the number of export 42
See Eaton et al. (2011) and (2007), respectively. Relatively
simple stochastic processes can simulate these distributions:
Chaney (2011) is an indication of the direction of this line of
research.

Table 2.3: Distribution of US exporting firms

Number of products exported Number of export destinations

Number Firms (%) Value (%) Firms (%) Value (%)
1 38 1 57 4
2 16 1 15 2
3-4 16 2 12 3
5-9 15 4 9 5
10 16 93 8 86
Source: Adapted from Bernard et. al. (2009)
 Chapter 2: Trade and R&D spillover effects: Implications for firm-level analysis in the
agricultural sector 29

consistent with learning-by-exporting, technology- average effect to be insignificantly different from

transfer, and R&D spillover narratives; however, zero.
they are also consistent with self-selection: if
exporting to richer markets requires a higher Selection, learning and innovation at the industrial
fixed entry cost then the observed differences by and national level
destination can be largely a result of selection.
The mixed evidence of post-entry gains in The Melitz model concerns the entire distribution
productivity for exporting firms is consistent of firms, not merely those that export. The
with international R&D spillovers; but it does not previous sections focus on selection into
provide direct or conclusive evidence. There is exporting; but there is also a lower productivity
a small literature that examines the relationship threshold that determines entry to and exit
between exporting status and R&D at the firm from the domestic market. Both thresholds
level. Several studies find evidence that firms are endogenous to market conditions. Trade
invest in innovation (R&D) prior to exporting and liberalization, for example, by increasing import
in anticipation of trade liberalization.43 But the competition and raising potential returns to
dominant direction of causality is from innovation exporting and importing, shifts the thresholds for
to exporting: engaging in the former increases trading but also shifts the exit threshold for non-
the probability of subsequently engaging in the exporters.
latter. Once again, self-selection is at work here.
Damijan et al. (2008) is exceptional in that it finds Competition and the distribution of x-efficiency
evidence of export-induced innovation. The study
uses nearest-neighbor matching to control for Leibenstein (1966) introduced the concept of
selection effects; but the far stronger influence x-efficiency to describe the common empirical
in this study, selection, is from innovating to observation that firms do not operate as efficiently
exporting. as assumed in economic theory. Heterogeneous
One reason why little evidence of a link firm theory has revived and reinforced
between exporting and innovation (R&D) is Leibenstein’s insight. Bloom et al. (2010a)
observed is because few firms engage in either measure the managerial practices employed by
activity. Typically it is larger, well-capitalized, firms in 16 countries, finding a wide range of
and relatively efficient firms that self-select into management-quality scores within each country,
exporting and engaging in R&D; very few firms similar to the dispersion of firm-productivity
engage in both activities.44 The population of scores found in other studies; and significant
new exporters, in contrast, is largely comprised differences between mean country scores. They
of small and medium sized firms that are unlikely explain much of the variation in management
to engage in R&D. The methods reviewed above quality by the degree of competition a firm faces,
treat individual cases equally; dummy variables whether it is engaged in trade (trading firms
capture the difference between the simple (un- have higher quality) and the formal education of
weighted) average productivity changes of new managers. The degree of decentralization (how
exporters and non-exporters, for example. Thus, much discretion lower management is allowed)
because of the low frequency of firms that export is also an important determinant; decentralized
and innovate, one would expect the observed management is highly correlated with the degree
median R&D effect to be zero and the observed of interpersonal trust in society; decentralized
management is greater in common law countries
than in civil law countries, for example.
Aw et al. (2008, 2011), Bustos (2011), Lileeva and Trefler
43
Syverson (2004) and Bloom et al. (2010b)
(2010). The argument is that there is a simultaneous self-
selection into (additional) innovation and exporting. examine the relationship between competition
and firm efficiency under conditions of spatial

44
On the distribution of R&D among firms see, for example,
Cohen and Klepper (1992). market power in two non-tradable markets:
 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
30 industry levels in developing countries

in cement production and public hospitals, in the domestic economy and induces domestic
respectively. They find that firm efficiency is TFP growth, primarily through selection effects.
largely determined by the proximity of competing Pavcnik (2002) examines trade liberalization
firms. Bloom et al. (2011a) take a clinical trial in Chile using firm-level data. She finds that
approach to management quality in textile plants surviving firms in import-competing sectors realized
in India. Randomly selected firms were provided significantly higher productivity gains (4.6 percent
management consultant services for free for annually) than in export-oriented (3.6 percent
one month; control firms did not receive these annually) and non-tradable (0.1 percent annually)
services. The consultants’ recommendations sectors. Exit is an important factor: in aggregate,
primarily concerned three issues: quality control, 70 percent of productivity gains can be attributed
inventory management, and the physical flow of to the reallocation of factors among firms. She
work. The recommendations were not new ideas, also finds that the relative lack of barriers to exit in
they could be found in any management textbook Chile facilitated factor reallocation; restrictions on
published after 1960. Not all treated firms acted bankruptcy, plant closing and redundancy inhibit
on the recommendations, but the average productivity gains.
treatment effect was an 11 percent increase in Trefler (2004) examines the impact of the
productivity. Canada-U.S. FTA on Canadian-firm labour
Hsieh and Klenow (2009) examine the productivity. Import-competing industries
distribution of x-efficiency (as measured by the experienced increased firm exit and reduced
misallocation of capital and labour) at the firm employment. This was more than offset by
level in India, China, and the United States. unusually high rates of labour-productivity growth
They calculate what the net productivity gain among surviving firms. Trefler finds that about
would be if the efficiency distribution of firms half the productivity gain can be attributed to
at each industry at the four-digit level in China exit and inter-firm factor reallocation and half to
and India were to shift to the associated U.S. within-firm increases in technical efficiency.
distribution. They note that this is essentially a Amiti and Konings (2007) examine the impact
Melitz model without trade liberalization: rather of tariff liberalization on Indonesian firms. They
than measuring the impact of trade liberalization construct firm- and industry-specific measures
on the distribution of firms (as in the articles of the change in the effective rate of protection
reviewed below) they estimate the maximum effected by liberalization: that is, specifying
potential change. The central estimate is a weighted indicators of both output and input
40 percent and 50 percent increase in aggregate tariff changes. They find that reductions in input
TFP, for China and India respectively. tariffs generate substantially higher within-firm
All of these studies above confirm and refine productivity gains than reductions in output
the earlier work of Nickell (1996) on competition tariffs. They also control for industry-level
inducing higher firm-level productivity. There competition by including a Herfendahl index alone
is emerging line of research that takes trade and interacted with the output-tariff change
liberalization events as natural experiments that variable. They find that within-firm productivity
increase competitive pressures in an economy and growth is negatively related to the degree of
contribute to TFP growth. This literature is the industry concentration; output tariff reduction
focus of the next section. induces productivity growth only for firms in
competitive industries. This finding does not
Liberalization, competition and innovation conform to the assumption of the endogenous
growth theory that imperfect competition is
There is a growing empirical literature that positively associated with innovative activity and
treats trade liberalization events as natural within-firm productivity gains.
experiments. The common causal path is that Lileeva and Trefler (2010) examine how
trade liberalization increases competitive pressures the Canada-U.S. FTA (Free Trade Agreement)
 Chapter 2: Trade and R&D spillover effects: Implications for firm-level analysis in the
agricultural sector 31

influenced the export-entry decision by Canadian response from ex ante higher-productivity firms
firms. They find that export entrants are than from lower-productivity firms. Moreover,
disproportionately lowerand mid-productivity the increased productivity does not result from
firms that were induced by import competition innovation or R&D spillover, but from investing
to invest in new technology, make process in improvements in quality control and inventory
innovations and improve management; such firms and personnel management. These are the
undertake these changes at significantly higher same mundane sources of intra-firm productivity
rates than similar non-exporting firms. Export growth adopted by Indian textiles firms in Bloom
entrants not only exhibit within-firm productivity et al. (2011a).
gains but also expand output volume and sales to Bloom et al. (2011b), Iacovone et al. (2011) and
the domestic (Canadian) market. This expansion, Amiti and Khandelwal (2009) utilize liberalization
in turn, increases domestic competition and raises events to investigate empirically the inverted-U
the exit rate. relationship between competition and innovation
Eslava et al. (2009) examine the impact of tariff advanced by Aghion et al. (2005) and Acemogul et
liberalization in Colombia. Their Colombian data al. (2006). The inverted-U is the vertical summation
permits estimation of firm-level TFP. Their results of two opposing effects.45 For firms far from the
are consistent with the other studies reviewed in technology frontier, an increase in competition
this section. What is novel is that they use their reduces the incentive to innovate because the
statistical results to simulate the counterfactual gains from innovation are likely to be reduced by
rate of exit (as a function of firm TFP) using pre- entry, but for firms near the technology frontier an
reform tariffs. Comparing the counterfactual with increase in competition encourages innovation.
realized exit provides a measure of the change in
the exit threshold: liberalization causes a significant Heterogeneous trading firms and related-
increase in the minimum threshold of firm TFP party trade
required for firm survival.
Bloom et al. (2011b) examine the impact of About two-thirds of the value of world trade
China’s entry into the WTO on firm-level innovation, consists of intermediate products. About
exit, and productivity in the EU-12. Consistent with one-third of world trade is intra-firm trade,
the other studies, greater exposure to Chinese most of which is of intermediate products.
imports induces greater levels of innovation, Heterogeneous-firm trade theory has drawn on
investment in information technology and organizational theory to explain the increasing
improvements in managerial practices. Chinese international fragmentation of production and
imports also led to differential selection: the the growing importance of related-party trade.
incidence of exit increased for lower-technology FDI is a potential channel for R&D spillovers;
firms relative to higher-technology firms, and there is an empirical literature on this topic,
the latter increased domestic market share. reviewed by Görg and Greenaway (2004), but
One important aspect of this study is that it with inconclusive findings. This short section
underscores the role of increased competition merely outlines the theoretical framework of this
in inducing innovation and productivity growth. emerging strand of research.46
Because the trade flow is South-North, from
China to the EU, one expects there to be very little
of the R&D spillovers or technological transfer
45
Specifically, measures of innovation are approximately quadratic
assumed to exist when the import shock is largely in the Lerner index; the Lerner index ranges from zero (perfect
competition) to one (perfect monopoly).
North-South.

46
The key papers in this literature are Antràs (2003), Antràs
Similarly, Iacovone et al. (2011) examine the and Helpman (2004 and 2008), and Helpman et al. (2004);
impact of Chinese imports on Mexican firms. the studies reviewed in Görg and Greenaway predate these
theoretical innovations. Keller (2010) reviews the subsequent
They find a similar differential response: import
literature. Grossman and Rossi-Hansberg (2008) advance a
competition induces a greater productivity theory of production fragmentation based on trade in tasks.
 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
32 industry levels in developing countries

The Coasian theory of the firm views the firm Location of production
as a nexus of contracts and the key question is Form of relationship Home Abroad
whether to make or to buy inputs. If inputs are
Make: Vertical integration No trade FDI & intra-firm trade
readily available in liquid markets, they can be
Buy: Outsource No trade Import arm’s length
purchased as needed with only market-price or
delivery risk. If markets are not sufficiently liquid
or the inputs are in some way specialized then Figure 2.6: Distribution of a 10% liberalization on
a contractual agreement is needed to assure French firms by size decile
supply. Contracts can be made at arm’s length
with another independent firm. But if contracting 1 2 3 4 5 6 7 8 9 10
10
is not feasible, for example, if proprietary
0
information cannot be revealed outside the
firm, then production is done within the firm. -10
International trade, when these relationships cross
Percent change
-20
international borders, adds a second dimension:
-30
whether to contract at home or abroad. The
international analogs are: anonymous non- -40
related-party trade, foreign outsourcing, and -50
vertical integration (foreign direct investment:
-60
FDI).
Size decile, 1 = smallest 10%
The 2-by-2 matrix below shows the union of firms sales
the make-buy and home-abroad dichotomies.
Source: Adapted from Eaton et. al. (2011)
Firms face four alternatives for contracting
specialized inputs. As in the Melitz model, each theories constructed on the nation state as the
mode requires a fixed cost; there is a hierarchy fundamental unit of analysis.
of fixed costs and firms select the optimal mode
based on their relative productivity. The least
productive firms only outsource domestically; 2.5 Conclusions part II
the next tier is domestic vertical integration;
then foreign outsourcing and, for the highest The discussion of the Melitz model noted that
productivity firms, FDI. An additional fixed cost Pareto distributions accurately describe the
is incurred for commencing operations in a new distribution of firms by size and by productivity
country; thus one observes a positive correlation and that simulating changes in these distributions
between firm productivity and the number of is one approach emerging in the current literature.
trade and investment destinations and sources.47 Eaton et al. (2011) provides an illustration of
Firms engaged in foreign production are not this simulation work. The study uses French
limited to importing back to the home country; firm-level data to simulate the impact of a
they can also sell in the host country or in third 10-percent uniform reduction in trade costs
countries. on the distribution of trading and non-trading
These theoretical developments drawing firms by size (firm size and firm productivity are
on organization theory have yet to be tested highly correlated). The graph below plots the
with micro-level data; this is the direction of selection impact of liberalization by firm-size
current empirical analysis in this area. Like other decile (all firms, not just trading firms). Half of
strands of heterogeneous-firm trade theory, its the firms in the lowest decile exit; there is net
firm-level focus challenges international trade exit in all deciles. The impact on firm sales is
more pronounced, sales decline for all but the

47
See Eaton et al. (2011) for these patterns in France; De Hoyos top decile. Selection, the culling of smaller, less-
and Iacovone (2011) find this pattern for Mexican firms. efficient firms, and the reallocation of factors to
 Chapter 2: Trade and R&D spillover effects: Implications for firm-level analysis in the
agricultural sector 33

larger, more productive firms is a major source level productivity. Both parts share a focus on
of productivity growth. This is what Griliches the relationship between trade and productivity
(1963) identified as a source of aggregate growth but the causal channels the two bodies
productivity growth; a source of growth excluded of research identify differ fundamentally. R&D
by assumption in aggregate growth models. It is central to the macro-level literature reviewed
is impressive that after 50 years the economics in Part I. In micro-level studies R&D is at best
profession has access to the data and has peripheral: selection and learning are the primary
developed models that are beginning to explain causal channels between trade and productivity at
aggregate productivity growth from the micro the firm level.
level. The difference between the macro and micro
The R&D spillover theories discussed in Part I literatures follows directly from differences in
are compelling narratives if one assumes universal the assumptions and definitions employed. The
technical efficiency at the firm level. If all firms macro-level analyses are part of the endogenous
operate on the efficiency frontier, then the only economic growth literature. In this framework
possible source of TFP growth is a positive shift economic growth can be attributed to two
in the frontier: that is, all observed growth is the causes: 1) increases in factors and 2) technological
direct result of technical innovation generated by change, which is the direct product of R&D. Thus,
R&D. But the empirical evidence review in Part II total factor productivity growth (that is, growth
does not support the distribution of technical net of growth in productive factors) is determined
efficiency assumed in exogenous and endogenous by R&D. International trade is hypothesized to
growth models. It finds that most firms operate increase the effectiveness of national-level R&D by
far inside the efficiency frontier: X-efficiency increasing the likelihood of R&D spillovers from
is pervasive. Most of what is observed as TFP trading partners. An international R&D spillover
growth at the national and industrial level is is narrowly defined: it is the flow of knowledge
selection-driven and involves movements toward from one country to another that leads to the
the technology frontier, rather than movements production of new knowledge in the recipient
with the frontier. The frontier does shift because country. There is confusion in the literature about
of R&D-driven innovation, but this is only one R&D spillovers, as Zvi Griliches has noted.48
of several factors that influence aggregate
productivity. [T]here are two distinct notions of R&D
“spillovers” here which are often confused
in the literature. In the first, R&D intensive
2.6 Conclusions and implications inputs are purchased from other industries
for future research and at less than their full “quality” price.
… If capital equipment purchase price
agricultural trade indices reflected fully the improvements in
their quality, i.e., were based on hedonic
The objective of this paper is to provide a critical calculations, there would be no need
literature review as background to applied to deal with it. As currently measured,
research on the benefits of agricultural trade to however, total factor productivity in
firms in developing countries, and specifically on industry i is affected not only by its own
trade-related R&D spillovers. Part I of the paper R&D but also by productivity improvements
reviews the literature on R&D spillovers at the in industry j to the extent of its purchases
macro-level, where the nation economy is the unit from that industry and to the extent that
of analysis. Part II reviews several emerging lines
of micro-level research where the firm is the unit
48
This quotation from Griliches 1992 is an almost verbatim
of analysis, that focus on the relationship between repetition of Griliches 1979 (1998: 30-31): the confusion in the
international trade and firm level and industry- literature is now in its fourth decade.
 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
34 industry levels in developing countries

the improvements in j have not been exists. Such spillovers were often referred to
appropriated by its producers and/or have as R&D spillovers; however, such spillovers are
not been incorporated in the official price not pure knowledge spillovers as defined by
indices of that (i) industry by the relevant Griliches and as used in endogenous growth
statistical agencies. The use of purchase- theory. They are, in fact, unapproriated quality
flow-weighted R&D measures assumes that improvements in inputs adopted by private
social returns in industry j are proportional agents in the agricultural sector. To eliminate
to its R&D investment levels and that the confusion, in light of endogenous growth theory,
amount of such returns transferred to agricultural economists now refrain from using
industry i is proportional to its purchases “R&D spillover”: they use the term “technology
from industry j. spillover” to refer to the cross-border diffusion
and adoption of inputs embodying R&D; and
But these are not real knowledge spillovers. they use “knowledge spillover” to refer to pure
They are just consequences of conventional knowledge spillovers.
measurement problems. True spillovers are With this distinction in mind one can restate
the ideas borrowed by the research teams the conclusion of Part I: the empirical approach
of industry i from the research results of of the macro literature, regressing national TFP
industry j. It is not clear that this kind of growth on various international purchase-flow-
borrowing is particularly related to input weighted R&D measures, conflates knowledge
purchase flows.49 spillovers and technology spillovers. The
finding that capital good- import-weighted
The confusion between the two notions R&D generates the best regression coefficients
of R&D spillover noted by Griliches has been is consistent with the insufficient quality
common in the literature measuring the adjustment of imported capital goods. It is likely
social returns to public agricultural R&D. The that some or much of what is being measured
assumption is that there is a compelling market is unappropriated productivity improvements
failure in R&D for agriculture. Because it is not by foreign suppliers of capital goods and other
economically rational for individual farmers to inputs. This problem is to be expected when an
undertake R&D and because the private returns indirect indicator of innovation derived from
from agricultural R&D are assumed to be largely aggregate secondary data (TFP growth) is used.
unappropriable, private agents will under-invest Credible evidence of international knowledge
in agricultural R&D. This is rationale for public spillovers requires direct or more proximate
provision of agriculture R&D. To justify this observation of institutions engaged in R&D; if
use of public funds agricultural economists at this is an important hypothesis then funding
public institutions estimate the social benefits for primary data collection should become a
and the social rate of return of these public priority.
investments. In calculating the increase in The micro-level research surveyed in Part II is
producers’ and consumers’ surplus from the more inductive and exploratory than theoretically
adoption and diffusion of, for example, an derived The underlying common denominator
improved variety developed by a public research is an attempt to identify sources of the dynamic
station, one does not quality-adjust the new gains from trade. Dynamic in this context is
variety: it is the social value of the publically- opposed to static: dynamic gains are those
financed quality improvement that one is in excess of the static gains. In terms of the
attempting to measure. When new varieties standard welfare-gains-from-trade diagram,
diffuse across state or national borders a spillover static gains result from movements along fixed
domestic supply and demand curves; dynamic
gains follow from movements in the curves.

49
Griliches 1998 [1992]: 257-58. Given the firm-level panel data available, the
 Chapter 2: Trade and R&D spillover effects: Implications for firm-level analysis in the
agricultural sector 35

focus is on the sources of productivity gains analyses reviewed in parts I and II. First, adopt
on the supply side; on whether, how and to a micro-level, firm-based focus; the weaknesses
what extent the domestic supply curve shifts of macro-level analysis have been noted many
rightward. The dominant importance of selection times in this paper. Second, collect primary
effects, especially the reallocation of productive data. Most of the studies reviewed in Part II are
factors from less productive exiting firms to more based on panel data sets constructed by national
productive surviving firms, is consistent with a governments or multi-lateral development
rightward/downward shift of the domestic supply institutions. The cost and years involved makes
curve. Learning effects are also consistent with a panel infeasible; but another panel is not
dynamic gains. Thus a consistent, empirically- necessary. The stylized facts are well-established:
grounded narrative emerges: increased there are selection effects and learning effects
international competition induces selection and and these can be examined in a small, well-
productivity-improving investment, pre-trade designed sample that matches trading and
and sometimes post-trade. The panel data sets non-trading firms, for example. Third and most
that provide the empirical base do not provide important, what is missing from almost all of
evidence of international spillovers, whether of the studies reviewed in this paper is qualitative
technical spillovers or knowledge spillovers. That data. The quantitative results indicate that firms
many of the panel-data based studies use labour do things that make them more productive
productivity rather than total factor productivity prior to engaging in trade and sometimes once
leaves scope for technical spillovers. It is unlikely they are engaged in trading: but this is merely
that knowledge spillovers play a major role in statistical inference. Few studies engage firms
the productivity gains observed in the panel directly and ask executives and managers what
studies, given the low proportion of firms that they did, why they did it, when they did it, and
engages in R&D. Focusing a study on firms that what they might have done had the institutional
do engage in R&D would allow one to gauge the environment been different. The answers to
relative magnitude of the international knowledge questions like these, which cannot be posed to
spillovers. a secondary data set, have the potential to move
The key question facing the FAO project on the research program forward and inform and
analyzing the benefits of agriculture trade to refine future research.
developing countries based on firm and industry Van Biesebroeck (2005) is one of the few
behaviour is whether to restrict its empirical studies to find strong and significant evidence
investigation into international R&D spillovers to of postentry productivity gains by exporters. The
knowledge spillovers. The propensity of agro- study is of a panel of manufacturing firms in nine
industrial firms in developing countries to engage Sub-Saharan countries. The study is exceptional
in R&D is even less than in developed countries. in that it uses qualitative data in addition to
This limits the likely importance of knowledge quantitative data. Van Biesebroeck’s argument,
spillovers as a benefit of trade, but the small based on a (qualitative) survey of panel firm
number of R&D-engaged firms in any given executives, is that contract enforcement in
developing country may make comprehensive the home market is weak. In contrast, the risk
in-depth surveys and interviews feasible. The of non-payment by foreign customers is very
alternatives are to broaden the scope slightly to low. Thus new exporters gain increased access
allow technical spillovers or broaden the scope to credit and realize in the export market
even further to allow the full range of causal economies of scale that had been limited by a
channels under the heading of dynamic gains lack of reliable domestic customers. This is a
from trade. post-entry, export-induced productivity effect
Invariant of the choice of these three but it is neither a knowledge (R&D) spillover
alternatives, there are some methodological nor a technology spillover nor does it qualify
lessons that can be drawn from empirical as a learning effect. It is a causal path that
 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
36 industry levels in developing countries

one could not have inferred from quantitative impediments to development; such finding are
results alone. Such qualitative findings enrich the important because they inform the direction
emerging narrative about the variety of benefits of data collection, theory construction and
of trade to developing countries and about local empirical analysis.
 Chapter 2: Trade and R&D spillover effects: Implications for firm-level analysis in the
agricultural sector 37

APPENDIX A: MEASURING STOCKS OF KNOWLEDGE

The stock of knowledge (R&D) is constructed from periodic (usually annual) R&D expenditure data,
a flow value, using the Perpetual Inventory Method (PIM).50 The R&D stock (St ) at the end of period
t is equal to the beginning stock (St-1) plus R&D expenditure during the year (Rt), minus depreciation
of the beginning stock (δSt-1), where δ is the annual depreciation rate.

St = (1-δ)St-1 + Rt

The stock of R&D in the initial year (S ) is constructed thus: S = R1/ (δ + g); where g is the average
0 0

annual logarithmic growth rate of R&D from the initial year to the present. The initial stock is not
observed, it is constructed based on the assumption that R&D spending and depreciation prior the
initial period is the same as the average rates after the initial period. The absolute stock of R&D is
sensitive to the validity of this assumption.
The depreciation rate is generally assumed to be 5%; this means it takes 13.5 years for a given
stock to depreciate by half and 45 years to depreciate by 90%. If one takes endogenous growth
theory seriously then the depreciation rate should be zero for the horizontal (Dixit- Stiglitz product
variety) model: knowledge once created is assumed to be immortal and demand for increasing
variety literally implies that no product becomes obsolete. The depreciation rate for the vertical
model, which assumes continual creative destruction, rendering existing stocks of knowledge
obsolete, should logically have a relatively high rate of depreciation; it would likely vary considerably
year-to-year as well.51
Agricultural economists have a distinct approach to constructing agricultural R&D stocks. The
convention is to assume agricultural research (e.g., plant breeding) takes several years to before any
useful research product becomes available. The new product then needs to tested and, if viable,
scaled up. Thus R&D is lagged several years, its effective value increases gradually, reaches a peak
or plateau in its mature phase, and then becomes obsolete as new, improved varieties are released
or as it ceases to be resistant to pests and diseases. The time profile of agricultural R&D is usually a
trapezoid or a gamma distribution density function.52

50
The OECD MSTI (Main Science and Technology Indicators) database is the standard source. The methodology of the indicators is
elaborated in the Methodology of the Frascati Manual, OECD (2002a)
51
Coe et al. (2009), for example, assume a horizontal model and use 5 percent depreciation. They test whether their results are
sensitive to this assumption and find that they are not (they test δ = .0 and .2). This further supports the argument presented in the
conclusion of part I about the low precision of R&D data.
52
There is a huge literature on this topic; Sheng et al. (2011) has an excellent applied discussion of the construction R&D (knowledge)
stocks for agricultural research and a good bibliography; it also examines R&D spillovers into Australian agriculture. Adams (1990)
provides empirical evidence of long (15-20 year) lags for basic research. Pakes and Schankerman (1984) explore obsolescence and
gestation lags.
 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
38 industry levels in developing countries

APPENDIX B: GROSSMAN AND HELPMAN ON WEIGHTING

INTERNATIONAL INFORMATION FLOWS

The passage below is from Grossman and Helpman (1991) Innovation and Growth in the Global
Economy; pp. 166-67.
It is plausible to suppose that the foreign contribution to the local knowledge stock increases
with the number of commercial interactions between domestic and foreign agents. That is, we may
assume that international trade in tangible commodities facilitates the exchange of intangible ideas.
This assumption can be justified in several ways. First, the larger the volume of international trade,
the greater presumably will be the number of personal contacts between domestic and foreign
individuals. These contacts may give rise to an exchange of information and may cause the agents
from the small country to acquire novel (for them) perspectives on technical problems. Second,
imports may embody differentiated intermediates that are not available in the local economy. The
greater the quantity of such imports, the greater perhaps will be the number of insights that local
researches gain from inspecting and using these goods. Third, when local goods are exported,
the foreign purchasing agents may suggest ways to improve the manufacturing process. In the
context of our model, the recommendations might take the form of ideas for new intermediate
inputs. The number of such suggestions is likely to increase with the quantity of goods exported. It
seems reasonable to assume therefore that the extent of the spillovers between any two countries
increases with the volume of their bilateral trade. To pursue the implications of this hypothesis, we
let Kn(t) denote the stock of knowledge capital in the small country, and suppose that the growth
of Kn depends not only on spillovers from local research but also on those international contacts.
In particular, we specify Kn(t) = G[n(t), T(t)], where T represents the cumulative volume of trade
(exports plus imports) up to time t.
 Chapter 2: Trade and R&D spillover effects: Implications for firm-level analysis in the
agricultural sector 39

Alston, J.M. 2002. Spillovers. Australian Journal

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 Chapter 3: Investigating the structures of agricultural trade industry in 49
developing countries

CHAPTER 3:

INVESTIGATING THE STRUCTURES OF THE AGRICULTURAL

TRADE INDUSTRY IN DEVELOPING COUNTRIES *

3.1 Introduction of a wider analysis on the determination of the

distribution of agricultural trade benefits among
The globalization of agricultural and food firms and stakeholders in developing countries,
trade has been hailed as a “big opportunity” seeks to compile and synthesize related literature
for farmers and agribusiness entrepreneurs. on the structure of agricultural trade industry in
However, considerations of quality, timeliness, developing countries.50 The objectives are:
and economies of scale have posed special
challenges to smallholders (World Bank, 2008). 1. To review the theory and evidence on the
The UN Special Rapporteur on the Right to structure of agricultural trade industry in
Food (2009) sounds the oft-repeated alarm developing countries.
that “concentration in food production and 2. Based on a literature survey, to determine what
distribution chains has been significantly causes the industry structure and how it affects
increasing over the past years. The resulting the distribution of trade benefits among firms.
market structure gives buyers considerable
bargaining strength over their suppliers, with Regarding objective 1, the hypothesis is that
potentially severe implications for the welfare trade in agricultural products is dominated by
both of producers and consumers (p. 5).” a small number of large firms receiving most
Benefits from growing international trade in of the trade gains. Under this objective, the
agricultural products are believed to have been study would attempt to describe a typology
captured by a few firms that dominate key nodes of organization/structure of agricultural trade
of the global value chain, to the exclusion of industry, and characterize the actual organization
small farmers and producers at the primary level, of agricultural trade industry in developing
whilst undermining food affordability at the countries (focusing on the main commodities)
retail level. based on the typology.
However, detailed information about the Regarding objective 2, the study seeks to
organization of agro-industry firms engaged understand the factors behind the formation of
in international trade is scarce. Understanding the observed industry structures in agricultural
how trading firms have been organized based trade, such as regulatory barriers, access to
on empirically verifiable facts and causal factors markets (i.e. raw materials), limit pricing, and
is important for analyzing the distribution of
trade benefits among firms and among their Here “trade” denotes cross-border exchange of goods that
50

can be adequately documented; informal trade across porous

upstream or downstream links. This study, part borders is, for lack of data, excluded.

* This chapter was written by Roehlano M. Briones (Research Fellow, Philippine Institute for Development Studies) and
Manitra A. Rakotoarisoa (Economist, Trade and Markets Division, FAO). This chapter expresses the personal opinions of the authors.
50 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
industry levels in developing countries

so on. It would also draw implications for the Table 3.1: Share of agriculture and agribusiness in
distribution of trade benefits. GDP, selected developing countries, recent years (%)
Unfortunately there are very few systematic
studies on the shares of agribusiness firms, Agriculture Agribusiness

particularly large ones, in international trade; Cameroon 40 17

market concentration would have to be Cote de Ivoire 28 26
inferred from “partial evidence” (Dy, 2009). Ethiopia 56 30
The insights and findings from the literature on Ghana 44 19
agribusiness structure are therefore relevant to
Kenya 26 23
agricultural trade. Hence the broader literature
Nigeria 42 16
on agribusiness structure is still covered in our
Indonesia 20 33
literature survey.
The rest of the paper is organized as Thailand 11 43
follows: Section 2 provides a setting and Philippines 12 15
context by presenting patterns and trends in Agri-based countries 39 22
agricultural trade and agribusiness. Section 3 Source: Wilkinson and Rocha (2009); Philippines - from Balisacan
addresses Objective 1 by describing a typology et al., (2011)
of agribusiness organization and tracing the
structure and evolution of agricultural industry in
terms of this typology, which provides insight into controlled by just a handful of firms. Following
the structure of agricultural trade (exporters and Wilkinson and Rocha (2009), “agribusiness”
importers of agricultural products) in developing refers to agriculture-related activities that
countries. Section 4 addresses Objective 2 and provide inputs to farmers, and connects them
analyses causes and distributional effects of to consumers through the handling, processing,
agricultural industry structure. It provides a transportation, marketing, and distribution of
schema for categorizing the causes and outcomes agricultural products. Their data suggest that
of industry structure and reviews available in agriculture-based, low-income countries, the
evidence of the hypothesized interactions. ratio of agriculture to agribusiness is around 0.6
Section 5 concludes. (Table3.1). The ratio increases to somewhere
below 2 for “transforming” countries, and
around 3 for urbanized developing countries (in
3.2 Agriculture, agribusiness a developed country such as the US the ratio is
and trade about 13).

Agriculture together with agribusiness combine Trade in agricultural products has been increasing,
to account for a prominent share of output in even over the period of declining real commodity
developing economies. As income increases the prices (1980s – 1990s). During this period the
size of agribusiness rises relative to that of primary structure of commodity trade had been shifting
agriculture. from traditional products to newer products such
as horticulture and seafood.
In the developing world, it is well-known
that agriculture remains a sizable part of Global exports of agricultural products has
the economy; less publicized is the fact that been increasing since the 1960s. This is seen in
agribusiness is also significant, perhaps more Figure 3.1, which uses FAO data (http://.faostat.
so as a share in GDP. While most farms (up to fao.org). Since the 1960s, growth of exports (in
85 percent) fall in the smallholder category real terms) has averaged about 3.6 percent. In
of below 2 ha (von Braun and Diaz-Bonilla, the 1980s to 1990s, world commodity prices had
2008), large swathes of agribusiness can be been on a long term relative decline (FAO, 2004),
 Chapter 3: Investigating the structures of agricultural trade industry in 51
developing countries

Figure 3.1: World agricultural exports, 1961-2009, in late 2000s, ending up with comparable growth
constant $ (1984=100) rates as the emerging commodities such as
meat, fish, vegetables and fruits, beverages, and
oilseeds.
500 Others
Traditional exports Global exports are dominated by the developed
400 Non-traditional exports countries. Among the developing countries the top
Cereals exporters are in Latin America and East (including
300 Southeast) Asia.

200 While developed countries are seen to have

achieved an “industrialized” status, they also
100 dominate world agricultural exports. This is
no coincidence, as industrialization leads to
0 sophisticated agro-industries and ancillary
1961 1971 1981 1991 2001 2009
services. The top exporters are the US and big
producers in the EU, namely France, Germany,
Note: Traditional exports denote coffee, cocoa, tea, spices, natural and the Benelux countries of the Netherlands
rubber, sugar, and sugar products; non-traditional exports denote and Belgium (Figure 3.2). Among the developed
fruits and vegetables, meat and meat products, and feedstuff.
countries the top exporters are the Latin American
Source: Trade data from FAOStat; US CPI from http://data.bls.gov
countries with the largest land areas (Brazil and
Argentina), China, and a few countries from
explaining in part the fall in world agricultural Southeast Asia. Among the developing countries,
exports over the sub-period. the top exporters tend to fall in the middle to high
Furthermore, the share of nontraditional income bracket. Diaz-Bonilla and Reca (2000)
exports has been rising sharply, whereas that of note that developing countries are traditionally
cereals and traditional exports had been declining, net exporters of oilseeds and products, coffee
at least until 2001 (Figure 3.1). This is consistent and cocoa, sugar, and fruits and vegetables.
with the changing structure of trade noted by Industrialized countries dominate world exports
Humphrey and Memedovic (2006), characterized in processed and high value food products except
by a shift away from traditional tropical products oilseed products. Developing countries are net
(coffee, cocoa, tea, sugar, spices and nuts) and importers of dairy products and cereals, except for
towards products such as horticulture and seafood. rice.
However a commodity price boom in the
late 2000s reversed the long term price decline. The agro-food industry exhibits high levels of
A more extended time series of food and other concentration and has undergone increasing
agricultural exports is shown in Table 3.2, which consolidation in recent decades.
uses UNCTAD data (http://unctadstat.unctad.
org). Trade in food products continues to grow, Market structure issues for global agro industry
albeit at a slower pace than overall merchandise are discussed in the next section; in this section
trade. The major food items are listed in the the focus is on domestic markets. High levels of
table; among these, the traditional products concentration and accelerated consolidation is
such as cereals, coffee, tea, cocoa and spices, established at least for some OECD countries.
and sugar experience low to negative growth The Hefernan report (Hendrickson and Hefernan,
(adjusted for inflation); similarly for traditional 2006) presents concentration ratios for US food
non-food items such as crude rubber, cotton, industry as of 2005 (Table 3.3).
and feeds. However these traditional items The highest four-firm concentration ratio
(except cotton) underwent a resurgence in the (CR4) is in beef packing and soybean crushing, at
52 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
industry levels in developing countries

Table 3.2: World merchandise exports, total and selected item, 1995–2010

Exports (in $ billions) Average growth, real terms (%)

1995 2000 2005 2010 1995-2005 1995-2010
Total all products 5 121 6 368 10 457 15 148 5.5 5.5
Food (including preparations) 460 426 681 1 143 1.7 4.1

Meat 48 45 75 119 2.2 4.1

Fish, crustaceans, molluscs 48 51 73 109 1.9 3.4
Cereals 56 50 73 129 0.1 3.5
Vegetables and fruits 71 70 117 184 2.9 4.4
Sugar, sugar preparations 21 15 24 48 (1.0) 3.6
Coffee, tea, cocoa, spices 33 28 45 86 0.6 4.5
Oil seeds and fruits 13 14 23 56 3.7 8.4
Miscellaneous 19 19 36 57 4.3 5.4
Beverages 33 34 58 80 3.7 4.0
Crude rubber 14 10 22 46 2.5 6.4
Cotton 12 8 11 19 (3.6) 0.7
Animal and vegetable oils 27 19 39 83 1.2 5.7
Feedstuff for animals 21 20 31 61 1.8 5.5
Tobacco 25 22 26 36 (2.3) 0.0
Note: Growth rates have been adjusted for annual inflation of the US CPI
Source: Trade data from UNCTADStat; CPI data from http://data.bls.gov

Figure 3.2: Top ten agricultural exporters , by country category, 2009 ($ billions)

USA Brazil
Netherlands China
Germany Argentina
France Indonesia
Belgium Thailand
Italy Malaysia
Spain India
Canada Mexico
UK Turkey
Australia Ukraine
0 20 40 60 80 100 120 0 10 20 30 40 50 60

Source of basic data: FAOStat.

 Chapter 3: Investigating the structures of agricultural trade industry in 53
developing countries

80 percent or more, while the CR5 ratio in food Traditional systems would eventually shift
retailing is lowest at 48 percent. The concentration towards a product-oriented food market where
ratios are all higher than in a previous year agents are typically larger and more capital
(1990 or earlier). Sexton et al (2007) find that, intensive. Downstream consolidation leads
at the four-digit SITC level, CR4 in US food to the rapid ascendance of large processors,
manufacturing was about 76 percent in 1997; supermarkets, and food service chains, coexisting
cigarette manufacturing is the most concentrated with traditional brokers, wholesalers, and
at 98 percent. In general, average seller smallholders. Consolidation entails diffusion of
concentration in the EU is higher than in the US, new organizations, institutions, and technologies;
averaging a CR3 of 67 percent for nine countries. the pace of evolution varies across regions,
Reardon and Timmer (2005) demonstrate with urban areas in middle income developing
that a similar agribusiness consolidation process countries transforming earliest.
is now occurring in many developing countries.
They distinguish between commodity and product
(in rather idiosyncratic sense) as follows: the 3.3 Agro-industry trade
former refers to standardized agricultural products structure: global perspective
with minimal processing and differentiation;
the latter refers to subsets of a commodity that
are differentiated in terms of brand, degree of The structure of global agro-industry: a
processing, or other attributes (e.g. organic). schema
Agribusiness consolidation can be seen as part
of the transformation of agrifood systems from Table 3.4 presents a schema by which to
commodity to products over the past half-century. characterize the structure of global agro-industry
The early, traditional stage was characterized and trade is presented in economic activities
by the following: related to agriculture range from production to
consumption and may be simplified in terms
• Numerous small producers. of the stages, as in the leftmost column (see
• Direct sale through traditional wholesalers to Dy, 2009). Inputs to farm production include
the urban market, or direct sale to retailers of seeds, fertilizers, chemicals, services (e.g. credit,
local brokers for the rural market. irrigation, animal health), and so on. Upon harvest
• Informal vendors, small shops, wet markets as the output undergoes processing, after which
the retail segment of the output market. it is distributed to retailers, finally reaching the
end-consumers. Processing spans from basic (e.g.
rice milling) to intensive (e.g. breakfast cereal);
Table 3.3: Concentration ratios in selected food indus- distribution covers wholesaling, international
tries in the US (%) marketing (whether import or export side), and
logistics. Retail includes supermarkets, restaurants,
Past Present shops, and wet market stalls. Note however that
(year) (2006) the marketing is by no means limited to the last
Beef packing 72 (1990) 83.5 two stages as it can occur at each transition (e.g.
Pork packing 37 (1987) 66.0 dealers sell fertilizer to farmers, etc.)
Each of these stages can be elaborated along
Broiler 35 (1986) 58.5
three dimensions of international industrial
Turkey 31 (1988) 55.0
organization, namely: i) engagement with the
Soybean crushing 54 (1971) 80.0 international market; ii) vertical coordination; and
Food retailing (CR5) 24 (1997) 48.0 iv) horizontal market structure.
Note: Ratios pertain to CR4, except where otherwise indicated. Engagement in the international market – a
Source: Hendrickson and Hefernan (2006). firm may opt to limit its activity and transactions
54 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
industry levels in developing countries

Table 3.4: Schema for characterizing the structure of global agro-industry

Engagement in the
Activity Vertical coordination Horizontal structure
international market
Input supply Cross-border trade Integration Monopoly
Foreign investment

Production Oligopoly
Spot market
Processing Monopolistic competition

Distribution Atomistic competition

Retailing Participation threshold

Source: Author’s diagram

to its domestic market, or engage other players differentiation may also be applied to firms in
in the international market. The most common an oligopoly or even monopoly, firms under
mode of engagement is through cross-border monopolistic competition may not necessarily
trade in goods; however foreign direct investment regard themselves as industry movers.
has emerged as another important modality. Nevertheless within the market niche opened up
Degree of vertical coordination - The sequence by their differentiated product, they are able to
of activities in the leftmost column of Table 3.4 can exercise some degree of market power.
be called a “value chain”. In its traditional form, The schema introduces an additional
exchanges along the chain are arranged through aspect of horizontal market structure, which is
arms-length transactions within a spot (cash) the participation threshold. The participation
market. The study of modern supply chains and threshold refers to the minimum economic scale
value chains emerged as a separate literature to required to enter and remain in the market. Such
study cases in which actors introduce coordination scale is required to pay back a large initial outlay
over some or even numerous links in the chain. (see Section V discussion on sunk cost). The idea
The tightest coordination is enforced through of participation to the level of microenterprises
ownership under vertical integration. Between and small farmers occupies much of the recent
vertical integration and the spot market are various value chain literature. In contrast, the notion
coordination mechanisms, e.g. contract growing. of minimum economic scale and barriers to
Horizontal market structure – as with degree entry is well recognized in the I-O literature, but
of vertical coordination, the degree of market is sporadically investigated in the theory and
competition is a spectrum spanning from pure empirics of market structure. The I-O literature has
competition by atomistic firms to a literal monopoly focused rather on the origin and extent of market
or monopsony. An oligopoly (oligopsony) exists power in relation to various forms of market
when there are few sellers (buyers); strictly concentration.51
speaking “few” is defined not by a numerical cut-
off, but by the recognition of other firms as rivals in
terms of price setting, market share, or both.
Another form of competition between Except for monopoly, the various forms of competition are com-
51

that of atomistic competition and oligopoly is patible with wide ranges of participation threshold; an industry
with very high concentration ratios, say 80 percent, may have
monopolistic competition, which emphasizes
20 percent of its market share provided by SMEs (small and
product differentiation. While product medium enterprises), and still be regarded as an oligopoly.
 Chapter 3: Investigating the structures of agricultural trade industry in 55
developing countries

Table 3.5: Size indicators of top global input suppliers, 2007 (USD million)

Foreign sales as share

Total assets Foreign sales
of total (%)
BASF AG Germany 44 633 49 520 58
Bayer AG Germany 24 573 24 746 52
Dow Chemical USA 23 071 35 242 66
Deere & Company USA 13 160 7 894 33
Du Pont USA 9 938 18 101 62
Syngenta AG Switzerland 9 065 9 281 95
Yara International ASA Norway 8 009 9 939 95
Potash Corporation Canada 6 079 3 698 66
Kubota Corporation Japan 5 575 4 146 43
Monsanto Company USA 4 040 3 718 43
Source: UNCTAD (2009)

Input supply Table 3.6: Concentration indicators in agricultural input

industries, global markets, 1994 and 2009
The 25 top global suppliers of inputs (except
feeds) listed in UNCTAD (2009) are all based in 1994 2009
developed countries, with eight based in the Crop protection chemicals
United States. The top ten are shown in Table 3.5. - CR8 28.5 53.0
The top five have assets of approximately $ ten - Herfindahl 398.0 937.0
billion or more; foreign sales account for the
Crop seed
bulk of sales (except for one US-based company).
- CR8 21.1 53.9
Many are large business conglomerates with
diversified interests in manufactures, e.g. - Herfindahl 171.0 991.0

BASF, Dow (the top two chemical companies Animal health

worldwide), Bayer (the 3rd-largest pharmaceutical), - CR8 32.4 50.6
and Du Pont. Others are agriculture-specialized - Herfindahl 510.0 827.0
industries, such as Monsanto (seed, GMOs), Farm machinery
Syngenta (pesticides, seeds), Potash Corp
- CR8 28.1 50.1
(fertilizer), and Kubota (farm machinery).
- Herfindahl 264.0 791.0
Fuglie et al (2011) presents concentration
Source: Fuglie et al., (2011)
measures for the global agricultural input market
(Table 3.6). The top 8 companies account for
over half of global sales of pesticides, seeds,
farm machineries, and animal health products; this does not necessarily denote domination of
the market share of the top eight has risen cross-border trade, as the sales may have been
substantially over the past 15 years, attesting to generated through FDI in overseas markets.
rising industry concentration at the global level.
The big agricultural input companies tend to be Production
specialized and do not exhibit vertical integration
downstream with production. The specialized The top twenty global companies with core
input companies appear to rely heavily on foreign business in plantations (including livestock
sales (e.g. Syngenta, Yara, Potash); however production) as of 2007 are listed in Table 3.7.
56 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
industry levels in developing countries

The country most represented is Malaysia (six Engagement in international markets takes
companies) followed by the United States the form of both foreign investment, with sales
(five). Two other Southeast Asian countries directed to domestic markets abroad, or to
make the list (Thailand and Indonesia). The export markets. The range of FDI exposure of
other top companies are based in developed the plantation companies varies widely (2 to
countries. All these plantation companies are 99 percent); likewise the reliance on overseas
vertically integrated forward to processing. The sales (6 to 99 percent). There is little pattern
processed output is in turn marketed whether discernible in FDI or foreign sales.
domestically or overseas by an integrated
international distributor. For the top companies Processing
the forward integration may reach as far as
branded consumer products, though seldom to Overview
the retail level (one exception being CP Foods).
The commodity types include fruit crops (banana, Food manufacturing firms producing branded
pineapple), edible oils, processed food, and non- products figure prominently to the retail level.
food products (rubber). The top fifty food manufacturing companies

Table 3.7: Top twenty companies with agricultural production as core business, 2007

Assets ($ millions) Sales ($ millions)

Company Of which foreign Of which foreign HQ Location
Total Total
(%) (%)
Sime Darby 10 879 43 10 296 63 Malaysia
Dole Food 4 643 56 6 931 60 USA
Del Monte 2 122 83 3 366 55 USA
Socfinal 1 285 85 491 94 Luxembourg
CP Foods 3 012 34 4 002 34 Thailand
Chiquita Brands 2 678 29 4 663 57 USA
KL Kepong 2 052 37 1 487 80 Malaysia
KWS Saat 802 72 727 75 Germany
Kulim 1 677 29 829 67 Malaysia
Camella PLC 1 253 33 322 56 United Kingdom
Seaboard 2 094 19 3 213 71 USA
Sipef 343 83 222 99 Belgium
Anglo-Eastern 263 99 127 100 United Kingdom
Tyson Foods 10 227 2 26 900 6 USA
PPB Group 3 623 5 904 16 Malaysia
Carsons Cumberbatch 185 56 78 42 Sri Lanka
TSH Resources 359 26 261 13 Malaysia
Multi Vest Resources 121 65 15 - Malaysia
Bakrie and Brothers 1 485 5 563 13 Indonesia
PGI Group 68 96 37 70 United Kingdom
Source: UNCTAD (2009)
 Chapter 3: Investigating the structures of agricultural trade industry in 57
developing countries

account for 27 percent of global food retail of the target firms were likewise from food
sales (Table 3.8). Even just the top ten account processing (45 percent), followed by wholesale
for over half of sales of the top fifty across or retail (13 percent) followed by agriculture
most regions; this group includes familiar brand (4 percent).
names such as Nestle, Kraft, Unilever, PepsiCo, Concentration levels in food manufacturing
Cadbury, Mars, and Kellog. The share of the are not as high as observed elsewhere in
top fifty rises to over two-fifths of food sales in the supply chain. However high market
North America. The proportion however falls concentration may be observed in specific
to 17.1 percent in Asia Pacific (USDA, 2009). product lines and regional markets (Table 3.9).
Apparently in the latter region there is a sizable Globally concentration is quite high for
presence of large domestic players. In 2008, Dy breakfast cereal and baby food, with diminishing
(2009) counts nineteen companies with sales concentration for confectionary and cheese.
of one billion dollars or more in Southeast Asia Levels of concentration exhibit no clear patterns
alone; the biggest of these is Wilmar International across regions, though Asia Pacific appears to
(sales of $29 billion), followed by CP Group have lower than average CR4, except for cheese,
(over $18 billion), and Sime Darby (over $10 whereas Australasia, followed by Africa and the
billion). Middle East, tend to have higher than average
The level of concentration appears to be rising levels of CR4 (USDA, 2009). A case in point is
over time, at least gauged from the increasing Indonesian food and beverage manufacturing,
frequency of mergers and acquisitions or M&A for which CR4 is 66 percent, while experiencing
(Muehlfeld et al, 2011). In 1986, food processing high price-cost margins over the period 1995 –
firms were involved either as acquirer or target 2006 (Setiawan et al, 2012a).
industry in 196 attempted takeovers; by 2006 Reardon and Timmer (2005) show that foreign
the number of attempts had risen to 983. A large direct investments are the primary avenue for
proportion of attempts involved a food processor globalization of the processed food market.
as acquirer (73 percent of total attempts); where Nevertheless processed food is an important
the acquirer was a food processing firm, most sector in global food trade. On the output side,

Table 3.8: Share of global packaged food retail sales, by manufacturer, 2007 (%)

Region
World
Western Europe North America Latin America Asia Pacific
Top 50 companies 24.6 41.9 26.2 17.1
Top 10 companies 15.4 25.9 17.3 5.0
- Nestlé SA 3.3 2.9 3.9 6.0 1.8
- Kraft Foods Inc 2.6 1.9 7.0 1.7 0.7
- Unilever Group 2.1 3.1 2.2 2.4 0.6
- PepsiCo Inc 1.8 0.9 4.6 3.1 0.3
- Danone, Groupe 1.3 1.9 0.7 1.4 0.7
- Cadbury Schweppes Plc 1.0 1.4 0.7 1.5 0.4
- Mars Inc 1.0 1.2 1.9 0.2 0.2
- Kellogg Co 0.8 0.5 2.3 0.8 0.1
- General Mills Inc 0.7 0.2 2.5 0.2 0.2
- Lactalis, Groupe 0.6 1.4 0.1 <0.1 <0.1
Source: Euromonitor (2009), as cited in USDA (2009)
58 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
industry levels in developing countries

Table 3.9: Four-firm concentration ratios (CR4) in selected food products, 2007 (%)

Breakfast
Soup Baby food Pet food Confectionery Cheese
cereal
World 50.4 62.3 60.0 45.8 32.9 20.2
Africa, Middle East 71.5 55.9 55.7 60.4 38.3 28.2
Asia Pacific 42.9 61.9 43.3 29.9 26.0 43.1
Australasia 91.1 87.8 91.5 59.0 74.1 70.1
Eastern Europe 66.5 40.0 55.2 58.2 36.6 17.5
Latin America 75.0 75.0 84.1 51.3 42.3 15.0
North America 68.3 82.3 88.0 48.6 56.8 43.2
Western Europe 55.6 61.3 73.9 45.5 37.8 21.5
Source: Euromonitor (2009), as cited in USDA (2009)

the share of processed food in world agricultural In the case of cocoa, processing begins from
exports has grown from 32 percent in 1980 to roasting, to grinding from which a variety of
51 percent in 2006. Developing countries’ share products may result, i.e. cocoa liquor, cocoa
in processed food exports tripled over the same butter, cocoa powder, and cocoa cake. The
period, though this expansion occurred mostly in cocoa liquor is further processed into industrial
middle to upper middle income countries, which chocolate or couverture which is the raw
account for 90 percent of processed food exports material for finished chocolate. Two-thirds of
from developing countries (Jongwanich, 2009). grinding are done by just ten firms, with the
On the input side, for some commodities top three – ADM, Cargill, and Barry Callebaut
production of agricultural raw material may be (Switzerland), dominating the market (40 percent
sourced from independent suppliers, which may share in the grinding market). Interestingly,
be located abroad. This appears to be the case for Cargill and ADM have entered the processing
some traditional bulk exports such as coffee, tea, segment fairly recently; they consolidated the
and cotton in which raw materials are imported. activities of traditional trading companies (such
Large, export-oriented processors would typically as Gill & Duffus, Berisford and Sucden), by
have their own distribution activities and allied displacement or outright acquisition (UNCTAD,
business interests (see below). The following 2008).
highlights several commodity cases. For tea, the downstream portion of the supply
chain is extremely concentrated (van der Wall,
Examples 2008). World trade is mostly divided across four
companies, namely: Unilever (UK), Van Rees (the
For the main traditional bulk exports, the review Netherlands), James Finlay (UK), and Tata/Tenley
of Poulton (2009) finds the following features of (UK). About 90 percent of Western tea trade is
global trade: controlled by just seven multinational companies.
• Cocoa: worldwide there are four main The big tea traders and processors typically
processors in the world chocolate market, three own large plantations; however in the biggest
of whom dominate the trade. tea exporting countries (Sri Lanka and Kenya),
• Coffee: Outside the specialty market (i.e. tea is now mostly produced by smallholders
regular coffee), roasting is highly concentrated (respectively, 65 and 62 percent).
with CR3 = 0.45 in 2005. Main traders linked Meanwhile for livestock, Dyck and Nelson
closely with the major roasters. (2003) note that, while hundreds of firms of
• Tea: there are four main packers in 2005; the various sizes participate in international meat
biggest may have up to 60 percent share of the trade, only a few very large firms are market
global tea market.
 Chapter 3: Investigating the structures of agricultural trade industry in 59
developing countries

leaders. The global TNCs (as of 2001/2002) supply (France) – the so-called “ABCD”; together with
both the domestic and foreign markets. Among Continental Grains (Belgium), CHS (USA), and
the top ten, seven are based in the United States. Wilmar (Singapore). Ownership ranges from
Using figures supplied by Dyck and Nelson family-owned (Louis Dreyfus), to relatively
(2003), a high degree of market concentration dispersed, i.e. CHS is owned by farmers, ranchers,
globally can be inferred, given high sales cooperatives, and other preferred stockholders.
concentration among the top fifty; for this sub- Activities are tend to be diversified; aside from
group, the CR4 is already 42 percent, and the CR5 the core business in global agricultural logistics
is 60 percent. Among developing countries, only (Table 3.10). Wilmar is the only newcomer
Thailand (#36) and Brazil (#37 and #47) are able (founded in 1991); the rest are established
to place at least one domestic firm in the top fifty. businesses founded in the 19th century or early
20th century. Wilmar is at the vanguard of Asia-
Distribution based trading houses now in an expansion mode,
including Noble Group and Olam International
Overview (Financial Times, 2011).

On the distribution side, the participation Examples

threshold appears high enough to limit access to
export markets to medium or large companies (or In the case of grains, Scoppola (2007) reviews the
cooperatives). The threshold is set by throughput evidence for a high degree of concentration in
requirements for shipping and handling. Buyers world trade. Only a few countries account for a
may be direct retailers (e.g. supermarket chains), major share of exports; typically their exports are
or other agents along the market chain. The managed by a limited number of firms, whether
large distributors tend to be integrated closely to in the public or private sector. In Canada and
processing. Australia, state trading enterprises account for
The global distribution business is dominated all exports, implying a 24 percent and 38 percent
by seven large players (Dy, 2009): Archer share of world exports of wheat and barley. Even
Daniel Midlands (USA), Bunge (founded in the in private sector grain trade only a few handful
Netherlands), Cargill (USA), and Louis Dreyfus of TNCs account for the bulk of exports. Globally,

Table 3.10: Revenues and business activities of top global agricultural logistics companies (2008)

Sales Activities and remarks

Cargill (1865) 120 Grains trading. Agricultural services, processing, livestock production;
financial services, industrial products (salt, starch, steel).
ADM (1902) 70 Grains and oilseeds trading. Largest processor of combined grain and oil
seed, and ethanol; flour and corn milling; other commodity trading.
Bunge Ltd. (1818) 38 Soybean and oilseed trader and processor; consumer foods; biofuels; fertilizer
production and phosphate mining.
Continental Grains (1813) n.a. Grains trading. Feed milling, livestock and poultry production and processing.
Wilmar Intl. Ltd. (1991) 29 Largest processor and merchandiser of lauric oils; oleochemicals, biodiesels,
consumer products; oil palm cultivation.
CHS (1931) 21 (est.) Grains trading. Animal feed, food ingredients, financial and management
services; petroleum refining and distribution; food retail.
Louis Dreyfus Commodities (1851) 20 (est.) Trading of grain, oilseeds, coffee, cotton, metals, bulk ocean freight,
consumer goods (orange juice).
Source: Dy (2009)
60 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
industry levels in developing countries

15 percent of grain exports are exported by Louis producer and exporter firms. The latter consist of
Dreyfus. In the US market just two firms, Cargill a few large transnationals, together with domestic
and Continental, accounted for 35 percent of firms of varying sizes.
US grain and oilseeds exports in the late 1990s.
According to Dy (2009), Cargill alone exported 25
percent of grain exports of Argentina. Box 3.1: Other rice trading companies
For rice, Calpe (2007) notes that a large
proportion of international trade is conducted Ascot Commodities (Switzerland): specializing in rice
through large international trading companies. sales to Africa; other Swiss companies include Rustal
Volatility in world trade has led to a turnover and Novel.
in the major players. Back in the 1990s, the
main rice trading firms were Continental, Churchgate (India): active in Nigeria.
Richco (Glencore) and Cargill; by the 2000s,
these had downscaled or abandoned their rice Nidera (the Netherlands): major operations in Latin
trade operations. The big companies still in rice America
trading include ADM, Louis Dreyfus, and Olam.
Other major trading companies are mentioned American Rice Inc. (USA): accounts for about 4
in Box 3.1. Unlike maize or wheat, rice is not percent of the world rice market; markets . It markets
standardized, hence brokers play an important around one fifth of US rice, and also has a joint venture
role in facilitating trade. Examples of brokerage with Vinafood I, one of Viet Nam’s major rice exporters.
houses are: Jacksons, Marius Brun et Fils (Europe); _________________
Creed Rice (USA); Western Rice Mills (Canada). Sources: Calpe (2007); FAO (2003)
For maize, in the 1990s the global market
underwent rapid consolidation, mainly through
mergers and acquisitions by grain firms. These Box 3.2: Other major vegetable oil traders
tend to be relatively new companies; only a few
major companies in the 1980s are still active in
the trade (Abbassian, 2007). Alimenta SA (Switzerland): among others, a partner of ADM
The main sources of vegetable oils are oil in Golden Peanut Cy, the world’s largest groundnut company.
palm, soybean, and rapeseed. Thoenes (2007)
notes that the global soybean economy is Bunge Group (Argentina): responsible for about a
shaped by a relatively small number of countries fifth of world trade in oilseeds and oils. It is the largest
and international business conglomerates. soybean processor in the western hemisphere, with
Nevertheless he views the market as highly significant interests in Brazil and Argentina.
competitive despite high levels of market
concentration, and expected consolidation. Some Kuok Oils and Grains (Singapore): large operations in
of the large vegetable oil traders (other than the palm and coconut oil, and in feed grains.
big seven global distributors mentioned earlier)
are shown in Box 3.2. Nidera (the Netherlands): a family firm trading annually
For fruits and vegetables, the global 18 million tons of soybeans, wheat, maize, rice and
value chain is characterized as buyer-driven other grains; major operations in Latin America.
(Fernandez-Stark et al, 2011). The buyers are
large supermarket chains in both EU, US, and ZenNoh (Japan): the third largest soybean and oil exporter.
increasingly in emerging markets. Stringent The federation represents over a thousand cooperatives
quality standards are imposed by these chains covering most of Japan’s 4.7 million farming households.
upon its suppliers, big or small, worldwide. The ___________________
horticulture industry is increasingly organized by Source: FAO (2003)
long term relationships and tighter links between
 Chapter 3: Investigating the structures of agricultural trade industry in 61
developing countries

Exporters may engage small and medium size portion of their products (Dy, 2009). However
domestic suppliers as contract growers. Between there has been a growing tendency to use
1980 and 2000, the low and middle income platforms in developing countries to export to
countries have managed to corner a greater
share of fresh produce export market. Recently, Figure 3.3: Shares in the global food retail market by
developing country exporters are increasingly type of retail outlet, 2009
taking over packing and processing, thereby
moving up the value chain. For instance, a wide
variety of fruit and vegetables in supermarkets are
shipped in as ready-to-eat convenience packs.
Other (16)

Retail 16%
Discounters (9)
9%
Convenience
Worldwide the leading form of retail outlet is the 52% stores (7)
supermarket or hypermarket (Figure 3.3). While 7%
Independent
modern outlets (supermarkets, hypermarkets, food stores (17)
17%
convenience sores, discounters) are seen to be Supermarkets and
hypermarkets (52)
largely a rich country phenomenon, Reardon
and Timmer (2007) observe a rapid diffusion of
modern retail centers in developing countries
since the 1990s.
In Latin America, North-Central Europe, and Note:
East Asia (outside Japan and China), the share of 1. Supermarkets - selling area 400 - 2,500 m2, at least 70 percent
foodstuffs and everyday commodities
supermarkets (shorthand for modern retail) rose
2. Hypermarkets – selling area > 2,500 m2, at least 35 percent of
from just 10-20 percent of food retail in 1990, to selling space devoted to food
50 percent or more by the early 2000s. Another 3. Discounters - typically 300-900 m2 with < 1 000 product lines
wave came in the late 1990s to early 2000s, (mostly packaged groceries);
where supermarkets started from practically nil 4. Convenience shops - selling a wide range of goods with
extended hours.
to about 10-20 percent share in food retail; these
Source: Euromonitor, cited in USDA (2009)
include parts of South and Central America,
Southeast Asia (e.g. Vietnam), China, and Russia.
The modern retail business appears to be
highly concentrated. For hypermarkets the share Table 3.11: Annual sales of top ten global retailers, in
of the top 15 retailers worldwide is 74 percent; $ billions, 2006
for convenience stores the share is 69 percent,
and for discounters, 58 percent. The top retailers Annual sales

are well-known for their global chains, established Wal-Mart (US) 312.4
by extensive FDI in middle- to high-income Carrefour (France) 92.6
markets (Table 3.11). Tesco (UK) 69.6
Based on UNCTAD (2009), retailers with the Metro Group (Germany) 69.3
largest share of revenue from foreign sales are Kroger (USA) 60.6
Metro (59 percent), Ahold (55 percent), and Ahold (Netherlands) 55.3
Carrefour (54 percent). The world’s biggest
Costco (USA) 52.9
retailer, Wal-Mart, still depends mostly on its
Rewe (Germany) 51.8
domestic market; nevertheless foreign sales
account for 24.2 percent of revenue. TNC Schwartz (Germany) 45.8

retailers source goods mostly from domestic Aldi (Germany) 45.0

processors; imports account for only a small Source: Hefernan (2006)
62 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
industry levels in developing countries

outlets worldwide. This is a very recent trend rice exports, and is responsible for most public
particularly for fresh produce and opens up export procurement of rice. Exports are tightly regulated
opportunities for developing country farmers through the Vietnam Food Association (VFA), a
(Reardon et al, 2009). government-controlled body, primarily to deflect
rice supplies from the foreign to the domestic
market. The VFA sets a discretionary minimum
3.4 Developing country export price, which discourages private traders
perspective owing to its unpredictability. All export contracts
need to be registered with VFA, hence the simple
So far characterization has covered global agro- expedient of not recognizing these contracts can
industry systems and trade. The following shifts prohibit exportation. This transpired in early 2008
to a developing country perspective in examining when Vietnam stopped private rice exports; in
agricultural trade industry based on focal the meantime, VINAFOODS2 continued to export
commodities for which information on market under government-to-government arrangement
structure is available. (with the Philippines), effectively turning into a
trade monopoly (Alavi et al, 2011).
Major export industries
Vegetable oil export industry
Rice
The largest category in the vegetable oil
The top two exporters of rice are Thailand and export market is palm oil, for which the top
Vietnam. Thailand rice exports are mostly done two exporters are Indonesia and Malaysia.
by the private sector, with the top 25 companies The Indonesian palm oil industry, according to
accounting for 90 percent of Thailand’s exports Chalil (2008), supplies 75 percent of its output
(Alavi et al, 2011). Contrary to the usual trend to the cooking oil industry, which is largely for
toward consolidation, the current set-up is more domestic consumption, leaving 25 percent for
dispersed compared to the pre-war era; in the export. Supply originates from three sources:
1930s, only five families accounted for 44 percent government; a private group consisting of ten
of rice milled (Goss and Burch, 2001). conglomerates; and smallholders (farm size
Shigetomi (2009) classifies the large Thai rice below 200 ha). The last accounts for only a 40
traders as follows: Group A firms were active in percent share. Cooking oil is regarded as a food
World War 2 or earlier; Group B firms comprised security item; government subsidizes for cooking
the “Five Tigers” that attempted to wrest control oil, and imposes an export tax on the palm oil
from Group A through cooperation (e.g. sharing industry. The cooking oil industry is itself highly
of orders); Group C and D firms are those that concentrated, with CR4 of 53 percent in 2005
emerged in the 1960s and 1970s. The latter (Muslim, Ertina, and Nurcahyo, 2008).
group are exemplified by Soon Hua Seng, Capital Unlike in Indonesia, palm oil in Malaysia
Rice, and Chaiyaporn rice; these exporters are is mostly exported, with only 10 percent for
known for pioneering the African Middle Eastern domestic consumption. As with Indonesia,
markets. government retains high levels of state
In contrast, in Vietnam the government ownership: about 30 percent of palm oil area is
maintains a highly interventionist stance. Only run by government agencies. The Federal Land
10 percent of exports are from the private sector. Development Authority (FELDA) alone accounts
The remaining 90 percent is contributed by for about 18 percent of area planted in 2002.
public sector companies, most prominent being About 60 percent of landholdings are under
VINAFOOD1 (exports from northern Vietnam) and private estates, with estate sizes ranging from
VINAFOOD2 (exports from southern Vietnam). a few hundred ha to hundreds of thousands of
The latter accounts for 50 percent of the country’s ha. The PNB, the government’s investment arm,
 Chapter 3: Investigating the structures of agricultural trade industry in 63
developing countries

owns large portions of equity in some of the tillage); large scale of its plants (90 percent of
industry giants such as Sime Darby Berhad, which oil is processed in plants with average capacity
has been mentioned earlier as world’s largest of 7 500 tonnes/day); and proximity to ports (on
plantation company (see Box 3.3). Less than average, production is only 300 km from the
10 percent of farms are owned by smallholders nearest port).
(under a rather generous definition of “small”, as Similarly in Brazil, the industry underwent rapid
in Indonesia). concentration since 1995, with the acquisition of
The next important source of vegetable oil large domestic firms by four multinationals, namely
is soybean, for which the top two exporters Bunge, Dreyfus, ADM, and Cargill. The CR4 rose
are Argentina and Brazil. Lopez, Ramos, and to 43 percent in 1997, from 31 percent in 1995. In
Simkievich (2008) deals with the soybean complex crushing, the CR8 reached 55 percent compared to
in the former. Conveniently, little of soybean 47 percent in 1995 (Thoenes, 2007).
production (whether grain or oil) is consumed
domestically; hence the industry market structure Orange juice export industry
is the same as for the export market. Over the
period 1995 to 2006, the soybean industry Brazil is also a prominent fixture in the global
exhibited strong growth, with output growing orange juice industry, being the second largest
over three-fold to 40.4 million tonnes, and area producer worldwide. In the major traded product,
more than doubling to 15.4 million ha (half of frozen concentrated orange juice, the country
total area harvested in the country). This period accounts for over 80 percent of total world
was accompanied by massive consolidation trade. Growth of export production averaged
(Table 3.12). about 1.8 percent per year in 2001 – 2007. The
The Argentinian soybean oil industry is seen industry generates about $4 billion a year and
to be the most efficient in the world. This is provides employment, directly or indirectly, to over
attributed to high farm productivity, owing to 500 000 people. The export market is strongly
use of latest technologies (transgenics, and zero concentrated: in 2001 the CR4 was 66.7 percent;
by 2003 the ratio had risen to 78.2. By 2007 it
may have reached 90 percent.
Box 3.3: Sime Darby Berhad About 80 percent of harvested oranges
are sold to processors (the remainder going to
the fresh fruit market). Oranges for processing
Sime Darby Berhad began with rubber farms in 1910, later are mostly obtained from contract farmers,
diversifying to palm oil and cocoa. Plantations in Malaysia and accounting for 55 to 65 percent of the export
Indonesia total 630 000 ha, of which 531 000 ha are planted industry’s output. Contracts are either on a fixed
to oil palm. Outside Asia, it has expanded to Liberia, with a price basis (majority of contracted oranges), or
220 000 ha concession planted to oil palm. It is integrated
forward to production of crude palm oil, refined palm oil,
and branded consumer products such as cooking oil. It Table 3.12: Indicators of Argentina export industry,
has also diversified into real estate and industrial products. selected years
The company started out under British ownership, but was
acquired by Malaysian investors (including PNB) in the 1980s. 1995 2000 2006
In 2007, a merger of three industry giants, namely Golden Number of firms 22 27 20
Hope, Guthrie, and Sime Darby, became what is now known Installed capacity (t/day) 58 902 94 258 149 318
as Sime Darby Berhad. Exports per firm (tons) 66 931 116 385 303 917
____________________
CR5 53.0 66.6 80.0
Sources: Dy (2009); www.simedarby.com.covering most of Japan’s
CR10 87.8 90.9 98.5
4.7 million farming households
Source: Lopez, Ramos, and Simkievich (2008)
64 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
industry levels in developing countries

flexible price (combining both a fixed and varying Box 3.4: The case of CP foods
component depending on world prices). The
next most important source is company-owned
orchards (18 – 22 percent). The remainder is CP Foods is one of the largest integrated poultry, livestock,
made up of other supply schemes, i.e. lease and aquaculture producers in the world. It is engaged in
arrangements, partnerships, etc. (Neves, 2007). the production of feeds, animal breeds, raising of livestock,
poultry, and fish, as well as food processing. Its associated
Meat export industry business (CP All) has a significant retailing presence in
Thailand and serves as outlet for its branded food products.
As mentioned earlier, of the top meat producer
companies the only developing country firms The business was established in 1923 by Chinese
are from Brazil and Thailand. For the former, immigrants as an agro-input company, later expanding
concentration ratio for the export industry is to feeds in the 1950s. In the 1960s is pioneered
available from Jank et al, (2001). Exports of contract growing of poultry in Thailand to stoke
poultry remained highly concentrated, with at demand for its animal feeds; it also established a
about 82-85 percent in the 1990s. Concentration poultry processing plant as well as provision of breeds,
in the domestic market is not as high but has veterinary inputs, and financing. The “defining
been increasing over the same period (CR5 of moment” of agribusiness expansion, not just for the
32 percent rising to 38 percent). Meanwhile for company but for Thailand as well, was the entry of its
pork the domestic concentration ratio rose from poultry products into Japan in the 1970s. In the 1980s it
61 to 68 percent. There is however an important branched out to aquaculture. As of 1993 the company
exception in the trend of rising concentration, and had become the world’s second largest poultry
that is for beef; concentration has been falling producer, the the third largest producer of animal feed,
based on CR4 (55 percent down to 48 percent and the largest producer of prawn feed. It is the largest
from 1990 to 1998). At the same time, the beef agribusiness company in Southeast Asia, with significant
sector also suffered a decline in export volume. investments outside Thailand, particularly in China.
In the case of Thailand, there is less evidence ________________
of rising concentration during a period of rapid Sources: Burch (2010); Goss and Rickson (2000)
production growth (4.3 percent annually from
1983 to 2001). In 1981, the CR3 was 92.8
percent; the top exporter then was CP Bangkok
Livestock Trading, part of CP Foods (Box 3.4). EVAP (evaporative) systems, which introduces
At the time only 7.6 percent of output was strict temperature and environmental controls
exported. By 2003 up to 69 percent of broilers within closed facilities (Costales, 2004).
were exported as foreign markets became the
main driver of demand. The market is controlled Africa country cases
by a few integrators who span the supply
chain from grandparent stock breeding to the In the foregoing the discussion has been
export market. Nevertheless the CR3 declined organized around large developing country
to 52 percent (Poangpongsakorn et al, 2003). It exporters, who are all from Asia and Latin
is possible that as the broiler market grew, new America. The following shifts the discussion to
firms entered, or some of the older companies Africa given its potential for sustained growth
managed to grow and take away market share through modernizing value chains.
from the older players. Production also appears
to be concentrated, with farms of over 2 000 Bulk commodities
birds accounting for the bulk of all broilers. Very
large scale production and high efficiencies were African exports have often been associated with
introduced through new technologies, mainly bulk commodities, e.g., cotton, coffee, and cocoa,
 Chapter 3: Investigating the structures of agricultural trade industry in 65
developing countries

which have been analysed by Porto, Chauvin, slowly and erratically thereafter. the sector
and Olarreaga (2011), on which the following remains highly concentrated, with Dunavant and
discussion is based. The export supply chains tend Cargill as the biggest players (accounting for 76
to be concentrated, most strikingly for cotton in percent of exports). In 2006, exports contracted
Burkina Faso and Zambia, as well as and coffee in owing to rapid currency appreciation; the largest
Rwanda (Figure 3.4). farmer organization, the Cotton Association of
In Burkina Faso, cotton is the main cash crop Zambia, attempted to negotiate for the first time
and accounts for 40 percent of all exports. Most the prices paid by ginners.
cotton farms are small-scale (3 – 5 ha). Nearly all Coffee (Arabica variety) was the main export
cotton lint is exported, mainly to Southeast Asia commodity of Rwanda during the colonial period.
(66 percent). Production is “semi-privatized”, with Upon independence coffee exports were under
private sector involvement commencing in 1998 the Rwanda Coffee Authority, a state monopoly.
when government sold some of its shares to the In the 1990s liberalization was pursued; since
domestic producer’s organization. Until recently then coffee marketing board has withdrawn from
price-setting has been guided by a guaranteed commercial activity, although it continues to issue
base price set in the previous year; currently a licenses for coffee traders, provides certification
more flexible scheme is in place, though price on quality standards, and distributes seedlings and
fluctuations trigger payments from a stabilization insecticides. Production is in the hands of 400 000
fund. smallholders; there is no large estate farm in the
Cotton is one of Zambia’s most important cash coffee business.
crops, involving 11 percent of all farmers, most Meanwhile in Uganda most of the coffee
of whom are small-scale. Until 1994, processed grown (90 percent) is Robusta. It used to account
cotton production was dominated by LINTCO, a for nearly all of the country’s export income;
state-owned monopoly. Following break-up and currently it still employs 500 000 smallholder
liberalization, sector underwent rapid growth, families and accounts for a fifth of export
expanding five-fold in just three years, but more revenues. All exports were previously under a
state monopoly, called the Coffee Marketing
Board (CMB). In 1991, the monopoly was
Figure 3.4: Export supply chain concentration ratios, abolished; the CMB continued to operate as
selected countries a commercial entity, CMB Ltd. Regulation and
licensing is spun off to a separate government
entity, the Uganda Coffee Development
Authority (UCDA). Over 90 percent of exports are
handled by 10 companies; roasting is even more
5% Netherlands concentrated, with only four companies registered
Switzerland under UCDA.
41% For cocoa, Africa is the largest supplier,
40% Italy accounting for about 72 percent of global
Germany production in 2005. Whereas about 90 percent of
the world’s cocoa output (since the 1990s), was
11%
5% France produced in smallholdings under 5 ha., the export
market is heavily concentrated. In Cameroon for
example, over 60 percent of exports in 2006-
2007 were handled by just four exporters. The
major exporters in Cameroon are subsidiaries
Source: Porto, Chauvin, and Olarreaga (2011). or otherwise closely tied to the transnationals
Note: Note: Concentration ratios are CR4, with the exception of handling world cocoa trade (UNCTAD, 2008). The
Cotton, Burkina Faso, which is CR3 same global traders tend to integrate vertically into
66 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
industry levels in developing countries

processing; very few international firms specialize revenue. During its rapid growth period (1970s
solely on trading. Most of Africa’s cocoa is exported to the mid-2000s), production was smallholder-
to the Europe for processing into chocolate. based, accounting for 60 percent of exports by
The top cocoa exporter worldwide is Côte 2004. Output is then funnelled to about a dozen
d’Ivoire, accounting for 40 percent of global supply. exporters with their own packing installations and
Cocoa is a major source of employment, providing modern logistics, including cold chains. These
jobs for 35 percent of all households. Upon exporters are all domestically based; foreign firms
independence, a state monopoly was established play a limited role, e.g. Del Monte has specialized
to regulate producer and export prices. A series of in pineapple production and processing. Similarly
reforms commenced in the 1980s, culminating in in Morocco, fruits and vegetables are a billion
full producer price liberalization and abolition of dollar industry; by 2007, only seven exporters
the state agency in 1999. The export share of the accounted for 70 percent of fresh fruit and
top 14 firms rose from 75 percent to 85 percent vegetable exports of Morocco. The top five firms
over a three-year period (2000 – 2003). Some are all vertically integrated throughout the chain,
of the TNCs in exporting managed to integrate from production, to logistics, and marketing
backwards to processing. Despite liberalization, the (Fernandez-Stark, 2011).
export sector is hobbled by an onerous tax burden, Fresh fruits and vegetables are now the fourth
from which government derives one-fifth its total main primary sector in Senegal, with specialization
revenue. in French beans (42 percent of export volume
At second place is Ghana, previously the of the sector) and cherry tomato (23 percent of
world’s top cocoa exporter, and still responsible export volume). Only a dozen companies account
for one-fifth of global supplies. Since the late for 40 percent of French beans and 82 percent
1940s marketing was monopolized by the of cherry tomato market. These companies are
Cocoa Marketing Board, which also provided almost all domestically-owned; there is one large
input subsidies, extension services, even road TNC operating in the country, which mainly
construction to cocoa-growing communities. exports tomatoes (Maertens, 2009). Somewhat at
From the late 1980s, the domestic market was the extreme is the case of Madagascar highlands
liberalized, allowing licensed private traders vegetables; almost 10 000 farmers produce high
to operate; input subsidies were scaled down. value vegetables for export, but most exports pass
However the sector remains tightly regulated, and through just one company. The company sells 2/3 of
exports remain a state monopoly. Licensed traders its produce to European supermarkets; of this, half
can be divided into four groups: government; of this is sold to seven main supermarket chains.
domestic private sector; farmer-based (under a
fair trade cooperative); and international. The The import side: parastatals in developing
latter is composed of just two companies, namely countries
Olam (Singapore) and Armarjaro (Britain). The
government reduced its market shares in recent The discussion has so far focused on the export
years; market shares of the cooperative and side of agricultural trade industry. The earlier
international companies have also fallen, whereas discussion on global distribution partly relates
that of the domestic private sector has increased. to imports, as the large distribution companies
also handle imports for developed countries.
Fruit and vegetable exports Systematic market structure analysis of the import
side of trade is however much sparser than that
In decades, diversification has gradually been of export side.
underway from traditional bulk exports to Available information on market structure on
horticultural crops. In Kenya, the fresh fruits and the import side for developing countries often
vegetables sector accounts for nearly $1 billion relates to the regime of marketing boards. This
worth of exports, or 21 percent of export kind of structure reduces to monopoly (similar
 Chapter 3: Investigating the structures of agricultural trade industry in 67
developing countries

Table 3.13: Marketing boards for importables in selected developing countries

Country Intervention
Ethiopia Grain trade controlled, ban on private trading; producer quotas; distorted prices
Mali Monopoly parastatal for coarse grain and rice (lifted in 1980s)
Tanzania Monopolistic parastatal for maize; coffee board controlled marketing, provided credit, extension
India Food Corporation of India has import monopoly over cereals
Indonesia Bulog stabilizes prices for strategic foods (rice, sugar, cooking oil); import monopoly
Philippines National Food Authority has rice import monopoly, maintains buffer stock, price stabilization
Mexico Parastatal maintained producer prices, subsidized inputs and consumer prices (eliminated 1995)
Colombia Federación controls coffee marketing
Source: Lundberg (2005); Rashid et al (2008)

to the export marketing boards discussed above over power in economic relations are a basis
for bulk commodities). For importables, the of the institutionalist critique of the market
commodity covered typically included the major economy, which emphasized the acquisition and
grain staple; other commodities deemed crucial exercise of power, in its political economy sense.
for food security were also covered. The objection posed by prominent civil society
In addition to import monopoly, marketing organizations such as Oxfam e.g. SAC (2012) to
boards would often also impose price restrictions, some extent derives from this critique.
quantity restrictions, and engage in direct An institutional economics approach may
marketing activities. Table 3.13 presents some consider vertical integration as an extension of
cases from developing countries. market consolidation by big business, asserting
control over its input suppliers and downstream
buyers even more complete than through the
3.5 Agro-industry trade structure: exercise of market power. Finally, firms may opt to
causes and consequences expand their markets in terms of either materials
sources, or product outlets, leading to an
Having characterized the organization of global international dimension in their exercise of power.
agro-industry, discussion now turns to the causes Mainstream economics does take seriously
and consequences (particularly for equity) of such the possibility of departure from price taking
industrial organization. Following the schema, the behaviour associated with perfect competition.
following issues are addressed, namely: horizontal The earlier “structure-conduct-performance”
integration (market concentration), vertical (SCP) school of industrial organization popular in
integration; and the international dimension of the 1950s and 1960s, saw market concentration
industrial structure. as a source of “market power” in the sense of an
ability to influence the market price. This in turn
Perspectives on market structure permits the dominant firms to earn above-normal
profits.
Institutionalist economics and mainstream economics However later studies probe deeper into the
perspectives extent and degree competition despite high
levels of observed concentration, as well as
Much of the concern with horizontal integration explanations of concentration other than ad hoc
relates to the sheer size, and corollary fears of explanations based on “power”. For instance,
economic “power” leading to skewed distribution Demsetz (1973) notes that the correlation of
of economic benefits and wealth. Concerns above-normal profits in concentrated industries
68 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
industry levels in developing countries

need not be due to market power, but rather to economic rationale. The agency literature is
production efficiencies that allow firms to realize based on private knowledge known only to one
lower costs. This perspective is not unique to party, typically an agent expected to undertake
economists; agribusiness researchers also tend a certain action (Sexton and Lavoie, 2001). If
to view firm and commodity system governance the private information is a property of the
structure and strategy decisions as responses to agent (e.g. being a high-cost producer) then
technological, demographic, and social changes at the problem reduces to adverse selection; if an
the institutional environment (Cook and Chaddad, unobserved choice of the agent, the problem
2000). is one of moral hazard. This strand of literature
formulates coordination as a principal-agent
Horizontal integration problem in which the principal, acting as a
Stackelberg leader, proposes an incentive
For horizontal integration, the main explanation scheme for the agent. The scheme maximizes
from mainstream economics is economies of scale the principal’s objective function, subject to an
and barriers to entry.52 One class of entry barriers incentive compatibility constraint (the agent
is policy-induced, perhaps inadvertently. For also maximizes his or her pay-off function given
instance, import licenses may impose minimum the scheme) and a participation constraint.
standards on logistics facilities under the licensee’s The incentive scheme can incorporate a variety
ownership. This may exclude other companies of features, such as nonlinear payment (e.g.
who are capable of importing without meeting penalties for delivery below a quota) and quality
the asset requirements (e.g. they are able to standards.
outsource their logistics). Another strand is the transaction cost theory
However regulation is not the only source of the firm. As summarized by Klein (2005),
of entry barriers. A firm may enjoy differential agreements between transacting parties run
access to technology owing to secrecy or patent into a complex set of risks and circumstances.
protection. An important entry barrier is sunk Contingencies cannot be fully anticipated leading
cost. Such cost can be endogenous, e.g. when to incomplete contracts, where adapting (or
a firm selects the level of capacity or R&D failing to adapt) to unexpected contingencies
investment, with greater capacity or investment introduces transaction costs. A particularly acute
being associated with superior product qualities problem is that of asset specificity: when two
or sharper product differentiation (Sutton, 2007). parties invest in assets which generate higher
Other forms of sunk cost include: outlays for value when combined than when separated, the
physical capital, i.e. cold chains, farm-to-port possibility of holdup arises in which one party
roads, etc.; or investments in intangibles, such as would threaten exit to extract rent from a joint
brand reputation. activity.
Transaction cost theory is fairly general as it
Vertical integration is essentially a study of alternative governance
structures to address the incomplete contracting
As with horizontal integration, vertical problem. The three basic types of governance
integration (and its variants) need not be structure are markets, hierarchies, and hybrids.
merely an extension or manifestation of market Within this literature, the contrast is often made
power, but rather may be explained by a deeper between high powered incentives offered by
market prices, but with risk of holdup; hierarchies

52
The theory of “contestable markets” (Baumol, 1982) has are an extreme solution as it simply vests
shown though the latter factor is the more fundamental basis
of market power. According to this theory, in the absence of
ownership of assets in one party to eliminate
sunk costs, entry and exit barriers, and identical technologies, holdup (while eliminating or attenuating the high
large incumbents (who may enjoy economies of scale) may still
powered market incentive). Alternatively, partial
behave competitively owing to the threat of potential (rather
than actual) entry. alignment is available from a hybrid form such as
 Chapter 3: Investigating the structures of agricultural trade industry in 69
developing countries

a franchise, long term contract, network, or other chemical processing has raised the profile of
arrangement, which seeks to combine both high some transnational seed and other input suppliers
powered market incentives with protection for (Reardon and Barret, 2000). In distribution
specific investments. up to retailing, a major driver is technological
change in logistics and information, requiring
Drivers of agribusiness consolidation further capital outlays and larger scale of
operations. Improvements in shipping and
Reardon and Barret (2000) identify a set of factors storage technologies in the 1980s allowed
classified under “meta trends”, “global changes”, shipping of fresh produce from the southern
and “developing country changes”, together hemisphere to northern markets. Modern logistics
with “indicators” of outcomes. In the following platforms allows large volume procurement,
this list serves as take-off point for identifying with its geographic reach widened by modern
supply drivers, demand drivers, and changes telecommunications. Computerized systems of
in the policy and institutional environment, as supermarket chains permit reduction of inventory,
factors underlying increasing concentration both paperwork, and accelerated order cycles, with
horizontally and vertically. heavy reliance on automated processes (i.e.
barcodes) and electronic data interchange. Lastly,
Supply drivers procurement tended to be more centralized
within each chain: while this increases transport
Hayami (2002) has argued that in general small cost, the transaction costs are reduced as the
family farms are economically efficient compared system allows automation, coordination between
to plantations, up to the level of primary warehouses and outlets, and other best practices
production. Rather, economies of scale are found in storage and logistics (Reardon and Timmer,
downstream at the processing and marketing 2007).
stages. To account for plantation agriculture,
he reviews historical experience showing that, Demand drivers
during the colonial period, industrialists sought
to expand sources of raw materials from the The major demand drivers involve shifts towards
territories. Plantations had to be established preference for modern retail service outlets
often in unsettled or sparsely unsettled areas (Reardon and Timmer, 2007). One is rising per
with little or no infrastructure or facilities. capita real incomes and an expanding middle
Establishment of plantations and farm worker class, particularly in some fast-growing developing
family communities then had to be internalized countries. Diet diversification would naturally
by plantation firms, accounting for large estate result owing to Bennet’s law (declining share of
sizes to justify the enormous capital outlays. This staple food in calorie intake as per capita income
implies furthermore, that family farms are efficient rises). It is furthermore possible or even likely
as long as settlements are already in place, with that consumer preferences are shifted towards
access to public and quasi-public goods such as these modern products and retail services, owing
road infrastructure, utilities, community facilities, to their wider availability, as well as aggressive
and so forth – provision of which is normally the promotional and advertising efforts.
role of the public rather than private sector. Another is growing urbanization and
Technological change has furthermore separation of households from farm production,
transformed each stage of production in the as well as entry of women into the workforce,
value chain, increasing the degree of scale thereby raising the opportunity cost of home
economies (e.g. capital requirements), intensifying production and food preparation. Falling prices
consolidation. Technological change affects the and greater availability of cars, modern transport,
chain all the way back up to the input stage, and modern appliances also play an important
where biotechnology and improvements in role in shifting preferences away from having
70 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
industry levels in developing countries

to shop daily in traditional retail outlets. These controls, and restrictions on geographic
drivers together fueled demand for greater variety movements of goods. Subsequently processing
of goods, of high quality and safety, as well as and later, retailing was opened up to FDI, which
of convenience foods. This in turn motivated proved decisive in restructuring of the agro-food
the modern retailers (i.e. supermarkets) to industry, in retail and food manufacturing.
source processed food products mainly from Previously, section IV presented some
large scale manufacturers to reduce transaction real world examples of policy evolution from
cost, maintain product flow, and provide quality parastatals to more open trade in many
assurance. Hence in the 1990s and 2000s, developing countries. Nevertheless, government
a wave of consolidation transformed food intervention in agricultural trade in selected
processing through M&A of small and medium crops and countries persists, with a tendency
size companies, transnationalization through FDI, to monopolize trade under a parastatal agency.
and specialization among the surviving smaller Interventions may be motivated by food security
processors in market niches (Wilkinson, 2004). (i.e. insulating the domestic market from global
instability in supply or price), or even strategic
Policy change trade policy i.e. export subsidies or other
interventions for exploiting imperfect competition
Changes in policies have likewise been a key in international trade (Branden and Spencer,
determinant of market concentration and 1985).
production relations. Plantation agriculture
underwent a dramatic transformation from the Institutional change
colonial period, where little domestic processing
took place. In the 20th century, large plantations As a response to, and further reinforcing the
took the brunt of nationalization policies, land above-mentioned drivers, is institutional change
reform, and related restrictions. While large farm and restructuring among market participants.
producers still persist, they now mostly operate One interesting development is the adoption of
through non-equity forms such as contract grades and standards by private sector players
farming, opening up participation in the global on a more systematic basis; and increasingly,
chain to small farmers. In Southeast Asia and on an industry-wide basis (Reardon et al 2001).
other regions, several plantation-based companies And while technological change and scale
have transitioned to domestic manufacturing economies are leading to consolidation on one
during the nascent industrialization phase of their hand, specialization in logistics and distribution
host countries (UNIDO, 2009) . has motivated retail chains towards outsourcing
In a set of case study countries reviewed of logistics and distribution, often under joint
in Reardon and Huang (2008), in the mid- venture arrangement.
20th century traditional food systems were The most crucial transformation in
transformed by a wave of public sector institutional arrangements is the shift away
interventions; this has been reviewed this from traditional spot market-type transactions
earlier in the discussion of parastatal controls towards more vertically coordinated contractual
over export and import trade. The brunt of or at least relational arrangements in modern
intervention fell on pricing and marketing, supply chains (Reardon and Timmer, 2007).
but was also felt in FDI restrictions in For retail chains, procurement has shifted
manufacturing. These would eventually give towards specialized, nontraditional wholesalers,
way to liberalization, also typical of many especially for fresh produce. In case of imported
developing countries. Stabilization and structural produce, they tend to rely increasingly on
adjustment programs from the 1980s onwards specialized importes with similar function
led to downsizing, or outright dismantling as nontraditional wholesalers. These non-
or privatization of parastatals, repeal of price traditional wholesalers exclusively cater mainly
 Chapter 3: Investigating the structures of agricultural trade industry in 71
developing countries

to supermarkets and specialize in a product this to be the result of the exercise of market
category. Through these specialized wholesalers power by large global trading companies.
the large retailers enforce their exacting product Similarly, Sexton et al (2007) cite the case of
and delivery requirements, all the way down the Mozambique cashew where export taxes were
supply chain. lifted, but pass-through to farmgate prices was
far lower than earlier projected; this is attributed
Effects to monopsony power on the part of traders,
who managed to capture most of the gains
The effects of horizontal concentration and from lifting the export tax. This case illustrates
vertical integration/coordination in agro-industry their argument for incorporating market power
trade are analysed in terms of market power, in evaluating the impact of agricultural trade
equity, and innovation, for which quantitative liberalization, which they substantiate using
assessment is based on indicators. For market simulation modeling.
power the main indicator is price-cost mark-up, However direct empirical evidence is at best
i.e. the excess of marginal cost over price as mixed. Sheldon and Spirling (2003) compiles
a proportion of price.53 Alternatively one may estimates of the mark-up over (marginal) cost
examine symmetry in foreign-to-domestic price as percentage of price. Industries with low
transmission. Equity may be gauged by share in to moderate mark-ups are: US sugar (0.05),
total value added by stage in the value chain; and US textiles (0.05), Canadian food processing
benefit in terms of employment or earnings for (0.12), German bananas (0.18). Meanwhile
small farmers, farm workers, and rural poor. For industries with high mark-ups include:
innovation the usual indicators are (changes in) US tobacco (0.65), UK bread (0.84), US livestock
total factor productivity, partial factor productivity, oligopsony (1.10). Market power is evident
or technical efficiency. Some of these indicators in some of the more heavily concentrated
are only loosely related to the effects they are industries, but high levels of concentration are
intended to measure, as shall be made clear also consistent with moderately or even highly
in the discussion below, though given scarcity competitive environments.
of empirical work these seem to be the more Consider some developing country examples
common indicators reported. (also covered in Sheldon and Sperling’s review):
the rice export market has a mark-up of 0.11
Market power (Karp and Perloff, 1989); cocoa in Cote d’Ivoire
has a market-up ranging from 0.25 to 0.37
The first inference from market concentration is (Wilcox and Abott, 2004); and Philippine coconut
market power. However as discussed previously, oil reaches a mark-up of 0.89 up to the 1980s
market concentration does not necessarily (Buschena and Perloff, 1991). Again there are
imply departure from competitive behaviour, variations from moderate to high. The last two
as concentration may be attributable to deeper country cases highlight the role of government
economic rationale. The presence and strength policy; in both cases the subject country was a
of market power should first be established, and dominant producer of the export crop; export
only then related to concentration. taxes and other restrictions allowed the industry
In the area of international trade, Morisset to exploit the country’s market position.
(1998) finds that transmission from world to However it is unclear whether the quest for
domestic prices exhibits a curious asymmetry: market power is a reliable guide for policy given
there is a greater tendency for increases to be the prospect of new entries, and (particularly for
transmitted compared to declines. He interprets coconut), the prevalence of substitute products.
Reimer (2006) finds that international food
and agricultural markets do exhibit oligopolistic

53
Technically known as the Lerner index. A zero value implies a
competitive market. behaviour; however the price-cost mark-ups are
72 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
industry levels in developing countries

small or non-existent. This leaves little or no basis force more “equitable” outcomes may introduce
to pursue strategic trade policy. Branden and distortions that undermine allocative efficiency.
Spencer (2008) themselves downplay the activist This is precisely the argument by Gilbert (2008);
stance, advocating multilateral trade disciplines he finds that the value shares in the coffee
precisely to prevent strategic “beggar-thy- and cocoa value chains, though apparently
neighbor” policies. skewed against producers, is not the outcome
So far the focus has been on horizontal market of market power, and should not be the object
structure. The relationship between market power of countervailing regulations such as antitrust
and vertical integration has been long been measures.
suspected, though only recently been the focus of Related to equity is another significant pre-
empirical work. For instance, in contract farming occupation in the literature, which the degree
systems, buyers can coordinate to avoid strategic to which small producers are included in agro-
default by suppliers. This may create informal industrial value chains. Research under this rubric
cartel-like arrangements to exchange information has witnessed an explosion of studies over the
about their borrowers and prevent side selling past decade. Expanding on the framework in
(Swinnen and Vandeplas, 2006). In the US soybean Section 3, the following may be posited:
seed market, biotech firms are endowed with
market power in terms of intellectual property over 1. There is a minimum efficient scale of
parent material. They may either license production production that tends to exclude the smallest
to seed companies, or integrate forward to seed farmers from supplying to modern agro-
production. A quantitative analysis confirms that industrial value chains.
vertical integration strengthens market power in 2. Farmers can group into associations, e.g.
a differentiated seed industry; vertical integration cooperatives, to realize economies of scale and
tends to raise mean seed price by 1.87 to 13.6 supply to modern value chains under closely
percent (Shi and Chavaz, 2011). coordinated arrangements by contract.
3. Farmers who gain access to the value
Equity and inclusiveness of value chains production in the modern chain is better off
than the farmer supplying the traditional
In an industry with identical average costs, a high trading outlet. In this manner the rise of the
concentration ratio implies concentration as well modern value chain may be contributing to
of profit among a few firms. It is not necessarily poverty alleviation.
the case though that gross returns per unit
capital is higher in these industries; furthermore Watanabe et al (2009) offer a macro level
the implications for the size income distribution view of the impact of agro-processing on poverty
requires further analysis of ownership structure. in the case of Thailand. They use education (less
Inequality has also been characterized along the than half of mandatory schooling attainment) as
value chain. According to Moir (2007), coffee a proxy for identifying the poor. Using national
producers account for 10 percent of value added input-output data combined with the labor force
of the finished product, whereas processors, survey, they find that agro-processing industry
roasters, and retailers may receive between employs the largest number of the poor among
20 to 30 percent; the split is similar for cocoa, the manufacturing industries, High employment
where producers may receive about 15 percent. contribution for the poor is due not only due to
Banana, despite low levels of processing, the large size of the industry, but also the higher
likewise generates just about 10 percent of intensity of demand for labor of the poor.
value added for plantations, whereas retailers Most of the relevant studies in this field
may receive up to 40 percent. If however such however rely on micro case studies. Results
concentration of income or value is an outcome from ten case studies in developing countries is
of efficient market relations, then attempts to summarized in Huang and Reardon (2008). For
 Chapter 3: Investigating the structures of agricultural trade industry in 73
developing countries

horticulture crops studied, average farm sizes pesticide application, company reps may even
are small in nearly all the countries, falling to as intervene directly in farm production.
low as 0.5 ha in China, with a one ha or so plots However, buyer support may not be sufficient;
being somewhat typical. Accordingly, in six out of to ensure participation of small farmers. On
ten cases, evidence of small farm exclusion from average, heads of contract farm households are
the modern market channels is absent. better educated. About 64 percent have finished
What varies substantially however is access to primary schooling, compared with 50 percent
productive assets. Productive capital is the clearest illiteracy rate for the average household. Contract
and strongest variable affecting access to modern farmers have been supplying regularly for an
channels. Cooling tanks, herds, greenhouses, and average of 8 years; 27 percent are members
irrigation investments - assets affecting quality, of a farmer organization. Small farmers that
consistency, and volume – are found to have the participate in these contracts have higher welfare,
most significant effects. In contrast, variations in mainly realized through better income stability
human capital – schooling, age, and experience – and shorter lean periods. Contract farmers tend to
were less less pronounced among modern chain adopt better farm technologies (e.g. composting)
suppliers. Lastly, evidence on the importance of that spill over into on the productivity of the
group membership is mixed. In only half of the staple crop rice. The case highlights the following:
cases, groups such as associations or cooperatives very poor farmers, in a low income developing
facilitated the participation of their members in country with poor institutions and infrastructure,
the modern chain. Of these, only in two cases and facing a monopsonistic marketing company,
was cooperative membership found to have a can benefit very significantly from integration in
positive effect. global value chains.
The importance of endowments is Other contexts point to the importance
exemplified by the fresh fruits and vegetables of farmer organizations or change agents for
industry in Kenya (Fernandez-Stark et al, 2011). community organizing, e.g. through an NGO.
Land redistribution policies created a smallholder Agro-industrialization in China has strengthened
system throughout the country; cultivators, farmers’ access to the modern agrofood chain
already owning their own family plots, were via farmer professional cooperatives (Jia et al
favoured by a good climate as well as access to 2010). An NGO case is described in Escobal and
modern technologies such as irrigation facilities Covero (2011), for agro-industrial demand for
and greenhouses. Furthermore market linkages potato as chips for food manufacturing in Peru.
opened up opportunities through ethnic and The agro-industrial chain offers an alternative
family ties among South Asians in Kenya and marketing channel to the traditional market. The
UK. main industry firm has the incentive to source
Meanwhile, the case of Madagascar vegetable high quality potato from an area (Mantaro Valley)
exports presented earlier in Minten (2009) illustrates during the potato off-season. However, the highly
the importance of institutional support along the fragmented and disperse nature of farm land in
supply chain. In this case, such support may even this area adds huge costs to vertical integration.
supplant farmer organizations as well as other Instead, it opts to deploy existing farmers in the
disadvantages of the business climate (inadequate Valley as suppliers. The firm contracts directly with
infrastructure, resource-poor cultivators, etc.). medium-size growers, but also contracts with
Individual farmers are intensively supervised by the small producers through an NGO intermediary.
main exporter; about 300 extension employees The NGO reduces monitoring costs, and provides
supervises about 30 farmers, who in turn access to technical assistance and new marketing
coordinates about 5-6 extension assistants residing opportunities for small farmers.
in the village. Every farmer is visited more than once The producers selling to the agro-industry
a week, to ensure correct production management have on average two more years of schooling
and avoid side-selling. For some aspects, such as than those selling their crop elsewhere. Also,
74 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
industry levels in developing countries

their average land holding is also greater (more higher concentration; however the “quiet life”
than double), as well as the average value of hypothesis relates high concentration with
their productive assets. Small farmers benefit lack of competition and weaker drive towards
from guaranteed sales and predictable time innovation. For Indonesian food and beverage
horizons of production sales; they experience a manufacturing, higher industrial concentration
76 percent gain in net income per ha for shifting is associated with greater technical inefficiency,
from traditional spot to modern contractual tending to confirm the latter hypothesis
arrangement. This illustrates, among other (Setiawan et al, 2012b). This contrasts with an
cases that some degree of outside financial and earlier finding by Karantinis et al (2008) which
technical assistance, is often required for producer detects economies of size in product innovation,
groups to form and operate successfully. for the case of Danish food manufacturing.
However, this can introduce problems with Moreover, the greater the market power of a
sustainability; Markelova et al (2009) highlight firm, the more products it tends to introduce,
the issue of dependency on external assistance, i.e. it tends to be more innovative. Firms which
well as the need for public and private sectors to indicate higher vertical integration tended to
sustainability through policies and programmes innovate more.
that allow farmers to access stable and The relationship between vertical
competitive markets. In general, across various coordination and innovation has been explored
commodities and countries, contract farming is under the more general rubric of “vertical
characterized by high turnover from one year spillovers” Gorg and Greenaway (2004)
to the next, both on the buyer’s side and on the examines spillover effects from FDI to domestic
supplier’s side. This is both a source and an effect firms (not necessarily agribusiness-based),
of contract risk; unfortunately little is known through several channels. Vertical linkages are
about medium to long term sustainability of one transmission channel as foreign investors
participation (Barret et al, 2011). both compel and equip (using technical
Exclusion of small farmers does not however assistance) their suppliers to upgrade their
entirely preclude participation of the poor. product quality and processes; another is
Based on the case of Senegal, Maertens (2009) through horizontal spillovers, e.g. imitation. He
demonstrates that modern chains employ a finds that FDI impacts are only weakly attributed
significant number of workers – in fact for to horizontal spillovers; the more important
every one smallholder farmer selling to the source are vertical spillovers. Moreover the
chain, there are fifteen workers in the fields and ability of domestic firms to benefit from these
processing centres. Earnings from employment linkages varies, depending on their initial level
in the horticulture export industry are invested of technology, and access to skilled labor. The
in part in the farm, ultimately raising farm importance of vertical spillovers has also been
incomes through alleviation of credit and higlighted by Alvarez and Lopez (2008), though
input constraints. In short, analysis of welfare the source of innovation in his study are not
implications of horticulture exports and agro- TNCs per se but rather exporters.
industrialization should also pay attention to
indirect, off-farm linkages.
3.6 Conclusion
Innovation
Globalization in agriculture has witnessed the
Another important strand of literature relates increasing participation of developing countries
horizontal or vertical consolidation with in world agro-trade. Concerns have been raised
technology or technical efficiency. Under owing to high levels of concentration and
the Schumpeterian thesis, innovation is increasing consolidation of agro-industry trade in
associated with larger firms, and therefore recent decades. This is most evident in developed
 Chapter 3: Investigating the structures of agricultural trade industry in 75
developing countries

countries; it should be no surprise to observe to coordinate across far-flung global supply

similar patterns and trends in developed countries. chains;
This paper reviews the relevant literature to • The heightened need for coordinated
characterize and explain the structure of agro-trade production and transaction flows are a major
in developing countries, and draw implications on determinant of agro-trade consolidation both
the distribution of trade benefits. in terms of horizontal concentration and
Our review finds that, while the related vertical coordination;
literature is extensive, little systematic evidence • Nevertheless, for selected countries and
is available to offer a comprehensive portrait of products (e.g. key staples and export crops),
agro-trade of developing countries. Evidence for policy distortions continue to perpetuate
impacts of horizontal and vertical structure is a monopolistic market structures;
fortiori even patchier. Nevertheless we are able to • Where coordination economies drive the agro-
draw some tentative conclusions, which serves as trade structure, benefits of trade would tend
basis for some hypotheses for further research to to be skewed towards participants in the chain
be presented below. exhibiting greater capacity to comply with
Among the stages of the global value chain, it externally-driven performance standards.54
appears the dominance of large-scale operations
is more pronounced in the downstream Future research should be directed towards
stages, compared to primary stages. Horizontal compiling market concentration measures,
concentration arises from economies of scale describing vertical coordination mechanisms,
together with entry barriers. These factors are at various stages of the value chain for widely
becoming more important worldwide, including traded products produced and imported by
in developing countries, owing to supply drivers, developing countries. A worthwhile research
demand drivers, policies, and institutional thrust would be to provide an in-depth analysis
changes. of the underlying causes of market consolidation
There is some evidence for significant and vertical coordination. Entry barriers
market power being exercised among the more should be identified and described in terms of
concentrated value chains, and that market technology, branding, policy (i.e. regulations,
concentration can also be leveraged via vertical subsidies, guarantees), sunk costs, and other
coordination to widen the scope of market power. factors. Likewise, the factors underlying vertical
Nevertheless concentration is not sufficient to integration or other coordination mechanisms
establish market power. There is mixed evidence should be elaborated.
suggestion that concentration and coordination Another fertile ground for research is
promote better technologies and innovation. determining the effects of market consolidation,
At the farm level, the evidence implies that that both horizontally and vertically, as well as
human capital, farm management practices, across borders, in terms of efficiency, equity
and other assets such as equipment and of distribution of benefits from trade, and
irrigation facilities would tend to differentiate participation of smallholders and SMEs in the
participants from non-participants in the value global value chain. One basis for determining
chain; smallholders are not per se excluded from distribution of benefits is market power, a feature
participation. that needs to be empirically verified, rather
Further research may be structured around the than automatically inferred from high market
following set of hypotheses: concentration. Ideally the measurement of market
power should be based on price-cost information.
• Global agro-trade is being increasingly driven In the absence of detailed information about net
by discriminating preferences of middle- to
54
On the other hand, where policies are the main determinants of
high-income consumers both in developed and
market consolidation, it can be surmised that benefits of trade
developing countries, together with the need flow in line with political connections.
76 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
industry levels in developing countries

margins, other means of inferring market power Burch, D. 2010. Growth and Concentration in the
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 Chapter 4: Analysis of trade impacts on the fresh pineapple 83
sector in Ghana

CHAPTER 4:

ANALYSIS OF TRADE IMPACTS ON THE FRESH PINEAPPLE

SECTOR IN GHANA *

4.1 Introduction between which variety of pineapple processors

actually want and what producers can rapidly
Background offer has shrunk the industry’s profit. Many
processors and growers have already gone out of
Like many other food industries in West Africa, business, and the few that survive have attempted
Ghana’s pineapple industry rose to the hope of to re-organize but faced continuing and steep
expanding exports of processed food to acquire competition with other suppliers from the rest of
a footing in the international markets. Value West Africa and especially from Latin America.
of fruits and vegetable contribution to Ghana’s These challenges have led to the
export increased significantly from the early government’s decision to encourage remaining
1990s and reached its peak at more than USD 30 processors to focus on the domestic market
million in the mid 2000’s. It is known that the and foreign low-end market niches and to the
pineapple industry, from plantation and collection, introduction of measures enabling farmers to
to processing and export, employed small-scale increase productivity and be flexible to market
farmers and poor workers. The success of the requirements. How these challenges and official
pineapple industry had been touted in the past policy responses have affected the organization
as an example of how a strong and direct link and the decision of the industry’s farms and firms
between the producers and processors in the on resource allocation and sale strategies by farms
fruits and vegetable market is a tool to reduce and firms in the industry remain unclear. The lack
poverty and create employment. of such information on the size and distribution
However, Ghana’s pineapple industry is now in of trade impacts limits policy makers’ ability to
the midst of an unprecedented crisis. One of the formulate trade policies consistent with their
problems facing the industry is that the pineapple development objectives to avoid the collapse of
market and processors require flexibility to the the pineapple industry.
frequent changes in variety of the pineapple fruits
demanded, while local pineapple planters are Objective
often unable to switch rapidly from one variety
to another. This lack of flexibility is due to low The objective of this report is to determine,
technological adoption and poor agricultural analyse and establish the level and distribution
extension. Recently, the processors/exporters of trade impacts (benefits or losses) for firms and
wanted to process the variety MD2 (a South farmers engaged in the production and export
American variety) but farmers have still stuck of fresh pineapple from Ghana. To achieve this
with the variety Smooth Cayenne. The mismatch objective, interviews of firms and farmers were

* This chapter was written by Julius Gatune Mitchris, Chapman-Kodam Kwesi Korboe, Francis Mulangu (African Centre for Economic
Transformation) and Manitra A. Rakotoarisoa (Economist, Trade and Markets Division, FAO). This chapter expresses the personal opinions
of the authors.
84 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
industry levels in developing countries

conducted, as well as desk research and data 3. Collect data on selected and key indicators
collected on the following: of exporting firms to establish whether
they are determinants to achieve positive
1. The structure/organization of the fresh trade benefits:
pineapple export sector in Ghana:
a. Export performance of selected firms.
a. Identify the size of the pineapple export b. Firm’s legal status (Registered or not).
industry (in comparison with other c. Number of workers.
agricultural exports); sources of the d. Wages of workers (average salaries);
export ability of the industry (regulations, e. Association membership (SPEG or any other
comparative advantage, or abundance in association).
factor endowment). f. Free Zone Board membership.
b. Identify exporting firms; their input and g. Access to finance (from EDIF or any other).
output markets; degree of integration; h. Size of pineapple cultivated land.
input sources; market destinations; market i. Type of pineapple variety cultivated (MD2 or
shares. any other).
c. Determine the level of industry j. Irrigation facility or rain fed farming.
concentration; level of competition among k. Type of exporter (fair-trade, organic, etc.).
firms; level of market power.
d. Investigate the presence of market power Approach and methodology
and especially the sources of market power
(regulations, proximity, procurement of Literature review: This involved extensive
inputs) for firms. desktop research and review of various reports on
the pineapple sector in Ghana funded by Donors,
2. Determining how the trading environment Non-Governmental Organizations, the private
(policies, trade agreements) affects the sector, and the Government of Ghana.
pineapple export industry behaviour, and
especially the exporting firms’ behaviour: Qualitative and quantitative analysis: In
order to establish the impact of trade on selected
a. Perform inventories of current and past pineapple firms in Ghana, the aims were to look
policies, including agricultural trade policy at the impact of conversion to MD2, controlling
(subsidy, taxation, regulations) on domestic for characteristic variables (such as firm size,
market. and age of the firm) on firms’ export volumes
b. Identify policy bottlenecks and barriers in and hence their market shares. Three models
foreign markets and document how these are tested. (i) The difference-in-difference model
constraints affect firms’ behaviour. shows the impact of conversion to MD2 on firms’
c. Investigate the link between exporting export volumes; (ii) the Chow’s test for structural
firms and their clients (importers) including change is used to establish whether there has
the bargaining power between exporters been a structural change in pineapple exports
and importers; investigate how changing after the 2005 shock; and (iii) a final model
pineapple export demand affects the tests the determinants of export, export per
behaviour of Ghana’s pineapple producers worker, export share, and capital intensity among
and exporters. pineapple firms in Ghana.
d. Document past experiences, if any, when
the exporters’ strategies worked effectively, Consultations/interviews/field visits: As a follow
enhanced trade gains for exporting firms up to the desk review, consultations, interviews and
and influenced the distribution of trade field visits were held with key players involved in the
benefits. sector, which are detailed in Table 4.1.
 Chapter 4: Analysis of trade impacts on the fresh pineapple 85
sector in Ghana

Table 4.1: List of Interviewees

Function Actors Issues for discussions

Exporters/Farms *
• Greenspan Farms Ltd • No of workers
• Chartered Impex Ltd • Land size
• Koranco Farms Ltd • Infrastructure
• Bomarts Farms Ltd • Production performance
• Bomarts Farms Ltd • Export performance
• Golden Exotics Ltd • Turnover
• Jei River Farms • Profitability
• Operational Cost
• Margin Analysis
• Marketing arrangements
• Supply arrangements of agric inputs
• Detail of outgrower schemes
• Policy & regulatory issues

Trade Association • Sea-Freight Pineapple Exporters of • Overview of pineapple sector

Ghana (SPEG) - Policy
- Regulations
- Market conditions
- Issues affecting sector
Government • Ministry of Trade and Industry • Policy and Regulatory Issues
• Ghana Export Promotion Authority • Support to Industry
• Ministry of Food & Agriculture
Agric Input Companies • Chemico Ltd • Supply arrangements with farms
• Agrimat Ltd
• Wienco Ltd
* There are currently fourteen exporting farms in Ghana
Source: Authors

Chapter structure air in very small quantities in the mid1980s by

sourcing from smallholder farmers in the Akuapim
The report is made up of seven sections including South District in Ghana. These smallholder
an introduction. Section 2 describes the evolution farmers initially supplied the Nsawam Canneries
and development of the pineapple export industry Ltd, a Government owned fruit processing firm
in Ghana. Section 3 describes the structure of the engaged in canning pineapple juice for the local
pineapple industry in Ghana. Section 4 presents and export markets. The early 1980s saw the
findings from data analysed in determining the development of commercial indigenous farms by
impact of trade on the pineapple sector. Section 5 Ghanaian entrepreneurs from diverse professional
discusses policy and trade affecting the pineapple and business backgrounds.
industry in Ghana. Section 6 covers a detailed The production of these commercial farms was
SWOT analysis of the pineapple industry. Section principally to complement purchases from the
7 covers the conclusions of this study, policy smallholder farmers and focused on the Smooth
recommendations, and areas of future research. Cayenne variety of pineapple, though the Sugar
Loaf variety of pineapple existed but was only
grown in small quantities in the Central Region
4.2 Evolution of the pineapple of the country for local consumption. The Queen
export industry in Ghana variety of pineapple was also introduced to Ghana
in 1999 by Jei River Farms but, like the Sugar
Ghanaian firms began exporting the Smooth Loaf, was also very limited in production to a few
Cayenne variety of fresh pineapple to Europe - commercial farmers having very limited market
which was and still is the major destination - by opportunities in Europe. Some of these farms
86 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
industry levels in developing countries

were Combined Farmers Ltd located near Obodan Smallholder contribution: Based on analysis
in the Akuapim South District (which in the 1980s of export data received and contribution of
and early 1990s was the largest producer and selected exporters and Farmapine GH Ltd from
exporter of fresh pineapple in Ghana) and Jei Sea Freight Pineapple Exporters of Ghana (SPEG),
River Farms Ltd at Ofaakor in the Awutu Effutu it is estimated that smallholder farmers who had
Senya District. formed some degree of relationships with the
majority of the exporting firms contributed about
Development of pineapple export in Ghana 50 percent of export volumes from Ghana. Sea-
freighted pineapples after 1999 contributed more
The export industry developed because to export volumes from Ghana than air-freighted
commercial cargo airplanes were in the practice fresh pineapples, with the Smooth Cayenne
of delivering part accessories to the oil fields in pineapple variety being the preferred choice of
Nigeria, and then flying northbound to Europe air-freighted pineapples.
empty. This offered the opportunity for fresh
pineapple exporters – led by Combined Farmers Export activities: between 2001 and 2004,
Ltd, Koranco Farms Ltd and Farmex Ltd – to average number of exporters was about 50 with
establish freight companies and charter cargo about 40 percent of them not engaged in direct
planes. pineapple production but relying on smallholder
farmers for supply. Few exporters had established
Market share: Ghana has, over the period, pack houses to clean, pack and palletize fruits
been the largest exporter of fresh pineapple by for exports against a backdrop of absence of
air due to this distinct advantage. The industry traceability and standards for exports. Most of the
experienced growth from 1994 to 2004 especially fruits purchased from smallholders were packed
from 1999 to 2004 at a cumulative annual growth in fields, with resultant bruising of fruits and
rate of 172 percent. This resulted in increased damage to cartons. Most of the fresh pineapples
market share of fresh Ghanaian pineapples in shipped by sea were destined for wholesale
Europe from 7-8 percent in 1999 to its highest markets and on a consignment basis. Exporters
level in 2004 of 10 percent. were not offered a minimum guaranteed price
and only received statements of account after
sales and receipt of receivables by importers. Fruits
Figure 4.1: Export volumes of sea and air freighted shipped by air did attract a high premium price
pineapples from Ghana (1994 – 2011) mainly because of the shorter transit time which
offered exporters the opportunity to harvest fruits
at specified brix55 and colour demanded by the
Total volume exported markets and reached destinations fresh.
80 000
Sea freight volume
70 000 Air freight Volume
Nucleus – outgrowers relationships:
60 000 Existing relationships between exporters
(Tonnes)

50 000 and outgrowers were loosely defined with

40 000
the exception of cooperatives of Farmpine Ltd,
a marketing company with cooperatives as
30 000
shareholders, which is detailed below. Some
20 000 exporters had a core of outgrowers who were
10 000 provided with production support with prices

0
55
The Brix value measures the percent of sugar solids in a
94 96 98 00 02 04 06 08 10
product, providing an approximate measure of sugar content. It
gives an indirect estimate of the degree of fruit ripeness.
Source: SPEG
 Chapter 4: Analysis of trade impacts on the fresh pineapple 87
sector in Ghana

agreed on before production. More often members of the Horticulturists’ Association of

than not, the exporters were responsible for Ghana (HAG). This initiative was introduced
de-greening fruits, harvesting and packing for due to the cost of airfreight which cost
exports. Initial payments were effected after 3.5 times more than sea-freight with the
harvest and validation of weight, with the former, limited niche air market and huge
balance paid after a minimum of six weeks potential and opportunities in the European
for sea-freighted pineapples. Growers of fruits market for sea-freighted fresh pineapples.
purchased for air-freight (unlike the ones for sea- Currently, airfreight costs 4.5 times more than
freight) were typically paid in full with minimal sea-freight in Ghana.
delay. Payments were effected after harvesting
and validation of weight. Because of lack of Donor/government funded programmes:
infrastructure such as pack houses in production A number of programmes were initiated with
areas and poor post-harvest procedures, the funding from donors and the Government of
quality of sea-freighted pineapples suffered Ghana to support the pineapple sector in the
with values obtained not commensurate with 1980s and 1990s.
equivalent volumes. A number of factors were
critical to Ghana’s export performance during that • Pineapple Production Expansion program
period. was implemented from 1987 to 1990 by the
Ministry of Trade and Industry (MoTI) and the
Factors impacting on Ghana’s export GEPC. The main objectives of the program
performance were to expand production of pineapples for
export, provide soft loans and assistance in
The introduction of sea-freight for exports of accessing Smooth Cayenne variety of planting
pineapple in 1994 under the new body Sea-Freight material from Ivory Coast, and technical
Pineapple Exporters of Ghana (SPEG) assistance in production and exports of
pineapple from Ghana.
This initiative was developed under the USAID • Agriculture Diversification Project - Horticulture
Trade and Investment Program executed by AMEX Development Component implemented
International, a US based consulting group in from 1991-1999 initially by GEPC, but with
close collaboration with some selected members responsibility subsequently transferred to the
of the Horticulturists’ Association of Ghana Ministry of Food and Agriculture (MoFA).
(HAG), which was at the time the association The project design began in 1988 and was
representing the pineapple sector in Ghana. The implemented with funding of USD 16.5 million
introduction of sea-freight culminated in the from the World Bank, IDA credit. The fund was
setting up of the Sea-Freight Pineapple Exporters also used to create the Horticulture Unit of
of Ghana (SPEG) in 1994. MoFA to serve as a project implementation unit.
This association was mandated to coordinate • Trade and Investment Programme (TIP): AMEX
logistics of members, vessels and operators and International implemented TIP from
to liaise with government agencies such as the • 1993 to 1998 with funding from the USAID.
Ghana Ports and Harbours Authority (GPHA), The project was aimed at providing support to
Ghana Export Promotion Council (GEPC), etc. At individual enterprises engaged in:
the peak of its operations, SPEG had 52 members
but currently has 30 members with 14 regular 1. Non-traditional exports such as
shippers. horticulture ,textiles, value added wood.
The initial members of SPEG were 2. Support to export industry associations.
Combined Farmers Ltd, Integral Farms Ltd, 3. Financing support to the industry
John Lawrence Farms, Greentex Farms Ltd and stakeholders.
Jei River Farms Ltd who were at the time also
88 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
industry levels in developing countries

• Trade and Investment Reform Programme - Farmapine GH Ltd. The creation of a

Increased Private Enterprise Performance cooperative-based export company made up
component (TIRP): TIRP, which was a of five pineapple cooperatives comprising 450
continuation of the objectives of TIP but farmers in the Akuapim South district and
with a greater focus on integrating the two existing small- medium producer-exporter
private sector, was implemented by AMEX companies (Gabrho Ltd and Kokobin Farms Ltd)
International, Technoserve and CARE took place in 1999. The World Bank through the
International from 1998 to 2004 with Ministry of Finance provided a loan of USD 1.5
funding of about USD 60 million from USAID. million to the cooperatives as start-up capital,
The focus on the private sector was intended which translated into 80 percent shares in the
to increase the capacity of micro-enterprises company. The assets, markets and expertise of
and to link microenterprises/small farmers the two producer exporters were valued, and they
into the production-marketing chain for were given the remaining shares. Management
exports. was then recruited to manage the company.
Farmapine between the periods of 1999 to 2004
Demand for pineapple in Europe. Consumer became one of the largest exporters accounting
demand for pineapples in Europe increased from for about 23.5 percent of fresh pineapple exports
339 000 MT in 1999 to 526 000 MT56 at a from Ghana at its peak of operations and offered
cumulative annual growth rate of 55 percent cooperatives direct access to markets in Europe.
by 2004 which provided the opportunity for The impact of Farmapine’s operations was to
increased production and exports from Ghana. create more market access for cooperatives and
This was a result of a decline in production exporters who did not have farms commenced
and export in Cote d’Ivoire because of political their own production and reduced their reliance
instability in 1999 and a civil war in 2002. on some of the cooperatives that served the
fulcrum of Farmapine’s operations.
Blue Skies Ltd. Blue Skies has been producing
fresh fruit products (fresh fruit cut) since Fairtrade Certification: About nine of the
1998 from its factory located near Nsawam in exporters are Fairtrade certified (Table 4.2), which
Ghana and in 2004 commenced the production have sustained exporters through obtaining
of fresh juice for foreign and local markets. The premium prices through the varietal shift on
company started by exporting premium quality the European market with Golden Exotics
freshly cut fruits to supermarkets in Europe, which Ltd in process of acquiring certification. The
stimulated demand for fresh pineapples locally. exporters who had acquired Fairtrade certification
Their initial requirement was estimated at about explained that access to that market was a way
3000 MT of Smooth Cayenne variety of pineapple to compete with exports from Costa Rica into the
annually. They sourced mainly from smallholder European market. This is because the Fairtrade57
farmers at prices competitive to those being market offers a relatively higher price, at about
offered by exporters. What this did was to offer 20 percent, than the conventional market
greater market access to smallholder farmers and though it constituted about 15 percent of export
stimulate production of the Smooth Cayenne volumes, resulting in overall improved average
variety of pineapple. They also sourced fruits from price per carton58 of fruit. Additionally, it also
a limited number of commercial farms whose made available to workers of these companies
fruits were not exported in large quantities due a premium of four Euro Cents per kilogram to
to aesthetic qualities such as size and colour than promote and execute social programs for the
brix, internal color and texture. benefit of workers and the resident communities.

57
www.fairtrade.net
56
Eurostat 58
www.average weight of carton is 12 kilos
 Chapter 4: Analysis of trade impacts on the fresh pineapple 89
sector in Ghana

in 2006 and this explains the sharp decline from

Table 4.2: Fairtrade certified pineapple exporters 2006 to 2007. The reason for the shift in demand
can be attributed to the following factors elicited
List of exporting firms that are fairtrade certified through interviews with buyers and importers of
Prudent Exports pineapple in Europe.
Milani Ltd.
Georgefields Farms • During sea freight, the MD2 variety travels
Jei River Farms best and is not affected by browning59 due to
Bio Exotica Co. Ltd.
low acidity, compared to the Smooth Cayenne
variety.
Volta River Estates Ltd.
• The shape of the fruit sits well on supermarket
Bomarts Farms
shelves and occupies less space as compared to
Gold Coast Fruits the Smooth Cayenne variety which cannot sit.
Source: SPEG • The MD 2 variety has a longer shelf life due
to its low acidity coupled with the logistic
Decline in fresh pineapple exports arrangements of post-harvest handling (usage
of packing lines and cooling facilities available
The fresh pineapple export industry since in Costa Rica) compared to post-harvest
2004 has, however, experienced declined volume handling of the Smooth Cayenne variety of
in exports due to a number of reasons, principally pineapple in Ghana and Cote d’Ivoire.
due to a shift in market demand in Europe to
the MD2 variety of pineapple produced primarily Interventions in response to varietal
in Costa Rica by Del Monte. Because of this change
shift in market demand for MD2 (instead of the
Smooth Cayenne variety of pineapple), Ghana has The decline in export volumes was further
seen a decline in the number of exporters from exacerbated by the delay in response of the
an average of 60 before 2004 to about 14 at industry to market shifts due to the following
present. Though the decline of exports of fresh reasons: The firms exporting the Smooth Cayenne
pineapples started in 2005, it should be pointed variety of pineapple, were saddled with leftover
out that export of Smooth Cayenne by sea ceased planting stock and work in progress in the fields
did not have enough capital available to invest
in true type seed material. The initial cost of
Figure 4.2: Number of fresh pineapple exporters in Ghana suckers and tissue-cultured material was priced
at 70 US cents in 2004 to 2006 compared
80
to Smooth Cayenne suckers priced at a mere
No. of exporters
three US cents. Also, technical knowhow amongst
70 Ghanaian producers both large and small on the
agronomy of the MD 2 variety was non-existent.
60
The greatest impact of the shift was felt by
50 smallholder farmers who contributed 50 percent
of export volume of pineapple before 2004 and
40
are no longer in the production of pineapple for
30
59
Browning or Internal Browning is a physiological disorder that
20 turns the colour of the interior of harvested pineapple fruit into
brown and rapidly reaches the core of the fruit. It is caused by
several factors including cultural conditions (e.g. varieties, soil
10
95 97 99 01 03 05 07 09 11 acidity and content in minerals), and postharvest treatments
(e.g. temperature and duration of storage).
Source: SPEG
90 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
industry levels in developing countries

exports today, felt the greatest impact of the drying firms such as HPW which projects to
shift. Interventions were made by donors and consume about 2 700 MT per annum. Not more
Government of Ghana to address availability of than 10 percent of pineapple production as
MD2 suckers for commercial and smallholder indicated above is targeted at Smooth Cayenne
farmers from 2005 to 2007. production, which is limited to a few commercial
For example, Government of Ghana in farms such as Jei River Farms and Unifruit Farms
2005 provided a two million dollar grant to the and mostly grown by smallholders. The bulk of
pineapple industry to procure planting material. Smooth Cayenne variety is exported by air with
Other remedial measures were the setting about 4000 MT sold to Blue Skies. Blue Skies
up of Bio Plantlets Ltd, a commercial tissue sources its Smooth Cayenne from smallholders
culture laboratory at the Ghana Atomic Energy (70 percent) and two other commercial farms - Jei
Commission (GAEC) funded by USAID. Also, River Farms and Unifruit Farms (30 percent).
under the Horticulture Export Industry Initiative Due to low production of Smooth Cayenne
(HEII), there was collaboration with a private tissue in the country, Blue Skies on a number of
culture laboratory Bomarts Ltd and Bio Plantlets occasions have to source from Togo, Benin and
Ltd to make available tissue-cultured plantlets of Cote D’Ivoire. The conversion rate for processing
MD2 variety to commercial smallholder farmers. fresh pineapple to fresh cut is about 26 percent.
Smallholder farmers who had lost incomes due to It is estimated that smallholder farmers incur a
lack of sales and inability of exporters to pay them production cost of USD 1 250/acre without using
due to losses incurred in Europe, were expected mulch and make a return of 70 percent over a
to multiply field suckers which required additional period of 14 months after harvest and sales at
capital on their part. This, coupled with their lack 40 Ghanaian pesewas (or USD 0.80) a kilogram.
of necessary agronomic skills to produce MD2, Prices offered by exporters and processors vary
further compounded the situation. with respect to the variety of pineapple on offer
and from which they export or process into. Blue
Skies offers presently to suppliers, 0.40 Ghanaian
4.3 Structure/organization of the pesewas per kilo for Smooth Cayenne and 0.20
pineapple export industry Euro cents/0.46 Ghanaian pesewas per kilo for
MD2. Most of the processing firms which buy
The pineapple value chain (Figure 4.3) based on pineapple for juice pay 0.26 Ghanaian pesewas
production data for 2011 and current situation in (or USD 0.52) per kilo ex-factory for the two
2012 has a large number of commercial farmers varieties. The bulk of air-freight pineapples are
producing about 90 percent of pineapple in shipped through cargo airlines coordinated by
the country currently. MD2 constitutes about Air Ghana twice a week unlike Blue Skies which
90 percent of total production in Ghana, with ships everyday on commercial airlines going to
smallholders accounting for about 2 percent of Europe. For processed pineapple juice, most of
current production volumes. It is estimated that the processing is done by small-scale firms for
Ghana currently produces about 70 000 MT of local consumption. Blue Skies Ltd also processes
MD2 variety of pineapples equivalent to about juice for both exports and local consumption.
5000 acres of production land, based on data Pinora Ltd is the only company engaged in
collected for exports, interviews with producers/ processing and export of fresh pineapple into
exporters and visits to their farms and analysis juice concentrate and offers USD 130/MT at farm
of their planting and production records, Blue gate. It has had major challenges in procuring
Skies and major processing firms. About 50 to fresh pineapples for processing and so had not
60 percent are exported by sea with the rest had continuous operations for the past four years.
sold to Blue Skies Ltd (6000 MT), Peelco Ltd in Currently, exports of fresh pineapples from
Bawjiase, domestic markets, processing firms Ghana are done by 14 companies, most of them
engaged in juice production such as Pinora and located in the Awutu Senya District of the Central
 Chapter 4: Analysis of trade impacts on the fresh pineapple 91
sector in Ghana

Figure 4.3: Value chain map of fresh Pineapple exports

LOCAL MARKET EXPORT MARKET

Air freight
Fresh & juice Sea freight
Fresh-cut Smooth
processing MD2:
3 000MT Cayenne:
Smooth 35 000MT
10 000MT
Cayenne: 3
2 Fresh-cut processors
Smooth Cayenne: 6 000MT

14 Large-scale farmers
(nucleus farmers/exporters)
Smooth cayenne: 5 000MT

Smallholder (200 outgrowers)

Smooth cayenne: 12 000MT
MD2: 2 500MT

Source: Authors

Region with two – Koranco Farms and Greenspan Table 4.3: List of major fresh pineapple exporters
Farms – located in the Akuapim South District
in the Eastern Region. For fresh cut fruits, Blue Exporting firms and contribution to exports of fresh
pineapples
Skies based in Nsawam in the Akuapim South
%
District has been the leader (95 percent) with
Peelco Ltd, which operates in Bawjiase in the Bomarts Farms 15
Awutu Senya district having limited operations. All Georgefields Farms 5
their products are air freighted using commercial Gold Coast Fruits 8
passenger air lines such as British Airways, KLM, Golden Exotics Ltd 26
etc with the bulk of Blue Skies products consigned Jei River Farms 12
to British supermarkets and Peelco to German
Koranco Farms 7
supermarkets. Eight key exporters (Table 4.3)
Milani Ltd 14
account for about 93 percent of sea-freighted
pineapples as of 2011. Blue Skies unlike Peelco Prudent Farms 6

has an extensive outgrower system in place and Source: SPEG

are Global G.A.P certified as a group.
Most of these farms are in the region of 60 km done based on interviews, review of exiting
from the main port of Tema. Exports of fresh literature and discussion with local consultants
pineapples are all year round with peak exports who have worked with smallholders under various
from October to March. With the exception of donor-funded programs. Based on the above and
Bomarts Farms, Milani Ltd., Gold Coast Fruits the current program to introduce healthy, disease-
Ltd, Georgefields Farms and Prudent Farms that free field suckers of Smooth Cayenne variety of
have limited number of outgrowers, all the other pineapple, it is estimated that about 30 large and
exporters rely on their own production for export. less than 200 smallholders’ farmers are currently
Estimates of workers and farmers engaged engaged in commercial pineapple production in
in primary production of pineapples have been Ghana.
92 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
industry levels in developing countries

Figure 4.4: Contribution of exported pineapple volumes Figure 4.5: Percentage contribution of horticulture to
to total horticultural volumes in Ghana 1998 - 2010 agricultural exports from Ghana

Total Volume exported (tonnes) Contribution of Contribution of

80000 100 Agricultural horticulture to
Air freight Volume (tonnes) Products to NTE Agricultural Exports
Sea Freight Volume (tonnes) Contribution of Processed and
70000 Semi-processed products to NTE
80
60000

50000 60
40000
40
30000

20000
20
10000

0 94 0
96 98 00 02 04 06 08 10

94

95

96

97

98

99

00

01

02
Source: Ghana Export Promotion Authority Source: Ghana Export Promotion Authority

Performance of the pineapple export sector Ltd in 2011. Data on monetary values from
government agencies are not available due to the
Prior to the shift in demand from the Smooth lack of instruments or systems to determine prices
Cayenne variety of pineapple to the MD2 received for exports and remittances from exports.
variety, the pineapple sector used to be the key
contributor of horticultural exports from Ghana. Destination of fresh pineapples exports from Ghana
Data obtained from the Ghana Export Promotion
Authority indicates a decline in percentage All consignments of fresh pineapples shipped by
contribution to volume from 60 percent at sea are exported to Europe with HPW AG, the
its peak in 2004 to about 30 percent in 2010 largest based importer of Ghanaian pineapples
notwithstanding an increase of 1 000 to 3 000 importing from about five companies accounting
MT of cut fruit exports. As pointed out earlier, the for 40.9 percent. About 20 percent of the fruits
juice exports have been very insignificant. This imported are shipped to Britain to high-end
finding indicated the importance of pineapple supermarkets with the rest shipped to Switzerland
to the horticultural sector in Ghana during the and other EU countries. Fruits bound for France
developmental phase of the sector. Whilst the are as a result of Golden Exotics which has its
decline in contribution can be directly linked corporate offices in Marseille, France. Currently;
to varietal shifts, concurrently the exports of most of the fruits shipped by sea are moved by
bananas by Golden Exotics Ltd further reduces vessels operated by the African Express Lines
the contribution of pineapples to exported (AEL), a subsidiary of COMPAGNIE FRUITIERE. AEL
volumes of horticultural producers with banana has dedicated fruit vessels with two scheduled
accounting from seven percent of horticultural port calls a week making them more attractive
exports in 1998 to 46 percent in 2010. The than other vessels which are open to general
highest annual volume achieved by the Volta River cargo and do not operate scheduled port
Estates Limited - a Fairtrade and organic certified calls. During the peak periods in November to
banana exporter - is about 5 000 MT, achieved December, the number of port calls is increased
in 2011, and about ten percent of estimated to accommodate increased export volumes.
volumes of bananas exported by Golden Exotics SPEG provides coordination of logistics services
 Chapter 4: Analysis of trade impacts on the fresh pineapple 93
sector in Ghana

Figure 4.6: Destination ports in Europe receiving sea Figure 4.7: Destination of fresh pineapple exports
freighted pineapples from Ghana from Ghana

Dover - UK France
Vendres - France Germany
Vado - Italy Italy
Antwerp - Switzerland
Belgium
Netherlands

Source: See Pineapple Exporters of Ghana (SPEG) Source: SPEG

to the producers to ensure timely delivery at the Table 4.4: Land size and staff strength of current
port for shipment. AEL makes port calls to four exporters of fresh pineapples
destinations in Europe with about 50 percent of
fruit exported discharged in Antwerp. The cost Exporting firms and contribution to exports of fresh
pineapples
of freight has, over the past four years, remained
Company Staff Strength Total Land Ha
steady at USD 227 and is currently about
USD 257 per pallet of 80 cartons. Golden Exotics Bio Exotica Ltd. 80 1 000
Ltd has the highest number of farm employees Bomarts Farms 650 3 000
and land size which is logical when juxtaposed Chartered Impex 150 2 000
against (their) being the largest exporters of fresh Georgefields Farms 250 2 600
pineapples from Ghana (Table 4.4). Gold Coast Fruits 210 1 260
Though Jei River Farms has the next largest
Golden Exotics 1 200 6 000
landholding, it is the fourth largest contributor
Greenspan Farms 75 750
to exports of fresh pineapples from Ghana. The
reason for its large land size is that, unlike most of Jei River Farms 435 5 800

the Ghanaian and indigenous companies which Koranco Farms 230 2 500
commenced operations in the 1980s, Jei River Mashaco Farms 45 483
Farms Ltd was established by a multinational Pioneer Quality Farms 50 400
trading company Société Commerciale de Prudent Exports 160 2 000
l’Ouest Africain (SCOA) in the 1970s when land Unifruit Ltd 150 1 800
accessibility was easy. Critical analysis of export
Volta River Estate Ltd. 100 1 000
volumes in Ghana by commercial farms in relation
to their land size indicate a land utilization rate TOTAL 3 785 30 593

of 15 percent for pineapple production and in Source: SPEG

resonance with long fallow practices seen in

Ghana, unlike in Costa Rica.
94 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
industry levels in developing countries

Computation of values of fresh pineapple exports • Sales of about seven percent of exported
from Ghana pineapples on the Fairtrade market on the
basis that nine exporters accounting for 65-
Values picked by government agencies such as 70 percent of export volumes from Ghana are
Ghana Export Promotion Authority (GEPA) are Fairtrade certified. Fairtrade certified pineapples
based on prices quoted by exporters on export have a 20 percent premium in price over
forms and fed into the Ghana Community conventional markets.
Network Services Limited (GCNet) electronic • Decline in contribution of air-freighted
system for processing trade and customs pineapples to overall export volumes but higher
documents in Ghana. These quoted prices tend prices offered currently than in 2004.
to differ significantly from actual export receipts
based on the experiences of the authors and It is estimated that the value of exports of fresh
interviews conducted with selected exporters. pineapples is about 20 Million US Dollars, from
This study has estimated the value of exports an estimated position of 23 Million US Dollars in
of pineapples from Ghana based on a number 2004 with an increase in fresh cut fruits from five
of assumptions detailed below and in-depth million USD to seventeen million USD. Though the
inspection of financial records of some exporters. decrease in value of exports of fresh pineapples is
The considerable experience of the authors of this expected, the quantum is not commensurate with
report in the pineapple export sector as well as reduced volumes as of 2011. What this means
lessons learnt from managing one of the major is not necessarily an increase in profitability but
exporter firms in Ghana are brought to bear in more of an increase in export receipts as a result of
this study. The assumptions used to estimate the access to high-end markets and improved post-
value of exports from Ghana are: harvest management and certifications.
In comparison to Costa Rica, the largest
• Current market prices on the basis of minimum exporter of sea freight MD2 to Europe, producers
guarantee prices to high-end markets. This in Ghana are not efficient and are operating
differs from pricing in the past which was not more than 55 percent of their production
based on sales on consignment basis and capacity. Table 4.5 compares some key indicators
targeted at low-end markets. in production between Ghana and Costa Rica.

Table 4.5: Comparison of some production indicators Ghana vs. Costa Rica

Ghana Costa Rica

• 3 500 cartons per hectare with an average size of 1.4 kilos • 7 500 cartons per hectare with an average size of
• Plastic mulch used due to low precipitation 1.8 kilos
• Planting density at 55 000 suckers/ha • No use of plastic mulch due to high incidence of rain
• Practice of uniformity in selection of field suckers improving • Planting density at 73 000 suckers/ha
• Suckers treated on the field for prevention and control of • Uniform selection and grading of suckers
fungal and pest infestation due to lack of dipping facilities • Suckers are harvested and treated and planted
• Due to lack of equipment, suckers are not planted within 48 within 48 hours. This is done in special dipping tanks
hours at a designated area and transported to field using
• Fertilisation done using both knapsack and boom sprayers due normal tractor and trailer.
to high cost of mechanization • Suckers and slips are used in planting averaging
from 150 to 900 grams
• Fertilisation and chemical application applied using
booms sprayers and highly mechanised harvesting
activities
Source: Authors
 Chapter 4: Analysis of trade impacts on the fresh pineapple 95
sector in Ghana

4.4 Some quantitative analyses between the different variables of interest is

of trade impacts hereby presented. Secondly, an estimate of
a dynamic difference-in-differences model to
In order to establish the impact of trade benefits evaluate the impact of the trade shock on firm
on selected pineapple firms in Ghana, three types exports. Thirdly, an ad hoc robustness test by
of analysis were conducted. The aims were to testing for structural change is presented. This is
look at the impact of Year of Conversion to MD2, done by empirically verifying if there is evidence
Firm Size, and Age of the Firm on Firms’ Export that the slope and constant of the export volume
Volumes and hence their Market Shares. Three regression line are statistically different before
Models are tested. The difference-in-difference and after 2005. Lastly, an evaluation of the
model shows the impact of conversion to MD2 determinants of trade by estimating a series of
on firms’ export volumes, the Chow’s test for OLS regressions is also done.
structural change is used to establish whether
there has been a structural change in pineapple Correlations
exports after the 2005 shock. A third model
used Ordinary Least Square (OLS) to estimate the Number of workers has a positive relationship
determinants of export, export per worker, export with export share of the firms and this is very
share, and capital intensity among pineapple firms significant at 1 percent level. This means that
in Ghana. the export share of a firm will increase as the
Four sets of empirical results are presented firm increases its number of workers. This may
below. Firstly, an estimation of the correlations also mean that larger firm (or perhaps more

Table 4.6: Correlation

Export Adjusted Export per No of Yrs per

Land MD2 Age
shares price worker workers harvest

Export shares 1

Adjusted Price -0.4068 1

(0.0317)
Export Per
Worker 0.5564 -0.5327 1

(0.0252) (0.0336)

No of Workers 0.8517 -0.2049 0.4221 1

(0.00) (0.3602) (0.1034)

Land 0.8234 -0.3546 0.2025 0.8975 1

(0.00) (0.1363) (0.4875) (0.00)

Yrs P-Harvest 0.776 -0.4744 0.7426 0.7095 0.5567 1

(0.0003) (0.0543) (0.0088) (0.0021) (0.0311)

MD2 0.6103 -0.7151 0.7351 0.3547 0.487 0.7927 1

(0.0026) (0.0002) (0.0018) (0.1147) (0.0345) (0.0001)

Age -0.09 0.0618 -0.2086 -0.1282 -0.2569 -0.1859 0.1431 1

(0.6621) (0.7644) (0.4555) (0.5901) (0.2883) (0.4751) (0.536)

Source: Authors
96 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
industry levels in developing countries

labour intensive firms) may have greater export fact that newer firms established prior to varietal
return. This fact is further reflected in the positive shift did not have huge cultivations of SC variety
relationship that exists between export share per of pineapple unlike the older firms. This put them
worker and export share of the individual firms. in a position to commence production of MD2
Period of conversion to MD2 variety of pineapple variety of pineapple and more importantly, acquire
has a positive correlation with firms’ export shares equipment more suited to MD2 production.
and is significant at 1 percent level. This means
that firms who converted early to MD2 have Difference-in-differences
bigger export shares than those who converted
later. This is because market demand in Europe A robust standard error dynamic difference-in-
after 2005 shifted from SC to MD2 variety of difference model using a year fixed effect model
pineapple. Firms that converted late definitely showing the year by year differences is estimated.
lost market shares as a result of lack of fruits The model specification used to carry out the
for exports resulting in losing importers to other analysis is presented in equation (1) below.
exporters. The results further show a negative
relationship between the year of converting Yt = β0 + ∑ βt .Dt + γ X .X + ∑ δt (Dt .X) + ∑ µ j Z j + εt
t t j
to MD2 and the FOB price of pineapples; this
relationship is significant at 1 percent level. This Y: Outcome variables (export volumes or export
means that farmers who converted early to the shares)
MD2 variety of pineapple obtained higher FOB D: Year dummies (t=2006,… ,2011)
prices for their pineapples than late converters X: Export dummy: X = 1, if firm is a strictly
because they had secured and cemented pineapple export firm and 0 otherwise
relationships with importers and importantly, Z: Time-varying independent variables (j=
used the period to improve quality of exported Adjusted price, MD2 adopted, Post-Harvest)
fruits to meet market specifications unlike their ε is the error terms and β, δ, γ, μ are parameters.
competitors who converted late. Year of obtaining
post-harvest facility shows a positive relationship Table 4.7 presents the results where the
with export share of individual firms and is dependent variable is the quantity of pineapple
significant at 1 percent level. This finding means exported. The results state that varietal shift from
that firms who acquired post-harvest facility with SC to MD2 variety of pineapples which peaked
installed packing lines and cooling facilities early in 2005 has had negative impact on pineapple
increased their export shares than firms who exports from Ghana well beyond 2005. The
acquired post-harvest facility late. relationship between pineapple exports and the
This is because unlike the SC variety of independent variable is sensible. While adjusted
pineapple, the MD2 variety requires cleaning, price has a negative relationship with export
waxing, sorting (weight and colour) using quantity, firm converting production from SC
packing lines and pre and post cooling handling. to MD2 variety of pineapple and Post-Harvest
This minimises bruising, increases shelf life and infrastructure are positively related to exports of
maintain colour attractiveness for consumers in pineapple from Ghana.
Europe. Availability of such facility offer firms the Further analysis indicates (Table 4.8) the
opportunity to improve quality of fruits exported number of years that firms converted to MD2 has
over a period and maintain secure importers in a heterogeneous impact on export volume. For
Europe. instance, firms that converted to MD2 in 2005
The age of firm has a negative relationship exported 1 176 more pallets than firms that did
with export shares of firms and this relationship not convert to MD2 in that year. This impact
was also not statistically significant; this means differs by year of adoption such that it becomes
that older firms have smaller export shares than 2163, 1208, and 391 pallets in 2006, 2007, and
younger firms. This could be attributed to the 2008 respectively but loses statistical significance
 Chapter 4: Analysis of trade impacts on the fresh pineapple 97
sector in Ghana

Table 4.7: Impact of MD2 shock on export volumes (in pallets)

Variables Coefficients Robust S. E. t P-value

Export 1705.455*** 123.366 13.82 0.000
Export*year 2006 -892.8609*** 117.0119 -7.63 0.000
Export*year 2007 -351.4997** 138.0467 -2.55 0.026
Export*year 2008 -635.5918*** 209.6132 -3.03 0.010
Export*year 2009 (omitted) (omitted)
Export*year 2010 (omitted) (omitted)
Export*year 2011 (omitted) (omitted)
Adjusted price -627.5093*** 155.6578 -4.03 0.002
MD2 adopted 574.026* 318.9974 1.80 0.097
Post-Harvest 3089.844*** 739.0243 4.18 0.001
Constant 810.3751** 294.5835 2.75 0.018
Fixed Effect Yes
* p < 0.10, ** p < 0.05, *** p < 0.01
Source: Authors

Table 4.8: Impact of MD2 shock on export volumes (a deeper look at the effect of MD2 conversion)

Variables Coefficients Robust S. E. t P-value

Export 1737.427*** 143.1349 12.14 0.000

MD2* year 2005 1176.607*** 59.82105 19.67 0.000

MD2* year 2006 2163.017*** 106.2 20.37 0.000

MD2* year 2007 1208.843*** 127.8657 9.45 0.000

MD2* year 2008 391.8077* 224.711 1.74 0.107

MD2* year 2009 79.22052 309.0134 0.26 0.802

MD2* year 2010 -148.0853 382.6423 -0.39 0.706

MD2* year 2011 (omitted) (omitted)

Export*year 2006 -1613.221*** 142.3333 -11.33 0.000

Export*year 2007 -434.0941** 173.5214 -2.50 0.028

Export*year 2008 -653.8792*** 231.1459 -2.83 0.015

Export*year2009 (omitted) (omitted)

Export*year2010 (omitted) (omitted)

Export*year 2011 (omitted) (omitted)

Adjusted price -658.1494*** 138.2472 -4.76 0.000

MD2 Conversion -191.9983*** 59.78368 -3.21 0.007

Post-Harvest 3292.536*** 798.5128 4.12 0.001

Constant 919.4139*** 252.6136 3.64 0.003

Fixed Effect Yes

* p < 0.10, ** p < 0.05, *** p <0.01
Source: Authors
98 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
industry levels in developing countries

after 2008. This means that conversion to MD2 Test for structural change
after 2008 does not significantly enhance export
volume. This is because the production cycle The main test statistic for the structural change
of MD2 variety of pineapple is about fifteen test is the Chow test (Tables 4.11, 4.12, 4.13,
months. After fruit harvest, the plant produces 4.14).
field suckers for replanting, over a period of six For the Chow Test, an interaction term of
months. In order to make any significant impact the regressor “adjusted price” and the dummy
on export volumes, a firm needs to complete variable “year 1” which is equal to 1 if the year
three full cycles of production, which is equivalent of observation is after 2005 and 0 otherwise
to a period of about five years. Therefore, any was created. The coefficient of “year 1” is the
firm that converted to MD2 after 2008, based on deviation of the post 2005 period intercept
the period of analysis will not have any significant from the baseline intercept (year 1=0). Likewise,
impact on its export volumes. the coefficient of “adjusted price” is the slope
The impact of the shock on export shares of the baseline period, and the coefficient of
(Table 4.9) is also negative and statistically the interaction terms of “adjusted price” and
significant. Incidentally, the impact worsens “year 1” is the deviation of the second period
every year implying that the industry may be on slope from the baseline slope.
the verge of decline. Export shares of pineapple The Chow Test is conducted such that the
firms have been declining by an average rate of null hypothesis is that two periods have equal
26 percent per year. parameters for “adjusted price” and intercept;
In the case of export shares (Table 4.10), MD2 deviations of the slope and intercept are
conversion after 2009 loses its positive impact not statistically discernible from zero. Before
on export shares. Firms that converted to MD2 estimating the Chow Test, the export figures were
between the years of 2006 and 2008 are the only de-trended to remove potential bias. The results
ones who experienced a positive impact on their reject the null hypothesis and suggest that there
export shares from trade and this is explained have been a structural change in pineapple export
above as a result of period of production cycle. after the 2005 shock.

Table 4.9: Impact of MD2 shock on export shares

Variables Coefficients Robust S.E. t P-value

Export 0.035591*** 0.00129 27.59 0.000

Export*year 2006 -0.0106516*** 0.003248 -3.28 0.007
Export*year 2007 -0.0116738*** 0.003174 -3.68 0.003
Export*year 2008 -0.0160949*** 0.003966 -4.06 0.002
Export*year 2009 -0.0173662** 0.006743 -2.58 0.024
Export*year 2010 -0.02611*** 0.008319 -3.14 0.009
Export*year 2011 (omitted) (omitted)
Adjusted price -0.0145136*** 0.003455 -4.20 0.001
MD2 adopted 0.0113871 0.008247 1.38 0.193
Post-Harvest 0.0985803*** 0.023168 4.25 0.001
Constant 0.0249342*** 0.007269 3.43 0.005
Fixed Effect Yes
* p < 0.10, ** p < 0.05, *** p < 0.01
Source: Authors
 Chapter 4: Analysis of trade impacts on the fresh pineapple 99
sector in Ghana

Table 4.10: Impact of MD2 shock on export shares (a deeper look at the effect of MD2 Conversion)

Variables Coefficients Robust S.E. t P-value

Export 0.0365265*** 0.00137 26.67 0.000

MD2* year 2005 0.0325791*** 0.002901 11.23 0.000

MD2* year 2006 0.0580488*** 0.003605 16.10 0.000

MD2* year 2007 0.0397311*** 0.00408 9.74 0.000

MD2* year 2008 0.0242494*** 0.005766 4.21 0.001

MD2* year 2009 0.017975** 0.009215 1.95 0.075

MD2* year 2010 0.0012945 0.012065 0.11 0.916

MD2* year 2011 (omitted) (omitted)

Export*year 2006 -0.0272359*** 0.001291 -21.10 0.000

Export*year 2007 -0.0187004*** 0.001784 -10.48 0.000

Export*year 2008 -0.0175595*** 0.003592 -4.89 0.000

Export*year 2009 -0.0213969** 0.009189 -2.33 0.038

Export*year 2010 -0.0366861*** 0.012196 -3.01 0.011

Export*year 2011 (omitted) (omitted)

Adjusted price -0.0139601*** 0.003034 -4.60 0.001

MD2 adopt -0.0126698*** 0.002922 -4.34 0.001

Post-Harvest 0.1023056*** 0.024051 4.25 0.001

Constant 0.0259051*** 0.005249 4.94 0.000

Fixed Effect Yes

* p < 0.10, ** p < 0.05, *** p < 0.01

Source: Authors

The three analysis presented in tables 4.11- 5. Policy and trade environment
4.14 suggest that the main determinants of
export are post- harvest infrastructure, adoption Inventory of trade policies affecting
of MD2 variety, fairtrade certification and firm domestic markets
size which is captured by the number of workers.
Post-harvest infrastructures, fairtrade, and MD2 There have been a number of policies designed
adoption are in fact some of the most important and implemented by the Government of Ghana
determinants of trade and firms that have been over the years with positive impact on the
using them the longest were observed to be those pineapple export sector through the Ministry
that traded more. of Food & Agriculture and Ministry of Trade &
Industry. Besides, the pineapple sector since 2001
has accessed and received certification from the
Ghana Free Zone Board60. Through the above
initiatives, the pineapple sector has enjoyed a

60
The Ghana Free Zones Board was established Act of parliament
in August 1995 and operates under Legislative Instrument
1618 with an objective of promoting economic development
and regulate activities of applicants.
100 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
industry levels in developing countries

number of incentives detailed below to improve registered in districts and are issued coupons
their competiveness. which are presented to agents of importing
firms in their locality to be redeemed by the
These include: government agency responsible for the program.
The effects of these policies resulted in (has been
1. Zero input duties on inputs. to) reducing the cost of production, and freeing
2. Zero Value Added Tax (VAT) and National up more capital for investment and expansion.
Health Insurance Levy (NHIL) on inputs.
3. Low-level corporate income tax of 8 percent. Policy bottlenecks and market barriers
4. Zero VAT and NHIL on imported packaging affecting exports of pineapples from Ghana
material.
5. Zero import duties on farm machinery. Nature of policy bottlenecks and market barriers
6. Subsidies on port handling charges between
1994 and 2009. Under the Cotonou Agreement, ACP countries
7. Benefits under Free Zone i.e. Non-Payment of including Ghana are allowed to export most
Duties and Levies. of their goods including fresh produce to the
EU duty-free on a non-reciprocal basis. This
To further support the development Agreement expired at the end of 2007 and
and promotion of the export trade, the negotiations commenced to develop a new
Government of Ghana established, by Act 582 framework, the Economic Partnership Agreement
dated 04 October 2000, a fund – the Export (EPA). In order to avoid imposition of tariffs,
Development Agriculture and Investment the 27 European countries represented by the
Fund (EDAIF) – to provide financial resources for European Commission (EC) and Ghana signed the
exporters in Ghana. The core mission is to finance “Stepping Stone” Economic Agreement or the
the development and promotion of Ghana’s LIGHT EPA in December, 2007. Ghana was the
non-traditional exports on concessionary terms second after Cote D’Ivoire to sign the agreement.
that promote the growth and prosperity of export The LIGHT EPA was to ensure that Ghana
firms, improve export competitiveness and enable continued to export duty-free to the EU until the
the export sector to contribute towards the final EPA was signed. Opportunities for Ghana
economic growth and development of Ghana. are varied and depending on comprehensive
The Fund has two main facilities which can be (homework) planning, Ghana could benefit from
accessed by applicants for funding, namely the the Agreement, which could later lead to a more
Export Development and Promotion Facility (EDPF) permanent arrangement i.e. the EPA. There are
and the Credit Facility (CF).The Credit Facility equal challenges associated with the agreements,
(loans) can be accessed through Designated particularly the fact that the local economy
Financial Institutions (DFIs) with credit for more could be overtaken by events and reduced to a
than five years. The Export Development and consumer economy if immediate steps are not
Promotion Facility (EDPF) support activities of taken to secure local industries and productivity.
groups and institutions in the development and The other advantage is that the agreement
promotion of export products and provision of is a contract between the two parties and not a
services to the export sector. preferential treatment. This means it carries with
Finally, the industry benefits from the fertiliser it a greater amount of transparency, security and
subsidy program instituted by the Government the predictability of a binding contract. Secondly, it
of Ghana for the agricultural sector since 2008. offers the country the reprieve to thoroughly do its
Under this program, the government absorbs homework to enable it become competitive. The
35 percent of the retail price of three types of Ghana Government is yet to sign the final EPA. In
fertilizers, NPK, Urea and Sulphate of Ammonia its negotiations, Ghana has to be able to determine
used by farmers in the country. Farmers are the imports from the EU which contribute
Table 4.11: Determinants of export per worker

Co- Co- Co- Co- Co- Co- Co-

Variables S.E. S.E. S.E. S.E. S.E. S.E. S.E.
efficients efficients efficients efficients efficients efficients efficients

Adjusted price -2.90*** 1.23 0.12 1.19

Years with
P-Harvest 1.77*** 0.53 0.90** 0.42
Years with
MD2 1.40*** 0.36 0.82*** 0.34

Land size 0.002 0.002

Age of the
firm -0.12 0.15

Fairtrade 4.52** 1.92

Constant 12.75*** 3.15 2.75** 1.33 -1.90 2.17 5.53*** 1.73 8.37*** 3.21 3.41** 1.36 -0.38 4.07
* p < 0.10, ** p < 0.05, *** p < 0.01
Source: Authors

Table 4.12: Determinants of export volume

Variables Co- S.E. Co- S.E. Co- S.E. Co- S.E. Co- S.E. Co- S.E. Co- S.E. Co- S.E.
efficients efficients efficients efficients efficients efficients efficients effi-
cients

Adjusted price -1190.76*** 504.58 271.43 487.24

Years with
P-Harvest 1356.67*** 616.68 448.77 298.4
Years with
MD2 623.92*** 261.62 -121.36 231.73

Land size 4.31*** 1.48 -0.62 1.29

Age of the
firm -35.49 104.12
Number of
workers 9.05*** 0.52 9.05*** 2.46

Fairtrade 1203.48 970.97

Constant 4713.63*** 1855.46 -213 657.62 -1323.92 1046.5 -428.21 659.97 2155.6 2280 -345.61*** 180.78 794.6431 -781.12 1839.46

* p < 0.10, ** p < 0.05, *** p < 0.01

sector in Ghana
Chapter 4: Analysis of trade impacts on the fresh pineapple

Source: Authors
101
 102
Table 4.13: Determinant of export shares

Co- Co- Co- Co- Co- Co- Co- Co-

Variables S.E. S.E. S.E. S.E. S.E. S.E. S.E. S.E.
efficients efficients efficients efficients efficients efficients efficients efficients

Adjusted price -0.03*** 0.01 0.0022 0.0054

Years with P-Harvest 0.04*** 0.016 0.012** 0.0059

Years with MD2 0.018*** 0.0068 -0.0045 0.0043

Land size 0.00*** 0.00 -0.00003 0.00002

Age of the firm 0.00 0.00

Number of worker 0.0002*** 0.000005 0.0003*** 0.00005

Fairtrade 0.05* 0.02

Constant 0.12 0.05 -0.003 0.01 -0.039 0.022 -0.01 0.012 0.056 0.061 -0.006 0.0071 0.02 0.02 0.00019 0.025
industry levels in developing countries

* p < 0.10, ** p < 0.05, *** p < 0.01

Source: Authors

Table 4.14: Determinant of capital intensity (Land size/Number of worker)

Co- Co- Co- Co- Co- Co-

Variables S.E. S.E. S.E. S.E. S.E. S.E.
efficients efficients efficients efficients efficients efficients

Adjusted price 0.03 0.3 -0.18 0.57

Years with P-Harvest -0.14 0.15 -0.11 0.27

Years with MD2 -0.14 0.13 -0.08 0.36

Age of the firm -0.01 0.03 -0.01 0.04

Fairtrade -0.21 0.47

Constant 2.49*** 0.81 2.9*** 0.34 3.30*** 0.79 2.85*** 0.57 2.67 0.34*** 3.97 2.47
Analysis of the size and distribution of the impacts of agricultural trade at the firm and

* p < 0.10, ** p < 0.05, *** p < 0.01

Source: Authors
 Chapter 4: Analysis of trade impacts on the fresh pineapple 103
sector in Ghana

significantly to national revenue generation. These export-led economic development as reflected

items should then be pushed to later years for in the country’s Growth and Poverty Reduction
liberalization. There are also the input items which Strategy (GPRS II) and Ghana Shared Growth
serve as raw materials for domestic production. and Development Agenda (GSGDA) will also
These items could be included in the first batch of not be affected. Information received from the
items to be zero-rated. Ministry of Trade and Industry (MOTI) indicates
Civil society groups particularly the Third that plans are far advanced for the Ghana
World Network, Oxfam and indigenous ones like Government to sign the EPA and this is welcome
the Ghana Trade and Livelihoods Coalition (GTLC) news for the horticultural sector.
have advocated against signing any reciprocal and With respect to the market barriers, the cost
non-preferential trade agreement between ACP for producers and exporters as result of instituting
and the EU. systems with attendant cost in investment and
The EU is the principal market for Ghanaian human resource is quite high but beneficial
fresh produce exports. The EU is also a significant access to markets. These certifications require
market for non-traditional exports in general annual audits and often go through modifications
taking an average of between 50 percent and without full participation of exporters and
60 percent of total NTEs every year, reaching producers in third world countries. Also, exporters
USD 2.4 billion in 2011. are at the mercy of buyers’ quality assessment
With respect to non-tariff barriers, there is reports and cannot vouch for their integrity,
no formal legislation in place in the EU. The key resulting in lower than expected receipts remitted
barriers are certification standards imposed by to them as a result of classification of fruits as
supermarkets such as the wholesale GlobalG.A.P poor quality. This greatly affects the revenue base
certification and those imposed by individual of the firms, resulting in reduced cashflow and
supermarkets such as Tesco Nature Choice (TNC) reduction in the necessary investment especially in
by Tesco, Field to Fork by Marks & Spencer, etc the face of difficulties in varietal shift in response
which an exporter requires in order to access their to the market in the EU.
shops. Another issue is the lack of a framework to The industry has in response to varietal shift on
assess quality of exported fruits and the absence the market commenced various initiatives, which
of exporters’ agent on the market to conduct and have brought in its wake, synergies to offset the
verify quality reports. negative impact of this shift under the umbrella
of their association SPEG and on individual basis.
Effects of policy bottlenecks and market barriers on First is a joint program executed and managed
behaviour of firms by SPEG which is currently the umbrella body for
the pineapple exporters group. It covers various
It is to be noted that switching away from the aspects of the industry ranging from production
EU market will be extremely difficult not only to market-related issues and is often supported
because of the investments that have already by internally generated funds complemented with
been targeted at the EU, but also because donor support.
of the difficulty of accessing other markets
because of logistical and other challenges and 1. Negotiating for freighting services for
weaknesses. Horticultural exports continue to members with African Express Line (AEL),
have free access to the EU market pending the the main vessel operators responsible for
finalization and execution of the EPA. Ghana’s movement of horticultural products by sea.
pineapple share of about 4 percent in the EU These negotiations are conducted on an
is currently safe and efforts are being made to annual basis where projections are made and
expand the share. Industry disruptions have prices agreed to with the vessel operators.
been avoided since the signing of the Light 2. Spearheading and coordinating group
EPA and the likely signing of the full EPA. The marketing for members; this started in
104 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
industry levels in developing countries

March 2012. SPEG identifies buyers and joint marketing and input support. The industry
negotiates prices and payment terms. Based has seen various collaborations over the years.
on buyers’ specifications, a quality control In 2006 for example, four companies including
team visits and conducts inspection of farms Bomarts which was the initial and only source
and packhouses which meet the standards for HPW AG, a large Swiss based importer of
and specifications demanded by the buyers. horticultural products from Africa and the Far
A common brand has been developed – East, formed a marketing relationship with Jei
“Sankofa” – with seven exporters River Farms, Georgefields and Milani Ltd. to
participating. Participating exporters are given supply HPW AG. This involved sourcing uniform
a code number for identification. Current cartons with codes representing each of the four
markets are Italy, France, Denmark and the companies under a common brand developed
UK, with an amount of 1 400 MT shipped earlier between Bomarts Farms Ltd and HPW
as at the end of August 2012. The objective AG. Inspection and quality programs jointly
of this program is to promote Ghanaian funded by the four companies with the support
fresh pineapples and reduce logistic cost in of the importer were developed and meetings
procuring cartons using common branded held jointly to plan export programs through
cartons. production forecasts and projections.
3. Agronomic support through training of
their members’ personnel, coordination of Linkage between exporting firms and
certification and, in collaboration with MoFA clients
and other research institutions, carrying out
joint research on farms of members. Unlike the fresh cut fruits exported by Blue
4. Coordinating trucking services to members Skies, Ghanaian exporters of fresh pineapples
for the timely conveyance of containerized shipped on consignment basis where sales
fruits from farms to the port of Tema, were determined after sales of products on the
resulting in lower cost than if individual wholesale market and dependent on the demand
members negotiated on their own. This and supply situation prevailing at the time of
service was started in 2011 with about sale. For the past six years, most exporters have,
ten exporters currently participating in the been able to access the high end of the market.
scheme. Members pay for the services directly This has resulted in bulk of sales on a minimum
to the haulage firm with SPEG providing a guarantee price basis which is negotiated
guarantee. between exporters and importers in the EU but
5. Coordinating and organizing supply of which also imposes on exporters, a higher level of
fertilizer, plastic mulch and packaging cartons professionalism in agreeing on specifications and
for members. This scheme commenced in projection of supply over a longer period.
2010 procuring original inputs, better pricing This has improved the ability of exporters to
and receiving inputs at required times. negotiate with importers in the EU, to a certain
Payments are currently being made through degree, though it must be pointed out that in
export receipts from the group marketing terms of preference, most importers offer a better
schemes. Goods are stocked in designated premium to imports from Costa Rica than from
warehouses of members with an officer Ghana due to the former’s consistency in supply,
designated to manage the scheme. product quality and huge export volumes of fresh
pineapples.
The second form of support is the promotion Despite agreement on a fixed price basis,
of various levels of collaboration between importers often during periods of supply glut look
exporting firms covering various aspects of the for reasons to avoid their obligations on prices.
sector. Collaboration is on-going on agronomic This takes the form of raising quality issues which
practices and harmonisation of fertilizer regimes, in periods of demand deficits is not an issue. To
 Chapter 4: Analysis of trade impacts on the fresh pineapple 105
sector in Ghana

overcome this situation, exporters in an effort to promoting social programs for workers and those
strengthen their position have done the following: living in their communities. Some of the benefits
to workers, their families and friends in the rural
• Exporters working individually and under the areas have been as follows:
umbrella of SPEG with a host of importers
who are specialised in taking all types of • Provision of toilet facilities in their communities.
specification vis-à-vis size, colour and brix. • Supply of computers and books for schools.
• Participating in group marketing to use • Credit schemes to assist workers.
increased volumes as a leverage to attract • Institution of scholarship schemes to support
major importers who need a critical mass of brilliant but disadvantaged children.
volume to economize on their infrastructure.
• Improved the quality of their exported products Estimates from 2006 to present indicate a
through proper post-harvest management. premium of USD 1 000 000 accrued to workers
of Fairtrade certified companies, their families
Whilst exporters conduct regular meetings and friends in their communities for their
with their importers in EU in the form of visits, the developmental and social programs. Another
Fruit Logistica61 which is held in Berlin, Germany, strategy has been the participation of members
remains the major fruit and vegetable trade show of SPEG in joint marketing using a standardized
in Europe. Most Ghanaian exporters do visit the carton for all participants resulting in savings
trade show on an annual basis to engage their of five euro cents per carton (compared with
importers and have a better understanding of sourcing individually). In fact, through SPEG, an
new trends in the industry. umbrella institution, companies were able to
negotiate with logistic companies and obtained
Past experiences of exporters’ strategies preferential tariffs and rates.

One of the key strategies employed by the major

exporters of pineapple has been to acquire
Fairtrade and other certification. This required
large initial investments in infrastructure, trainings,
and adherence to compliance criteria such being
first buyer at FOB. But at the end, it paid off as it
gave exporters access rather exclusive markets. Figure 4.8: Profitability analysis Ghana vs. Costa Rica HA
Currently, six of the major fresh pineapple
exporters are Fairtrade certified with the largest,
Golden Exotics Ltd, in the process of acquiring
its certification. This strategy of exporting firms
in obtaining and selling fruits under Fairtrade
label which has 20 percent higher prices in
comparison to conventional fruits have reduced
to an extent, the negative effect on turnover
of reduced volumes as a result of the shift of
variety from Smooth Cayenne to MD2. This was
confirmed by all the exporters interviewed during
the development of this report during our field
visits. One major benefit of Fairtrade has been
the premium of four euro cents per kilo paid for

http://www.fruitlogistica.de/en/
61 Source: Authors
106 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
industry levels in developing countries

Table 4.15: SWOT analysis of the pineapple industry in Ghana

Strengths: Weaknesses:
• Trained workforce with a long tradition of pineapple • Low productivity and yields of producers
cultivation • Weak financial base of exporting firms resulting in
• Excellent post-harvest facilities on commercial farms and collapse of some which ultimately affecting exported vol-
a state of art facility at the Tema port umes and cost of logistics and agric inputs due to inability
• Very good logistics for transportation available to meet economies of scale
• Presence on the market since the nineteen eighties and a • Lack of competitively priced long term capital for expan-
noted leader for air freighted fresh pineapples sion in Ghana

Opportunities: Threats:
• Counter balance and provide importers with a major • Emerging supplies from south and central America and
source of supply to those coming from the south and other countries in West Africa , re-emergence of Cote
central America to mitigate risk in the event of disrup- D’Ivoire and new entrants such as Nigeria, Liberia
tions • Issues of weather and rainfall patterns that can affect
• New market niches in Europe for certified pineapples production of pineapple affecting yields. This calls for
especially when most of the exporters in Ghana are huge investments in irrigation with attendant cost
indigenously owned • Difficulties of some existing companies which if collapses
• Building up productivity to what exist in Costa Rica where will reduce market share but also result in cost increase of
producers/exporters have reached their peak in terms of logistics due to reduced volumes
yields and efficiencies. • Possibility of new varieties resulting in varietal shift in
demand
• The inability of the government of Ghana to sign the EPA
resulting in imposition of taxes reducing competitiveness
Source: Authors

has developed the relevant human resource

4.6 Strengths, weaknesses, to manage the sector demonstrated by the
opportunities and threats large presence of local entrepreneurs, logistic
infrastructure to facilitate production and exports
(SWOT) analysis of fresh pineapples. Notwithstanding the strength
of the industry, productivity and yields are low
Identifying Ghana’s comparative advantage in in comparison with Costa Rica coupled with
the pineapple export sector will require detailed adverse external macro environment in Ghana
comparison with the largest exporter of fresh such as high interest rates and lack of long-term
pineapples to Europe which is Costa Rica. capital. This situation is further aggravated by
As indicated earlier in the report, Ghanaian environment challenges and re-emergence of
exporters have since 2004 invested in Cote d’Ivoire and emergence of Nigeria. Whilst
infrastructure such as packhouses with installed this is worrying news to the industry in Ghana,
modern packing lines and cooling systems for the long history of pineapple production in Ghana
quality control similar to pack houses in Costa coupled with importers in Europe to counter
Rica. Also, agronomic practices have improved balance over dependence on fruits from Latin
reflecting in increased yields of 60 MT per hectare America will mitigate and provide Ghana the
and an exporting yield of 65 percent which, opportunity to take advantage of this evolving
though far lower than that for Costa Rica, which situation.
is about 120 MT per hectare, has an exporting
yield of about 85 percent. Table 4.15 summarizes
strengths and weakness of the pineapple industry
and opportunities and threats to the industry.
Due to the long history of production, Ghana
 Chapter 4: Analysis of trade impacts on the fresh pineapple 107
sector in Ghana

However while size matters, how the firm/

4.7 Conclusions and farm is organized also matters. Farmapine GH
recommendations Ltd, working with close to 450 smallholders
organized under five cooperatives was the
In 2004, it was estimated that Ghana earned model for organizing small-holders farmers into
an amount of USD 23 million from exports of large entities. Based on a price of 11 US cents
fresh pineapples to the EU, its major market. per pineapple unit offered by Farmapine to its
In 2011, it is estimated that export receipts has outgrowers, it estimated that its outgrowers
reduced to USD 20 million. Based on pre 2004 between 1999 and 2004 realized direct sales
export performance at annual growth rate of of USD 3.1 million. In widening net gains by
22 percent, Ghana was projected to export about smallholder, it is estimated that they obtained
250 000 MT of pineapples by 2011 with an about USD 3.8 million from supplying pineapples
estimated foreign exchange receipt value of about to fresh pineapple exporters in just 2004. Under
USD 100 million. the MCA Program, close to over 1 600 farmers
However the pineapple export sector has been in Akuapim South district were identified and
affected by varietal shift in demand in Europe, registered as outgrowers formally engaged in the
a shock that had a devastated the industry. production of pineapples. However Farmpine was
Ghana has lost its market share of fresh exports unable to withstand the MD2 shock.
which was 10 percent in 2004 and 4 percent It is clear that while the bigger producers
in 2011 whilst during the period, imports for have weathered the MD2 shock, they are still
fresh pineapples by sea in the EU has increased. very uncompetitive. The productivity of Ghana
Results obtained from data analysed indicated farms is 60 T/Ha compared to 120 T/Ha for Cost
that varietal shift from SC to MD2 variety of Rica which also enjoys a much higher quality as
pineapples which peaked in 2005 had negative attested by export yield of 85 percent compared
impact on pineapple exports from Ghana well to 65 percent for Ghana.
beyond 2005. A strategy that targets high end niche markets
The biggest loser has been the smallholder is the most viable alternative for the Ghana export
sector. The shift in demand to MD2 in preference sector to overcome the huge disadvantage in
to Smooth Cayenne (SC) variety of pineapple also productivity. Indeed, the biggest winners have
resulted in the displacement of a great number been the niche marketers. Our analysis shows that
of smallholder farmers. By 2004, it is estimated fairtrade certification has been a key determinant
that smallholders contributed about 50 percent to of good export performance and indeed the top six
export volumes. Our estimates based on review of large exporters are fairtrade certified while fresh cut
the sector through discussions with outgrowers, pineapple exporters have seen sales volumes have
and other stakeholders indicate a huge reduction increased threefold the period after the MD2 shock.
in smallholders engaged in commercial pineapple The result of better performance of niche marketers
production. has been the fact that fall in receipts of pineapple
Large-scale commercial sector was largely exports has been less than fall in volumes.
able to weather the storm. Therefore, size It goes without saying that infrastructure
matters for export competitiveness. The number and finance for the sector are critical going
of workers had a positive relationship with forward. Every hour of delay in cooling can lose
export share of the firms and was very significant shelf life by one day in EU (Fould and Gough
at 1 percent level. Responsiveness (flexibility) is 2008). Further estimates puts fruits lost due to
also key. Those firms that converted production rough roads at 10 percent. Some intervention
from SC to MD2 variety of pineapple early, specific to pineapple industry include support in
acquired Post-Harvest infrastructure maintained development of cold chains from farm to port. Tax
their export share and had a heterogeneous breaks and subsidies on refrigeration equipment is
impact on export volumes. a potential intervention.
108 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
industry levels in developing countries

More innovative financing models are needed. products will be a key success factor for years
The current model under Export Development to come. Therefore highly integrated producers
Agricultural and Investment Fund (EDIAF) needs to like Del Monte, Dole etc. will continue to define
be re-examined. The model which provides loans the industry standards forcing small players to
to agricultural export sector fails to address the continue playing catch up. Their presence helps
critical market failure that makes bank not lend to open markets and also develops export logistics
agricultural sector in the first place. Under current that become available to industry as a whole.
arrangement EDIAF provides funds at subsidized The Ghana pineapple industry relies on banana
interest rates (12.5 percent) but the loans are export logistics developed by Companie Fruitiere
administered through commercial banks which (a subsidiary of dole).62
collect 10 percent of the interest as fees (leaving However attracting the larger global fruit
2.5 percent for EDIAF). However the banks are companies to set-up shop in Ghana will be an
asked to bear the full risk. Banks are reluctant to uphill struggle due the difficulty of acquiring an
lend EDIAF funds as they can lend their own funds appropriate piece of land that is big enough to
at high interest rates which is commensurate attract such concerns. Developing a package of
with the risk they are taking. Banks thus tend incentives (including needed infrastructure and
to undersell the EDIAF facility. EDIAF has made sophisticated financial sector) that will attract
the wrong assumption that liquidity is that issue can be politically contentious63 and costly. This
while interviews with banks indicates that banks has all the same been done, as the presence of
have cash. The challenge is the risk that comes Companie Fruitiere (Golden Exotics) attests, and
to lending to the sector and EDIAF should be this path could therefore be pursued. However,
subsidizing the risk. A rethinking of the funding this can only be a longer-term strategy.
model so that EDIAF take a more venture capitalist In the short to medium term, supporting
approach is needed. existing commercial farms to become bigger
Going forward, Ghana should adopt a two and more competitive in niche markets offered
pronged strategy mainly targeting niche export by fairtrade and organic certification seems to
markets. be the best strategy going forward. This can be
implemented by building capacity in the sector
Support large scale commercial farms through training, and by support in defraying the
targeting organic and fairtrade market huge costs of going through the certification and
niches auditing processes.
The government needs to upgrade the existing
Ghana should put more effort in supporting the standards authority so that they can have the
emergence of large scale pineapple growers. globally recognized credentials for certifying.
It is clear that size and flexibility will continue Export Development Agricultural and Investment
to matter as the export markets continue to be Fund (EDIAF) should develop special funding
dominated by a few supermarkets that demand facilities to help firm become certified as organic
consistent supply and flexibility. or fairtrade.
Thus to stay competitive in export markets and
be responsive to changing demand, the presence
of large diversified multinational fruit companies
62
Note that Golden Exotics, has built the banana export sector
is needed. Only a few supermarkets and retailers from almost nothing (first exports in 2006) to become the one of
define the market for fruits in Europe. When the leading exports commodity. This is a testimony to the power
of integrated global fruits companies. Golden is established by
Tesco, Marks and Spencer, and the other chains Companie Fruitiere which is 40 percent owned by Dole.
in Europe began demanding MD2, the Ghanaian
exporters, and the industry as a whole went 63
There are already complaints that incentives (tax holidays and
duty exemptions in imported inputs and equipment) given to
into a tailspin. Ability to work closely with
attract cocoa processing companies have been too generous
these chains in defining standards or designing and given the benefits they bring.
 Chapter 4: Analysis of trade impacts on the fresh pineapple 109
sector in Ghana

Support development of fresh cut Standards Authority can be accredited

pineapple exports industry to international standards, part of this
cost can be defrayed. Ghana labelling
Perhaps the most dynamic sector in the wake of requirements are higher than European,
MD2 crisis was the development of a fresh cut however, GSA is not very rigorous in
fruits sectors using mostly the SC variety and testing the packaging containers.
sourcing from small-scale farmers. This sector has
the best chance of keeping smallholders in the • Logistics
export sector.
Therefore, continued help to revamp the - Traffic in Accra can cause serious delays;
small-scale sector is needed. As fresh cut sector there is potential loss of EU 15 000 if a truck
can use the SC variety that smallholder sector is does not get to airport on time (plus cost of
conversant in growing, the greater effort will be unhappy customers). Police escort in case of
in building trust between small producers and traffic emergency can help.
processors as the past experience that saw many
smallholder left without market of SC has created - There is only one cold room at the airport
a level of mistrust. There is need for development and this is set at one temperature yet
and enforcement of contract models and some different fruits require different temperature
kind of insurance to shield smallholders from settings for optimum preservation for export.
opportunistic behaviour of processors. Some Thus, expansion of cold storage facilities at
farmers claim that when processors have enough the airport is needed.
fruit they tend to have a higher level of rejection
rate of fruit supplied by smallholders so that they Limitations and future research
do not have to pay. An independent testing and
measuring body is needed to guarantee farmers The present analysis sought to evaluate the
get their due and to reduce mistrust. impact of trade on Ghana pineapple exports.
Selling fresh fruits to supermarkets chains has Unlike previous analysis, the present work stands
very strict and exacting requirements to guarantee out by its rigorous analysis using firm level data.
product safety. However, interviews with However, the quality of the data prevented
stakeholders indicate that some the challenges the inclusion of all possible determinants in
facing the sector include: the analytical model. In fact, the trade impact
was estimated by comparing trade outcomes
• Testing and Certification (to sell to European between pineapple exporting and non-exporting
markets) firms before and after the year of the trade
shock. However, ignoring the extent to which
- It costs more to get a thermometer non-exporting firm interact with exporting ones
certified by Ghana Standards could have undermined the robustness of the
Authority(GSA) than it cost to buy a new analytical results. Some non-exporting firms could
thermometer in Europe. be indirectly exporting by supplying pineapples
to exporting firms and thus may be victim of
- GSA collects samples and stores them at second order trade effects. Unfortunately, limited
room temperature and it takes 21 days to information on the different actors involved in
get results, yet the products need to be each firms supply chain did not fully reveal these
refrigerated and have a 7 days shelf life. effects.
Second the lack of reliable data on smallholder
- Yearly certification from EU is required pineapple farmers involved in exports limited the
which costs about EU 10 000 to paper from expanding its trade impact analysis to
bring auditors from Europe. If Ghana pineapple producers. The lack of flexibility among
110 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
industry levels in developing countries

smallholder farmers to quickly switch to MD2 has Cassidy, M. & O’Brien, D. 2005. Export
been identified as one of the main reasons behind Performance and Competitiveness of the Irish
the collapse of the industry. The data limitation Economy 2005. Quarterly Bulletin No. 3.
obscures the determinants of this lack of flexibility
which could have guided the design of applicable Dixie, G & Sergeant, A. 1998. The Future of
policy deliberations. Also the change in the market the Ghanaian Horticultural Industry. Accord
structure of exporting firms imposed greater Associates, 1998.
oligopolistic pressures on smallholder farmers
who in exchange saw their influence in price Easterling, T., Fox W.J. & Sands B.F. 2008.
determination vanished. In the past farmers had a Factors affecting economic growth in Ghana:
choice between a large number of exporting firms. Bases for a new USAID approach to economic
But now their bargaining power has dropped along growth. Sibley International
with the reduced number of firms and the data
was too weak to capture this effect. Federation Associations of Ghanaian
For future research, evaluation of innovative Exporters. 2009. Market intelligence report
activities that firms do to reduce their vulnerability in pineapple. Federation Associations of
to trade shocks is important. Innovation and Ghanaian Exporters and United States Agency
adoption of new technologies are one of the for International Development 2009.
most effective ways to keep a business strong and
resilient against shocks. It is therefore important Institute of Statistical Social and Economic
to carefully study these innovative activities and Research. 2010. State of the Ghanaian
initiatives and measure the extent to which they Economy in 2009. Institute of Statistical Social
have helped existing pineapple firms weather the and Economic Research Accra, 2010.
effect of trade shocks and why other firms did
not adopt them. For the case of pineapples, all of Jaeger, P. 2008. Ghana exports horticulture
the exporters now produce their own pineapples cluster strategic profile study-scoping
and no longer rely on smallholder farmers. Is this review. Prepared for Worl Bank Sustainable
an optimal adaptation strategy? What can policy Development Network (WD-SDN), Africa
do to allow smallholders to re-enter the export Region Agriculture and Rural Development
market? These are key questions to be answered. (AFTER), Ministry of Food and Agriculture
(MoFA), and all ACP agricultural Commodities
Programme (EU-AAACP) 2008.
References
Ketels, C. 2010. Export Competitiveness: Reversing
Afari-Sefa V. 2007. The dynamics of horticultural the Logic. Harvard Business School Working
export value chains on the livelihood of small Knowledge weekly newsletter.  Harvard
farm households in Southern Ghana. African Business School, 2010.
Journal of Agricultural Research Vol. 2 (9), pp.
435- 440. Korboe, K. 2010. Impact of Donor Support on
the Horticulture Export Sector in Ghana 1994
AMEX International. 2003. An Appraisal of – 2009. Thesis submitted to the University
the Ghana Pineapple and Mango Industries: of Ghana towards award for M.A. Economic
Opportinities and Challenges. USAID Ghana Policy Management
Trade and Investment Programme, Accra 2003.
Ministry of Food and Agriculture. 2007. Food
Barrett, H. & Browne, A. 1996. Export and Agriculture Development Policy (FASDEP
horticultural production in sub-Saharan Africa. II) Accra : Republic of Ghana, 2007.
The incorporation of the Gambia, 1996.
 Chapter 4: Analysis of trade impacts on the fresh pineapple 111
sector in Ghana

Ministry of Food and Agriculture. 2004. Voisard, J.M. & Jaeger, P. 2003. Ghana
Horticulture Export Industry Initiative Detailed Horticulure Sector Development Study. World
Work plan. Ministry of Food and Agriculture, Bank, 2003.
Accra 2004.
Whitfield, L. 2010 Pineapple Export Industry
Sackey, H.A. 2001. External Aid Inflows and the in Ghana. Production and Poverty research
Real Exchange Rate in Ghana. The African programme. Elites, Accra, 2010.
Economic Research Consortium, Nairobi 2001.
Whitfield, L. 2011. DIIS Working Paper 2011:29
Sesay, A.A. 2006. The Expansion of a Pineapple Political Challenges to Developing Non-
Plantation in Ghana. Eastern Mediterranean Traditional Exports in Ghana: The Case of
University Cyprus, 2006. Horticulture Exports

Technoserve. 2004. Study of Mango Industry Winogrond, W. Barinkova S., Martirosyan, K.,
in Northern Ghana Technoserve, Z 75 Volta 2006. Fresh Produce Market Competitiveness
street Accra , 2004. Study. Abt Associates Inc. Suite 600, 4800
Montgomery Lane, Bethesda, MD 20814-
Todaro. M.P. & Smith, S.C. 2008. Economic 5341, 2006.
Development . Addison - Wesley, 2008. 10th
Edition.

United Nations Conference on Trade and

Development. 2008. Export competitiveness
and development in LDCs: policies,issues and
priorities for least developed countries for
action. United Nations Conference on Trade
and Development, Geneva, 2008.
 Chapter 5: Market structure and distribution of benefits from agricultural exports: 113
The case of the Philippine Mango Industry

CHAPTER 5:

MARKET STRUCTURE AND DISTRIBUTION OF BENEFITS FROM

AGRICULTURAL EXPORTS: THE CASE OF THE PHILIPPINE
MANGO INDUSTRY *

5.1 Introduction Aims and scope

Overview The case study approach will rely on quantitative

and qualitative information, derived from
The Philippines derives considerable export desk review, focus group discussions, and key
revenues from agriculture. As of 2011, agricultural respondent interviews, using both structured
exports reached USD 5.9 billion, equivalent questionnaires and informal question guide. The
to 10.7 percent of total exports. Among food objectives are three-fold:
exports, the single biggest source of earnings is
edible fruits, valued at USD 940 million. 1. Characterize the mango export industry at
The tropical fruit industry in the country has the institution, industry, and firm levels.
had a long history of globalization, both in terms of 2. Provide qualitative analyses of the main
trade and foreign direct investment. Globalization determinants of the level and distribution of
critics have long suspected that the benefits of the trade benefits among firms.
world trading system are confined to only a few 3. Undertake quantitative analyses of the main
large companies, i.e. transnationals and their local determinants of the level and distribution of
allies. On the other hand the benefits from the trade benefits among firms.
export market may turn out to be widely diffused
over the supply chain, reaching numerous small Subject to data availability, characterization
and medium enterprises and growers. A study of and qualitative analysis would cover the
the role of market structure in the distribution of following:
export benefits would illuminate the contribution
of the agro- export industry in inclusive growth. • Identify the size of the tropical fruits
This study examines the case of the Philippine export industry (in comparison with
mango industry, the third largest fruit export other agricultural exports); sources of the
of the country after banana and pineapple. A export ability of the industry (regulations,
diverse set of market players are active in the comparative advantage, or abundance in
export trade. The mango industry is a case study factor endowment).
of a dispersed industrial organization, in contrast • Describe the industry and its firms and their
to banana and pineapple, which tend to be link to the country’s agricultural sector and
dominated by large agribusiness interests. economic activity.

* This chapter was written by Roehlano M. Briones (Senior Research Fellow, Philippine Institute for Development Studies), Peter A.
Turingan, (Supervising Legislative Staff Officer, Senate Economic Planning Office, Republic of the Philippines), and
Manitra A. Rakotoarisoa (Economist, Trade and Markets Division, FAO).
114 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
industry levels in developing countries

• Identify exporting firms; their input and 5.2 Philippine mango industry:
output markets; degree of integration; input review of past trends and
sources; market destinations; market shares;
• Determine the level of industry concentration; studies
level of competition among firms; market
power; entry and exit rates. Trends
• Identify the exporters’ strategies to ‘win’
over the importers and the strategies when The Philippine mango industry has been
dealing with inputs and service providers; the consistently expanding, judging by trends in area
size and distribution of the trade gain. harvested (Figure 5.1). From below 80 000 ha
• Document past experiences, if any, when in 1990, area has been increasing, approaching
these exporters’ strategies worked and 200 000 ha by 2009. Initially, yield was also
effectively enhanced trade gains for exporting increasing, from 6 t/ha in 1990 to 8 t/ha in 1997,
firms and influenced the distribution of trade before plummeting to current levels of only 4
benefits. t/ha. Aggregate production reached 1 million
• Discuss all possible factors, including tonnes in the late 1990s (Figure 5.2), and again
organization and conduct, that influence the in 2007, before dropping to below 800 000
level and distribution of trade benefits among tonnes in 2011. Climate and pests remain major
the heterogeneous firm. drivers of production; in 2008 for instance the
• Describe how trade benefits spill from drop in production was traced to typhoons,
the trading firms to their upstream or wind damage, anthracnose, bacterial wilt, fruit
downstream domestic links. flies, and leaf hoppers, according to Bureau of
• Provide implications of the findings for the Agricultural Statistics or BAS (2008).
distribution of potential trade gains on The climatic conditions for mango production
upstream and downstream links. are summarized as follows (Bally, 2006, p. 7):

Accordingly, the following will be discussed in Mango grows over a wide range of
relation to the quantitative analysis: frost-free climates. The trees produce
best in climates that have a well defined,
• Determine what influences the level and relatively cool dry season with high heat
distribution of trade benefits among firms and accumulation during the flowering and fruit
industries; particular focus will be on the role development period. Rain or free moisture
of organization and behaviour of trading firms. (high humidity, heavy dew, and fog)
• Discuss the implications of the findings for during the flowering and fruiting period is
enhancing the ability of trading firms and conducive to the development of fungal
their upstream and downstream links to diseases that cause flower and fruit drop.
capture trade benefits and opportunities.
Climate and geography of the Philippines is
The remainder of the report is organized as described in Box 5.1. Luzon possesses the climate
follows: Section 2 characterizes the industry and ideal for mango growing; according to Figure 5.2,
based on review of industry trends and previous Luzon is by far the largest producer, with more
research. The case study method is described in than half of its output coming from Ilocos Region.
Section 3, which discusses valid and tractable The bulk of Luzon’s output is harvested during
indicators of trade benefits that arise from the the hot dry season of March to May. Year-
data. Key findings are presented Section 4. round production is obtained from Visayas and
Section 5 summarizes and discusses implications Mindanao. Mindanao has the unique advantage
for enhancing ability of firms to capture benefits of being mostly free from the typhoons, which
from exporting. routinely strike about twenty times a year in the
 Chapter 5: Market structure and distribution of benefits from agricultural exports: 115
The case of the Philippine Mango Industry

Figure 5.1: Area (in ‘000 ha) and yield (t/ha) of mango, Figure 5.2: Mango production in the Philippines by
1990 – 2010 island group, 1990 - 2011 (‘000 t)

9 200 Mindanao Other Luzon

Yield Area
1200
8 Visayas Ilocos Region
7 160 1000
6
120 800
5
4 600
80
3 400
2 40
200
1
0 0 0

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010

Source: CountrySTAT Source: CountrySTAT

Box. 5.1
The Philippines

The Philippines is divided into three major island groups: Luzon, Visayas, and Mindanao, respectively: North, Central, and Southern
Philippines. The north and central part is affected by monsoon rainfall beginning about May – June up to October – November, with a
dry season from December to April. The northwestern part has a more pronounced dry and wet pattern compared to the rest of the
country. The eastern part has no dry season but has a pronounced rainy season in December to February. Mindanao is characterized by
uniform rainfall year-round. The rainy season is accompanied by typhoons (averaging twenty per year); which pass through a typhoon
belt that basically bypass Mindanao.

Each island group is divided into administrative regions, the Ilocos Region highly suitable for mango growing. The list of regions of
the Philippines is as follows:

LUZON
NCR: National Capital Region (Metro Manila)
CAR: Cordillera Administrative Region
Region I: Ilocos
Region II: Cagayan Valley
Region III: Central Luzon
Region IVA: CALABARZON
Region IVB: MIMAROPA
Region V: Bicol Visayas
Region VI: Western Visayas - Region VII: Central Visayas
Region VIII: Eastern Visayas Mindanao
Region X: Northern Mindanao
Region XI: Davao
Region XII: Central Mindanao (SOCCSKSARGEN)
Region XIII: Caraga
ARMM: Autonomous Region in Muslim Mindanao

Source: http://kidlat.pagasa.dost.gov.ph/cab/climate.htm; Bally (2006)

116 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
industry levels in developing countries

rest of the country. Farming practices

Exports of mango by volume took off in the
1990s (Figure 5.3). Even at peak exports, the Mango production is input-intensive (Table 5.1).
domestic market still absorbed 95 percent of Farm inputs take up nearly a third of production
domestic production. Note that mango exports cost; imputed costs of labor and capital account
followed overall trends in production in the for another third. Profit per kg is P10.00.
1990s; however in the 2000s, mango exports fell Production is typically small-scale; in the last
off quite steeply in terms of volume. agricultural Census (2002), average farm size
A different story emerges however from nationwide was only 1.64 ha (Figure 5.5). There
considering export value (Figure 5.4), which are however large variations across regions: the
suggests a shift from exports of fresh mango largest farm sizes are found in Mindanao (in the 2
towards the more rapidly growing processed to 4 ha range, except for Autonomous Region in
sector (Digal and Concepcion, 2004). There is Muslim Mindanao or ARMM). Farm sizes in Ilocos
no clear declining trend in the 2000s, but rather Region (1.2 ha) are even lower than the national
one of fluctuation; the year of peak production average.
(2007) does not coincide with the highest A mango industry survey reported in BAS
export earnings, which in fact peaked in 2011, (2002) covers 200 farms, found in all the island
approaching USD 100 million. The country’s groups (Table 5.2). Nearly three-quarters have
mango industry has achieved such spectacular farms of under 1 ha, while only 6 percent farm
growth owing to a robust world market together above 5 ha. The vast majority (over four-fifths)
with a shift in higher value products. own their own mango farms, whereas tenants
By destination, the biggest markets have account for only 12 percent.
traditionally been Japan followed by Hong Kong. Farmers enter into three main types of
In the last few years though, export markets have contracts (De la Cruz, 2007):
diversified quite dramatically, with the US now
being the biggest market destination, though Leasehold – the owner agrees to lease trees to a
Japan and Hong Kong continue to command producer, who undertakes all commercial activities
significant export shares.

Figure 5.3: Area (in ‘000 ha) and yield (t/ha) of mango, Figure 5.4: Mango production in the Philippines by
1990 – 2010 island group, 1990 - 2011 (‘000 t)

60000 50000 Other countries Japan

Mangoes, mangosteens, guavas
50000 Hong Kong, China
40000
United States
40000 of America
30000
30000
20000
20000

10000
10000

0 0
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
1962
1966
1970
1974
1978
1982
1986
1990
1994
1998
2002
2006

Note: Mangosteen and guava exports are negligible

Source: FAOStat Source: Trademap (www.trademap.org)
 Chapter 5: Market structure and distribution of benefits from agricultural exports: 117
The case of the Philippine Mango Industry

Table 5.1: Production cost of mango, 2010

Cost per kg, in pesos Share in total (percent)

Total cost 14.7 100.0
Cash cost 8.8 59.8
Farm inputs 4.8 32.9
Workers 2.5 16.7
Fuel, utilities 0.4 2.8
Other fees 1.1 7.4
Non-cash costs 1.0 6.7
Imputed costs 4.9 33.5
Family labour 1.1 7.5
Others 3.8 26.1
Note: yield = 4,359 kg per ha; farmgate price is P24.76 per kg. In 2010 the exchange rate averaged 45.11 pesos
Source: CountrySTAT

Table 5.2: Distribution of mango farmers by size of farm and type of tenure, 2001 (percent)

Below 1 ha 1 to 4.99 ha Above 5 ha

Size of farm
74 20 6
Owner Tenant/Lessee Other tenure
Size of tenure
81 12 7

Source: BAS (2002)

Figure 5.5: Average farm size of mango farms by from spraying to harvesting and marketing. The
region, 2002, in ha renter/producer shoulders all input and marketing
costs. Payment per tree is estimated based on
age and size of tree. Payment may be done in
Philippines installment, i.e. 50 percent before fruiting, and
NCR
CAR 50 percent after harvest. For larger farms (over
Ilocos twenty trees) the terms of lease may be governed
Cagayan Valley
Central Luzon by a written agreement.
Calabarzon
Mimaropa
Bicol Output-sharing – the farmer agrees to share
Western Visayas
Central Visayas output with a contractor; the latter shoulders
Eastern Visayas
Zamboanga production inputs starting from spraying up to
Northern Mindanao harvest. The sharing is typically 50:50; 60:40 in
Davao
Central Mindanao favour of the contractor may also be agreed if the
Caraga
ARMM location or production environment of the farm
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 is unfavourable (i.e. entails higher cost per kg for
the contractor).
Source: Census of Agriculture and Fisheries (NSO)
118 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
industry levels in developing countries

Contract buying – the contractor simply purchases most common route is through a contract buyer.
fruit from the farmer at pre-determined rates; From the buyer the product passes through
however the buyer is not involved in production. either a wholesaler-retailer, or wholesalers, who
The agreement may be reached at the fruiting then send the product to a retailer or to an
stage, or around harvest season. exporter.
The contracts differ in risk exposure and One complication is the introduction of
asset protection. Leasehold offers the least risk processing (dried mango, mango juice, mango
to farmers, but also the least protection of their pulp), which caters to the export or domestic
assets – the lessor may “abuse” the trees by over- market. Furthermore between the farmer and
spraying, while the lessee has difficulty monitoring retailer there may be multiple layers of traders as
such behaviour. Contract buying offers maximum described in BAS (2002). The categories are:
protection for the trees and land, but also shifts
risk entirely on the farmer. Output sharing appears • Assembler: focuses on procurement from
to be the middle ground to balance risk and asset farmers or other traders; typically sells to
protection, and has emerged as a “very popular” one (primary) buyer. Can be distinguished
form of production contract. by geographic level of sources: barangay,
municipal, provincial, regional, interregional.
Value chain • Distributor: focuses on selling to multiple
buyers. Can be distinguished by size, i.e. small,
Summarizing previous studies, Digal (2005) medium, and large distributor.
describes the various marketing channels for the • Assembler-distributor: equal attention to
mango value chain (Figure 5.6). The farmer may procurement and sales. Can distinguish
sell directly to an exporter or even the consumer both by level of procurement operation,
(especially for small local markets); however the and size.

Figure 5.6. Marketing channels for the mango value chain

Consumer

Retailer Exporter

Wholesaler

Wholesale Retailer

Contract Buyer

Farmer

Source: Adapted from Digal (2005)

 Chapter 5: Market structure and distribution of benefits from agricultural exports: 119
The case of the Philippine Mango Industry

Digal (2005) provides a simple breakdown of highlights the role of the export trader, as their
the price margins for mango, with a comparison pricing is higher compared with that of the local
with the export price (Table 5.3). Note that the trader, inducing growers to improve the quality
export price has only a slight edge over the of their produce to export grade. The survey is
retail price. The price differential accounts for limited to Davao City, Digos City (in Davao del
27 percent of the retail price and as much as Sur province), and Island Garden City of Samal
44 percent of the wholesale price. (IGACOS, an island accessible by short boat trip
The differentials may be explained at least from Davao City). The net margins by stage of the
in part by marketing costs, described in detail in marketing chain are summarized in Table 5.5. In
BAS (2002) based on a marketing cost survey. Davao City, retailers earned the highest margins;
Marketing costs incurred by traders within a the city hosts large markets such as Bankerohan.
province (transportation, labor, materials, etc.) In Digos City meanwhile, wholesalers earn the
are shown in Table 5.4. The shares appear to highest net margin owing to proximity to mango
be sizable relative to the farmgate price. Davao growers in Davao del Sur, reducing their transport
City has the highest cost owing to the airplane costs. In IGACOS, it is the farmers which earn
fare for transport to Metro Manila markets. a higher net margin compared to retailers (no
Pangasinan cost is high owing to high cost of wholesalers operate in the area). The markets
depreciation and labor; for Guimaras the largest stalls in the area are still small; most of the
cost components are miscellaneous expenses, mangoes are shipped directly to Davao City and
materials, and labor. other neighboring provinces.
A more recent survey on marketing costs is
reported in Sarmiento et al (2012). Their study

Table 5.3: Price margins for mango by market level, in percent, 2002

Price USD Margin (over previous level)

Export (f.o.b.) 0.84 not available
Retail 0.81 27
Wholesale 0.59 44
Farm 0.33 not applicable
Source: Digal (2005)

Table 5.4: Marketing costs and farmgate price of mango in selected provinces, in P/kg (2001)

Cash cost Non-cash cost TOTAL Farmgate price

Pangasinan, Ilocos 5.25 3.25 9.02 21.25
Guimaras, Eastern Visayas 5.77 3.25 9.02 24.51
Iloilo, Eastern Visayas 4.76 0.40 5.17 20.33
Cebu, Central Visayas 3.37 0.10 3.47 22.74
Davao City, Davao 10.02 0.01 10.03 14.41
Davao del Sur, Davao 4.16 0.04 4.2 21.35
General Santos, SOCCSKSARGEN 3.29 0.08 3.37 13.59

Note: The exchange rate in 2001 was P51/$1

Source: BAS (2002)
120 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
industry levels in developing countries

Table 5.5: Net margins by stage of marketing chain, selected locations

NPrice Net margin

(P/kg) (P/kg)
Davao City Farmer 21.66 2.83
Wholesaler 40.00 14.96
Retailer 50.00 19.72
Digos City Farmer 22.83 6.35
Wholesaler 35.00 17.35
Retailer 52.50 16.15
IGACOS Farmer 20.60 8.93
Wholesaler n/a n/a
Retailer 45.00 4.41

Source: Sarmiento et al (2012)

Export business mid-2000s (Pearl2 Project, 2004). The industry is

composed of a variety of products including dried
Aveno and Orden (2004) describe the business of mango, puree, juice, nectar, slices, and halves.
four exporters operating in Luzon. Peak export Processed mango exports are dominated by dried
months are from March to May; canvassing mangoes, accounting for 46 percent by value; this
for supplies begins in December. Procurement is is followed by puree, accounting for 40 percent.
done through roving agents, though growers/ Processors are actively introducing new products
cooperatives are also entertained. such as fruit blending (i.e. mango and tamarind),
A farmer may opt for classified pricing, in mango leather (dried puree), etc.
which mango pieces are sorted for export and Most firms are small- and medium-sized.
local grade; the alternative is straight pricing, in There are about 85 mango processing firms,
which no sorting is done and payment is made majority of whom (66 percent) produce puree,
according to total quantity. Export grade mangos and are clustered in Metro Manila. Thirteen firms,
should meet quality requirements, i.e. maturity, mostly processors of dried mango, are in Cebu.
absence of scabs, molds, burns, marks, and Numerous small processors specializing in other
scratches; fruits are further distinguished by size, mango products such as sauces and preserves
i.e. small, medium, large, and extra large. operate in and around Metro Manila and Metro
Fatajo et al (2006) discuss the Hong Kong Cebu. Fresh mango for processing is typically
export market. One motivation to export to Hong procured from the “open market”. Only 23
Kong is the absence of tariff or taxes in that percent of processors obtain mango from their
city state; its regulatory imposition is modest, own farm or by contract arrangements.
requiring only certification of fitness for human Philippine mango is well known worldwide
consumption from the Department of Health. for superior taste, which carries over into the
Prices are predetermined by the exporter and processed product. This corresponds to a price
consignee (the importing agent) before shipment. premium over its major competitors, namely
The landed cost of the fruit in Hong Kong was Thailand, followed by India, China, Malaysia,
equivalent to P66 per kg in March 2002; at peak Vietnam, and Indonesia. However competitiveness
shipment (April and May) the price can drop to can be improved by reducing the cost of raw
as low as P35 per kg, but can rise to 133 per kg materials, especially mangoes and sugar. The
from February to September. report identifies the major issue of the industry
A comprehensive value chain analysis is being the “lack of good-quality mangoes at
available for the processed mango industry as of reasonable prices”.
 Chapter 5: Market structure and distribution of benefits from agricultural exports: 121
The case of the Philippine Mango Industry

5.3 Method For the first step, data collected from the
enterprise survey could in principle provide an
Data collection indicator of trade benefit if there can be a clear
distinction between mango sold for export, and
The case study collected qualitative and mango sold for the domestic market. This is
quantitative information based on informal possible however only at the level of the direct
interview of key respondents, and structured exporter, or its direct suppliers, i.e. the last and
interviews of enterprise heads, classified as penultimate links in the chain.
growers, traders, and processors. Growers are Further up the chain, from the grower to
defined as mango producers (whether or not the earlier layers of marketing agents or traders,
they own mango farm land) who do not engage it is usually impossible to make the distinction
in trading. Traders engage in trading, either for between mango for export and mango for the
local and export markets (or both), whether or domestic market. This implies two things that
not they engage in growing, but are not engaged hold throughout the chain at the enterprise level
in processing. Processors produce dried mango (except the last and penultimate stages):
for export (but may engage in other activities and
markets). Distribution across geographic areas is • Participants would usually be unable
shown in Table 5.6. to identify the share of exports in total
Mango processors are mostly concentrated production;
in Cebu; in Ilocos Region, the province with the • Participants would be unable to segment
highest production and densest concentration prices between exported mango, and mango
of mango farmers is in Pangasinan. In all for the domestic market.
46 respondents were interviewed using the
structured questionnaire. Informal interviews as To address this, for the first step the study
well were conducted with the same respondents focuses on the market-level effects of export
as appropriate; in addition, several members of prices using supply-demand modeling rather than
the National Mango Action Team, a joint public- analysis of enterprise-level data. The analytical
private sector consultative body convened by the tool is the Agricultural Multi-market model for
Department of Agriculture (DA), also served as Policy Evaluation (AMPLE), an eighteen-sector
key informants. model of Philippine agriculture which includes
Mango as a distinct sector, described in Briones
Quantitative analysis (2010). The scenario involves dropping the world
price of mango to levels at or near the domestic
Quantitative analysis adopts a two-step approach. wholesale price, to simulate a situation of zero
The first step is to quantify the benefit from mango exports; the resulting prices, quantities,
exporting; second is to examine the distribution of and so on, represent a counter-factual to the
benefits from exporting. baseline or reference scenario.

Table 5.6: Distribution of respondents

Pangasinan
Cebu Davao Region Manila Total
(Ilocos Region)
Growers 1 6 7 0 14
Traders 4 9 13 1 27
Processors 5 0 0 0 5
Total 10 15 20 1 46
Source: Authors
122 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
industry levels in developing countries

For the second step, distribution of benefit Annual sales (in pesos)
from export trade is analysed at the firm level Unit revenue =
Mango input (in kg)
using micro-data from the enterprise survey.
Analysis focuses on the relationship between an
indicator of benefit from exporting and indicator Exporting allows the enterprise to gain access to a
of enterprise size – conditional on a positive premium price, hence increasing unit revenue.
relationship, the greater the impact of enterprise
size on benefit from exporting, the less equitable Hypotheses for quantitative analysis
the distribution of trade benefit.
The ideal firm-level indicator is the impact The first key hypothesis of the study pertains to
of export trading on enterprise income or horizontal structure: the bigger the firm, the greater
profitability. However, within the limited time the unit revenue. The implication of this for equity
frame of the study, measuring profit at the is that the bigger firms are better able to gain
enterprise level would be time consuming as this access to a lucrative export market. The indicator of
would require information on cost. This does not enterprise size is value of fixed assets.
seem necessary for two reasons: The second pertains to vertical linkages:
relationship-based supply or purchase transaction
• There seems to be no separate production promotes greater access to the export market
technology targeting the export market; rather and therefore higher unit revenue. The indicator
a set of good practices that produce high of vertical linkages, denoted “Relation”,
quality mango either for domestic or export pertains to a relationship-based supply or buying
market. arrangement, or outright vertical integration (i.e.
• There is relatively adequate information from a grower-trader). This is represented as a binary
previous studies reviewed in Section 2 for variable (value of 1 for vertical linkages and
production cost and returns throughout the zero for spot market transactions.) The presence
marketing chain. of vertical linkages allows greater control over
product quality, which facilitates exporting.
Instead of differences in profitability, the The relationship between revenue per
study focuses on the difference in revenue due kilogram (RKG) and enterprise size and vertical
to exporting. However this confronts another linkages is initially explored using simple summary
difficulty, the widespread practice of “all-in” pricing charts. This is complemented by multiple
mixes together both domestic grade and export regression analysis, incorporating other control
grade mango, under a single price. Hence high variables such as characteristics of enterprise
export prices can indirectly affect the average price head (years of schooling, and years of experience
along the chain. This implies market segmentation in mango business). With unit revenue as the
between export and domestic outlets, with the dependent variable, an important set of controls
former commanding a higher price, but imposing relates to indicators of market segmentation,
more stringent entry barriers in the form of quality both horizontal (e.g. type of product or market
standards and sales networks. Larger firms may destination) and vertical (portion of the supply
have greater capability to overcome these entry chain specialized). The segmentation leads to
barriers, allowing them to sell a larger share of differences in unit revenue that embody the joint
output to the export market. effects of both supply and demand factors.
In short, a suitable indicator of trade benefit is For horizontal segmentation the relevant
average price or unit revenue: variables are:

Given the cross-section nature of the data, the • Processor (binary).

most important factor distinguishing unit revenue • Fresh mango exporter to Japan or Europe
across firms, is access to the export market. (binary; “Freshnorth”).
 Chapter 5: Market structure and distribution of benefits from agricultural exports: 123
The case of the Philippine Mango Industry

• Fresh mango exporter to other countries Philippine economy, similar to that of Briones
(binary; “Freshother”). (2012). Projection occurs over the horizon
2010 – 2020. World mango prices in real terms
The prices commanded by Freshnorth are are assumed to rise gently (by 0.5 percent per
expected to be the highest, followed by year in constant dollars) over the horizon. The
Freshother, and then Processor. comparison scenario involves reducing export
For vertical segmentation the relevant variables price to levels that drive exports to approximately
are: zero over the horizon. The shock introduced for
2010 is -32 percent, followed by fixed prices in
• Trader of fresh mango (binary). real terms thereafter. The constant elasticity of
• Exporter, whether direct or indirect (binary). transformation (CET) for mango is set at 2.0.
• Percent of output exported (continuous; Results for mango exports are shown in
“Pctexp”). Figure 5.7. Exports are projected to rise from
26 000 to 31 000 by 2020 corresponding to an
Traders and Processors are expected to earn annual growth of about 1.9 percent. Production is
greater unit revenue than growers. The Exporter shown for both reference and no-export scenarios
category tags firms that sell directly to a foreign (Figure 5.8).
buyer, or to an exporter; this is further qualified by Production in the latter is uniformly lower
Pctexp that measures the degree of participation by about 41 000 – 54 000 t or an average of
in the export market. For Exporters and for higher 5 percent. Impact on producer prices is even
Pctexp the unit revenue is expected to be higher. less perceptible; on average producer prices are
As discussed previously, the last two variables may 0.3 percent lower in the alternative scenario.
be prone to measurement error. Clearly a more disaggregated analysis, focusing
on the subset of firms that do gain significantly
from exporting, is needed to better understand
5.4 Results the importance and distribution of benefits of
export trade. As a check, a sensitivity analysis
Benefits from exporting: national level is conducted by varying the CET for alternative
analysis values 3.0 (Figures 5.9 and 5.10) and 1.5
(Figures 5.11 and 5.12).
As described in Section 4, the first step to analyzing The reference scenarios (whether for
benefits from exporting is a national level analysis output, exports, or producer prices) are almost
using AMPLE. The AMPLE data set records exports identical regardless of the value for the CET.
of mango at 26 000 t (fresh weight equivalent), The differences appear in the impact alternative
which is a 3-year average (2009-2011). This zero-export scenario. For CET = 3.00, export
accounts for only 3 percent of total mango price needs to fall by only 19 percent (much
production of 795 000 t. Export price is about smaller than the 32 percent decline with CET = 2);
210 percent higher than the estimated domestic meanwhile for CET = 1.50, export price needs
wholesale price (P90 vs P43 per kg). As explained in to fall by as much as 45 percent to approximate
Briones (2010), the supply for export and domestic zero exports. For CET = 3.00, output under
markets are treated as differentiated goods, within the alternative scenario rises to 888 000 tons
a constant elasticity of transformation framework (slightly above 880 000 tons projected under
(fairly standard in computable general equilibrium the alternative scenario when CET = 2.00). For
models). Given the proportions involved, even a CET = 1.5, output rises to 834 000 tons (slightly
massive export price shock would likely have only lower than when CET = 2.00). The differences in
small effect on market outcomes of the industry. producer price between reference and alternative
The AMPLE Reference scenario captures scenarios are likewise minimal regardless of the
baseline trends for the agricultural sector and CET value.
124 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
industry levels in developing countries

Figure 5.7: Exports under the reference and alternative Figure 5.8: Production under reference and no-export
scenario, ‘000 t scenarios, ‘000 t

35 1000
Alternative Reference
Alternative Reference
30
800
25

20 600

15
400
10
200
5

0 0
2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020
Source: Authors Source: Authors
Note: CET = 2.00; export price falls by 32% Note: CET = 2.00; export price falls by 32%

Figure 5.9: Exports under the reference and alternative Figure 5.10: Production under reference and no-export
scenario, ‘000 t scenarios, ‘000 t

35
Alternative Reference
1000
30 Alternative Reference

25 800

20 600

15
400
10
200
5

0 0
2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020
2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Source: Authors Source: Authors

Note: CET = 2.00; export price falls by 19% Note: CET = 2.00; export price falls by 19%
 Chapter 5: Market structure and distribution of benefits from agricultural exports: 125
The case of the Philippine Mango Industry

Figure 5.11: Exports under the reference and Figure 5.12: Production under reference and no-export
alternative scenario, ‘000 t scenarios, ‘000 t

35 1000
Alternative Reference Alternative Reference
30
800
25

20 600

15
400
10
200
5

0 0
2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020
Source: Authors Source: Authors
Note: CET = 2.00; export price falls by 45% Note: CET = 2.00; export price falls by 45%

The export market worldwide and a couple of suppliers mention

buyers in Europe (almost inaccessible to fresh
Competitiveness of the Philippine mango industry mango exporters) as being major customers.
is based on natural endowment. The Philippines Entry to the export business is subject to
is gifted with an exotic variety that thrives well large volume requirement (to make shipping
in selected areas of the country. In fresh form a economical). In turn this requires considerable
major limitation of the Philippine mango is its working capital outlay, beyond the reach of
thin skin, imposing high freighting cost over long many small traders. In the case of the Japanese
distances. This limits the fresh mango market to market this is compounded by the high fixed
Asia, of which the two major markets are Japan cost of complying with quality standards, such
and Hong Kong. The former is the most lucrative as investing in a VHT (which could run up to
market by far but imposes the most stringent a million dollars depending on capacity and
quality requirements, including maximum residue quality). Meanwhile in the case of Hong Kong
limits, and mandatory Vapor Heat Treatment exports, the main challenge is the risk imposed
(VHT). by the consignment scheme, in which the Filipino
The other major product category in the exporter absorbs loss from output not sold
export market is processed mango; for this case in the destination market. Many traders who
study the focus is on dried mango. Logistics for could possibly meet the volume requirements
processed mango is easier compared to fresh of exporting to Hong Kong are deterred by risk
mango. Quality is also less of an issue; unlike fresh involved, as well as need to form trust relations
mango for Japan, processors are not particular with Hong Kong importers. In the case of mango
about the quality of mango skin; however the processing, the processing plant itself represents
flesh must likewise be free from blemish as these a significant fixed investment (about P50 million).
affect quality of dried mango. Processed mango is Development of marketing contacts seems less
mostly exported, with about 85 percent of dried of a problem once a firm has established its
mango production sent abroad. It is easy to ship reputation for quality.
126 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
industry levels in developing countries

Profile of exporters number (5 out of the 26) specifically singled

out chemical companies as source of technical
Exporters whose destination market is Japan must assistance.
have a VHT; the biggest clusters of VHT plants are Two-thirds of enterprises were part of vertical
found in the agro-industrial park of Food Terminal commercial linkages. All the processors engaged
Inc. (FTI), a government-owned corporation. in either or both contract buying and contract
The park is located in the Taguig, eastern part selling. As for the traders, as many as 21 out
of Metro Manila, in which there are only three of the 27 are also growers, implying vertical
locators. integration between production and marketing;
For mango processing, there is one cluster the rest of the 27 were engaged in informal
located in Metro Cebu. About a dozen processors contracts for purchasing mangoes.
remain active; there is a single dominant firm, Lastly, a small proportion (3 out of 14) of
accounting for roughly 85 percent of output. The growers were also contracted as regular suppliers.
dominant firm has a capacity is 1 000 t of fresh Of these, only two out of the three receive
mango input a day, whereas other processors can advances for materials from the buyer. Many
handle only a tenth of this; The dominant firm of the traders report having engaged in such
also produces puree and juice. “putting out” contracts in the past, but had
Characteristics of enterprise heads are discontinued these contracts due to difficulty
summarized in Table 5.7. Most have been at least in recovering their advances. Hence supply
two decades in the business; processors are the arrangements gravitate to either spot contract or
oldest firms in the business. Enterprise heads have outright integration.
mostly reached tertiary level of education, with
majority having finished college; processors also Challenges of exporting
tend to have the most years of schooling.
Nearly half of the respondents got their start in As discussed in Section 2 there is considerable
the mango industry as part of the family business; benefit from exporting, for the few enterprises
the proportion rises to 60 percent for processors. that manage to break through to the export
Two-thirds of the respondents are members of a market. Exporting however faces some daunting
mango business association; the proportion rises to challenges. First, as in selling to the domestic
100 percent in the case of the processors. market, mango exporting is subject to seasonality
Majority of enterprise heads received technical of supply. Luzon harvest season of March to
assistance, mainly for mango production; May requires large capacity of VHT plant to
however none of the processors received technical handle deliveries; for the rest of the year though
assistance. Respondents were not always able to equipment is largely idle. During off-season,
pinpoint whether the technical assistance was supplies must come from Visayas and Mindanao.
from government or not; however a significant Similarly, processors have to contend with

Table 5.7: Characteristics of enterprises average and enterprise heads

Years Started in Had technical

Years in Membership With vertical
Category Number schooling family business assistance
business in association linkage
(average) (number) (number)
Processor 5 31 15 3[ 60] 5 [100] 0 [0] 5 [100]
Trader 27 19 13 12 [44] 15 [56] 16 [59] 10 [37]
Grower 14 26 15 7 [50] 11 [79] 10 [71] 4 [28]
Total 46 23 14 22 [48] 31 [67] 26 [56] 19 [46]
Source: Authors
 Chapter 5: Market structure and distribution of benefits from agricultural exports: 127
The case of the Philippine Mango Industry

seasonality. Capacity is expanded to accommodate products, as reciprocity to similar trade barriers

the Luzon harvest (which arrives with little difficulty imposed by the Philippines on destination country
in Cebu). During the lean months however, exports (such as vegetables from China).
processor’s agents must comb the Visayas and Lastly, for the processed sector, recognition
Mindanao regions to gather enough raw material. in a crowded world market for preserved fruit
In general, the main constraint identified by requires more than just capitalizing on the
the Pearl2 (2004) report, applies even today and superior taste of Philippine mango. Processors
for both fresh and processed mango: exporters need to maintain high quality and offer variety of
and traders mostly identify adequacy of supply of export items, which entails continuous research
export grade mango as a constraint. Processors and product development. This is most evident
in particular are unconstrained by lack of orders in the dominant firm, which produces a wide
from importers; rather lack of raw material array of products in its dried line, not to mention
compels them to turn down purchase orders from extensive offerings in its juice and puree lines.
their buyers. Likewise growers mention difficulties
in maintaining output levels, mentioning pest Distribution of benefits from exporting:
infestation and bad weather as culprits. enterprise-level analysis
The second main problem is high cost of
inputs. One trader was vocal in attributing high The following presents findings on distribution
cost of inputs to government regulation, mainly of benefits from exporting based on a more
in the form of regulatory barriers imposed by the systematic quantitative analysis. Consider first
Fertilizer and Pesticide Authority (FPA, an attached a scatterplot between enterprise assets and
agency of DA). Among processors, high cost of unit revenue (Figure 5.13). Most enterprises are
sugar (a major input in dried mango production) relatively small (assets of P10 million and below).
has also been cited as a problem. This in turn Nevertheless there is a tendency for asset size
is traced to high tariffs and regulatory barriers to be associated with increasing RKG. The plot
to sugar importation. Moreover, destination suggests important non-linearities, which we can
countries (such as China) would themselves adjust by performing a scatterplot on the natural
maintain trade barriers against Philippine mango logarithms of RKG and assets (Figure 5.14). The

Figure 5.13: Scatterplot diagram between unit revenue Figure 5.14: Scatterplot diagram between unit revenue
(RKG) and enterprise assets (RKG) and enterprise assets, in natural logarithm

70 70

60 60

50 50
RKG (Php/Kg)

LnRKG

40 40

30 30

20 20

10 10
0 3000.0
0 6000.0 8000.0 0
5 9 13 17 21 23
Enterprise Assets (Php ‘000) LnAssests

Source: Authors Source: Authors

128 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
industry levels in developing countries

positive relationship is much clearer; also drawn vertical linkages, are traders, and export directly or
is a linear trend line which suggests a strategy for indirectly; only a small proportion are processors;
multiple regression. an insignificant fraction export to the North or
As indicated in the Methods section, other even to other overseas markets.
variables that may also be correlated with unit These variables are dropped in the pairwise
revenue are enterprise head characteristics, correlation matrix. Unit revenue is noticeably
enterprise category variables, and a binary correlated with Asset, but only moderately so for
variable for vertical linkages (whether forward Relation. The latter though is strongly correlated
or backward). Summary statistics and pairwise with Exporter and especially Pctexp. This may
correlation coefficients are shown in Table 5.8 complicate econometric analysis owing to possible
and Table 5.9. The average of Assets is large multicollinearity.
(equivalent to about USD 1.4 million at current Ordinary least squares regression isolates
exchange rates), but the standard deviation the importance of enterprise size and vertical
is also large (5.7 times as large as the mean). linkages by incorporating various potentially
A sizable proportion of the respondents have influential variables. The following regressions and

Table 5.8: Summary statistics of the enterprise variables

Variable Average Standard deviation Minimum Maximum

RKG 40.32 33.29 9.64 178.50
Asset (‘000 pesos) 59 729 338 578 0.00 2 300 000 000
Relation 0.41 0.50 0.00 1.00
Experience (years) 22.54 9.85 0.00 42.00
Schooling (years) 13.81 2.89 5.00 18.00
Processor 0.11 0.31 0.00 1.00
Trader 0.59 0.50 0.00 1.00
Exporter 0.67 0.47 0.00 1.00
Pctexp 0.34 0.31 0.00 1.00
Freshnorth 0.02 0.15 0.00 1.00
Freshoth 0.07 0.33 0.00 1.00

Source: Authors

Table 5.9: Pairwise correlation coefficients of selected enterprise variables

1 2 3 4 5 6 7 8 9
1 Unit revenue 1.00
2 Asset 0.27 1.00
3 Relation 0.41 0.20 1.00
4 Experience 0.11 0.18 0.20 1.00
5 Schooling 0.05 0.07 0.00 -0.03 1.00
6 Processor 0.26 0.45 0.42 0.31 0.15 1.00
7 Trader 0.02 -0.18 -0.10 -0.44 -0.25 -0.41 1.00
8 Exporter 0.24 0.12 0.49 0.25 -0.25 0.24 0.08 1.00
9 Pctexp 0.50 0.27 0.68 0.31 -0.09 0.41 -0.16 0.77 1.00
Source: Authors
 Chapter 5: Market structure and distribution of benefits from agricultural exports: 129
The case of the Philippine Mango Industry

statistical tests are performed using STATA. The that every 1 percent increase in assets increases
first specification directly applies the variables in RKG by 0.1 percent. In short, the quantitative
Table 5.8 directly as independent variables in the analysis based on enterprise-level data confirms
regression. The results are shown in Table 5.10. the first hypothesis, that larger enterprises tend to
The coefficient of Assets is both quantitatively earn higher average revenue due to greater access
and statistically insignificant. In fact none of the to export markets.
coefficients are statistically significant, except for However there is no confirmation of the
the Vertical linkage variable. The regression passes second hypothesis, that vertical linkages
the F-test for joint significance, with a moderate contribute to gaining access to export markets.
goodness-of-fit based on adjusted R2 of 0.25. The coefficient of Relation is positive but not
The mediocre fit of the simple linear model to significant at the 5 percent level.
the data suggests a specification problem, namely Other significant coefficients pertain to Pctexp
failure to account for non-linearities in the data, (positive) and Freshoth (negative). The significance
which is already evident from the scatterplot of of the former suggests a multicollinearity issue
Figure 5.14. This failure is corrected by running a affecting the coefficient of Relation. Moreover
log-linear regression, results of which are shown there is the possibility of Pctexp being prone to
in Table 5.11. measurement error. As a check, another least
The goodness-of-fit dramatically improves squares regression is implemented with Pctexp
with adjusted-R2 of 0.56. The Breusch-Pagan test dropped (Table 5.12). Coefficient values are
for heteroscedasticity (null hypothesis of constant similar, except for Relation, whose magnitude
variance) yields χ2 = 0.010 corresponding to P(χ2 as well as t-value rises; it is now statistically
˃ χ2 ) = 0.75, i.e. failure to reject the null. The significant (at 5 percent level). This may be seen as
Ramsey reset test (null of no omitted variables) preliminary but inconclusive confirmation of the
yields an F-value of 1.98 or P(F ˃ Fc) = 0.25, second hypothesis. The mechanism is likely to be
i.e. failure to reject the null at 0.05 level of the improved enforcement of quality standards
significance. That is, standard tests fail to detect and volume requirements, compared to spot
fundamental problems in model specification. market, consistent with the authors’ qualitative
Moreover the asset variable is now significant impressions from field interviews. The second
with high t-value. The coefficient value implies hypothesis is indeed plausible and certainly cannot

Table 5.10: Results of least squares regression on unit revenue

Variable Coefficient t-value P(t ˃ tc)

Assets 0.000002 -0.15 0.88
Relation 2.013 0.20 0.84
Experience 0.043 0.10 0.92
Schooling 0.645 0.49 0.63
Processor 28.358 1.53 0.14
Trader 15.158 1.64 0.11
Exporter -24.904 -1.91 0.07
Pctexp 68.049 2.99 0.01
Freshnorth -28.327 -1.06 0.30
Freshoth -18.681 -1.32 0.20
Constant 9.534 0.39 0.70

Source: Authors
Note: F-test of joint significance of coefficients yields an F-value of 2.39, P(F > Fc) = 0.03; adjusted R2 = 0.25
130 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
industry levels in developing countries

Table 5.11: Results of log-linear least squares regression on logarithm of unit revenue

Variable Coefficient t-value P(t ˃ tc)

Assets, in logs 0.095 2.60 0.01
Relation 0.165 0.95 0.35
Experience -0.007 -0.94 0.35
Schooling -0.013 -0.53 0.60
Processor 0.120 0.33 0.75
Trader 0.240 1.52 0.14
Exporter -0.331 -1.50 0.15
Pctexp 0.025 2.38 0.02
Freshnorth 0.635 1.38 0.18
Freshoth -1.301 -5.30 0.00
Constant 2.126 3.97 0.00

Source: Authors
Note: F = 6.27; P(F > Fc) = 0.00; adjusted R2 = 0.56

Table 5.12: Results of log-linear least squares regression on logarithm of RKG (Pctexp dropped)

Variable Coefficient t-value P(t ˃ tc)

Assets, in logs 0.103 2.63 0.01
Relation 0.387 2.46 0.02
Experience -0.007 -0.88 0.39
Schooling -0.010 -0.4 0.69
Processor 0.190 0.49 0.63
Trader 0.173 1.04 0.31
Exporter 0.019 0.11 0.91
Freshnorth 0.644 1.31 0.20

Source: Authors
Note: F = 6.27; P(F > Fc) = 0.00; adjusted R2 = 0.56

be ruled out, though unequivocal confirmation is Vertical market structure, i.e. contracting
not found. relationship or vertical integration, was
hypothesized as a mechanism to improve
product quality to export grade. The case study
5.5 Conclusion and implications offers tentative confirmation of this hypothesis.
Vertical linkages are a mechanism of ensuring
The case study has found that benefits of mango supplies comply with quality and quantity
exporting are relatively small at the industry requirements acceptable to the export market.
level; nevertheless for a subset of firms who Clearly, the private sector should take the lead in
are able to consistently supply or procure developing effective vertical linkages to increase
export grade of mango, exporting offers a very value-adding in the mango supply chain. However
lucrative option. other stakeholders such as the national and
 Chapter 5: Market structure and distribution of benefits from agricultural exports: 131
The case of the Philippine Mango Industry

local government, and other members of the Regulations and trade protection (on the side
development community, should direct their of the Philippines) have been cited as factors in
efforts and resources to support the development elevating cost of chemicals and processing inputs
of tighter links along the chain, such as providing (i.e. sugar). Importing countries have also refused
better transport infrastructure, technical to relax trade barriers as reciprocal treatment to
assistance, community organizing farmer registry high trade barriers imposed by the Philippines.
(see below), and credit support. These factors should be reviewed for possible
On the other hand, horizontal market ways to reduce cost through better policy.
structure does appear to be an important factor A more stringent constraint however
in exporting. Economies of scale and ability to appears to be erratic yields and quality due to
bear risk are present at the level of marketing environmental factors (i.e. weather, pest, and
and processing. These take the form of volume disease). It appears that the level of technology
requirements (for shipping), the risk of poor of mango production has not matured to the
sales or rejection by regulators in the destination point of comprehensive management and
market, and large fixed investments (treatment control of environmental risk, even for large-
plant or processing plant). scale and technically sophisticated agribusiness
However, there are no discernible scale firms. This suggests that R&D may continue to
economies at the level of primary production. offer enormous gains for mango production and
This possibly accounts for prevalence of small address the problems faced by small farmers. Past
farms in the mango production sector. Moreover research success in the Philippines, home of the
large agribusiness interests who have ventured revolutionary flower induction technology, augurs
into mango farming (e.g. Dole Philippines) have well for investments in this area (see e.g.
failed to replicate the success of their other fruit http://beta.searca.org/searca/index.php/45-dl-
ventures. umali-award/45-2011-dl-umali-awardee).
Even in marketing and processing, Furthermore, as discussed in the Pearl2 (2004)
the importance of scale economies in the report, lower production cost can already be
industry should not be overstated. Investment realized under existing technologies, such as:
requirements, while they do rule out property fertilizer management informed by soil
microenterprise-scale operations, are perfectly testing; and reduction of pesticide use (through
within reach of medium-size firms. Considerably bagging and integrated pest management).
more entry is possible with adequate and stable Propagation of current and new technologies
supply of quality raw material at reasonable cost. should be promoted through a responsive
In fact entry has been recorded in both fresh and extension system in which public and private
processed exports, though exits are also frequent; extension agents are key partners.
the largest firms, especially among processors,
tend to be the longest-lived.
The Pearl2 Project (2004) report recommends
creation of a database of suppliers with track
record in supplying good quality mango; this
is particularly timely as the DA is preparing a
nationwide farmer’s registry (http://www.da.gov.
ph/index.php/2012-03-27-12-04-15/2012-04-17-
09-30-59/1087-farmer- database-to-aid-aggie-
sector-in-program-dev-t.) This database may also
benefit private sector traders and processors,
particularly new investors in mango exporting and
processing.
132 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
industry levels in developing countries

Digal, L. 2005. Benefit Diffusion and Linkage

References Development in the Philippine Tropical Fruits
Sector. Paper presented at a conference on
Aveno, J. & Orden, M. 2004. Hot water treatment “Closing the Productivity Gap”, World Bank
of mango: a study of four export corporations and the National Economic and Development
in the Philippines. King Mongkut Institute of Authority, Asian Institute of Management
Technology Ladkrabang Journal 4(1). Policy Center, 27 June.

Bally, I. 2006. Mangifera indica (mango). Special Fatajo, L, Galang, L., Jamandre, M. & Panela, W.
Profiles for Pacific Island Agroforestry. 2006. Analysis of the Price System and Trade
www. traditionaltree.org. Related Concerns of Philippine Mango.
Research Paper, Central Luzon State University,
Bureau of Agricultural Statistics. 2002. Munoz, Philippines. National Statistics
Marketing Costs Structure for Mango. Office [NSO], 2010. Census of Agriculture
Marketing Costs Structure Study Series No. and Fisheries 2002. NSO, Manila.
3. Agricultural Marketing Statistics Analysis
Division, BAS, Quezon City, Philippines. Pearl2 Project. 2004. State of the Sector Report –
Philippine Processed Mango. Technical Paper
Briones, R. 2010. Scenarios and Options for No.1.
Productivity Growth in Philippine Agriculture:
An Application of the Agricultural Multimarket Sarmiento, J., Aguinaldo, R., Digal, L., Castillo,
Model for Policy Evaluation (AMPLE). A. & Balgos, C. 2012. Mango Production in
Discussion Paper No. 2010-05. PIDS, Makati. Major Areas in Davao Region: Value Chain
and Net Margin Analyses. Paper presented at
Briones, R. 2012. Philippine Agriculture to 2020: the End-of- Program Conference and Dinner
Threats and Opportunities from Global Trade. for the ACIAR-PCAARRD Southern Philippine
Discussion Paper No. 2013-14. Philippine Fruits and Vegetables Programs, July 1-3,
Institute for Development Studies, Makati, Cebu Parklane International Hotel.
Philippines.

De la Cruz, A. 2007. Contractual Arrangements

in Agriculture (Northern and Central Luzon
Component). Discussion Paper Series No. 2007
– 21. Philippine Institute for Development
Studies, Makati, Philippines.
 Chapter 6: Conclusions and implications 133

CHAPTER 6:

CONCLUSIONS

The analysis of the size and distribution of officials, and 4 trade worker unions were directly
agricultural trade impacts in developing countries interviewed. Several farmers and workers
interests more than just the traders. Many of the supplying raw materials to and working for the
owners of inputs (especially poor workers and agro-trading industries were also either directly
farmers) linked to the industries rely on trade interviewed or asked to send in their written
revenues for a living. Trade impacts are often responses to questionnaires. Prior to the case
explained or discussed at an aggregate level, but studies, preliminary research identifying the
the studies compiled in this report have provided knowledge gaps in the theories and estimation
an opportunity to track trade impacts at the of trade impacts was conducted. The preliminary
level of the actual actors, the trading firms. The research also helped define the relevant trade-
aim was to discover strategies for enhancing impact indicators to be employed and posited
agricultural trade benefits to firms and also to some main hypotheses to be tested in the case
the owners of inputs. The investigations focused studies.
on the firms’ heterogeneity on the bases of their One of the challenges in the case studies
characteristics, practices, and especially their was to track the trade-impact indicators at firm
decisions and strategies within the industry. and industry levels. Because the focus was on
The main approach has been to employ both the structure (organization) of the agro-export
qualitative and quantitative information taken industry, market (export volume or value) share
from sample surveys and interviews to reveal how was widely chosen. Unit margin (a proxy for
agro-trading firms in developing countries were revenue or profit) was used particularly in the case
organized and how, through their individual or of mango export of the Philippines. Export (in
collective actions, they responded to internal and volume or value) per unit of input were also used
external shocks, including policy shocks, weather as trade-impact indicators as this may be used as
risks, and price risks. proxy to productivity of the input, especially to
The main focus was, therefore, on the compare if smaller firms are as input productive
organization and behaviour of trading firms in as larger firms. In addition to studying these
agro-export in selected developing countries. The formal indicators, all the research teams in the
case studies dealt with the exports of pineapple case studies investigated the entries and exits
in Ghana, horticulture products in Indonesia, of exporting firms over the last 5 to 10 years.
mango in the Philippines, and cashew nut in The quantitative analyses in the case studies
Tanzania.64 About 120 firm managers (including employed different methods, ranging from simple
heads of exporters’ associations), 10 government correlation analyses to econometric models and
partial equilibrium analysis. Although the selected
industries had different characteristics that affect

64
The Indonesia and Tanzania studies will be fully reported in a
separate document. trade impacts, they shared many similarities in
134 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
industry levels in developing countries

how their firms organize themselves, strategize, • The review of the literature pointed to the
and make decisions to face challenges and difficulties of applying the macro-economic
opportunities in international markets. theories of trade impacts such as R&D spillover
effects of trade at the industry or firm levels.
It was, however, clear that trade benefits
6.1 Main findings were self-fulfilling in that firms with higher
productivity could benefit more from trade.
The existing literature on trade impacts at
agro-trading firms in developing countries The organization and behaviour of
was thin firms showed a concentration of export
industries but no cartels
• The literature has remained scarce on the
size and distribution of trade impacts among • The selected agro-processing and exporting
firms for developing countries, and even industries in the countries considered in the
more so on the role of the organization and case studies were dominated by a few large
behaviour of trading firms. The preliminary firms holding large export shares. Economies
research revealed, however, new entries of of scale rather than regulation and greater
firms exporting processed or semi-processed access to input (including raw material) and
agricultural products in developing countries, output markets seemed to be one explanation
confirming that the industry is slowly moving of such industry structure.
away from exporting of raw materials • These few large firms had not acted as a
towards more processing, thereby boosting cartel, as they had no absolute power in both
agricultural value added. In Asia for instance, output and input markets. For instance,
the emergence of new and diversified although they were geographically dispersed,
markets (e.g. China, India, Singapore) and the large firms faced strong competition to
technological progress at the firm and industry have the best quality raw materials. The
levels contributed to this trend. However, exception was the case of Tanzania’s cashew
there were signs that this trend was receiving nut industry, where the large exporting firms
only limited institutional, financial, and were also subsidiaries of large importing
material supports, reducing the extent of the companies based in India and had market
trade impacts. power on raw cashew purchase; their markup
• There were early indications from the was relatively high.
preliminary research and literature review • The cooperation among the larger firms in
that firms were engaged in various forms the case studies (especially in Ghana and
of cooperation to enhance trade gains. The the Philippines) focused generally not on
information on organization of the industries controlling prices but on taking collective
pointed towards the existence of a few large actions to negotiate for better export prices
firms. These early indications had to be and favourable export policies (especially
confirmed in the case studies. low export tax) with their buyers and local
• Several trade-impact indicators were governments. Such collusion also served as a
considered, but the survey results indicated platform for exchanges of market information
that export volume and revenue, export and knowledge sharing. For instances,
shares, and export profit per kilogram of managers of pineapple exports in Ghana
raw materials were the most accessible and confirmed that their industry overcame some
tractable indicators. Input (e.g. labor or land) of the negative impacts of the change in
productivity of exporting firms was also used, pineapple variety from Smooth Cayenne to
though less often, as an indicator of trade MD2 through large consultations and dialogue
impacts. among the exporting firms and between the
 Chapter 6: Conclusions and implications 135

exporters and the growers. Similar claims were The size and distribution of trade impacts
made by managers in the other case studies. revealed that although firms with large
• The few large agro-processing and exporting assets held large market shares, small and
firms seemed to have been in business for medium firms resiliently survived
longer periods (some more than 60 years).
They were more resilient to shocks and to • Agro-export industries in the case studies had
other structural changes that the industries benefitted from trade expansion (even for the
had experienced. pineapple export industry of Ghana, contrary
• Small- or medium-sized firms had also thrived to prior fears of the industry would collapse).
in recent years because of new openings in This can be seen statistically from the increase
emerging economies in Asia (especially China). in export volume in real terms between 4-10%
Although their average durations of stay in the growth per year in the last 5 to 6 years and
export business were short because of greater the increasing number of firms participating in
vulnerability to shocks, these small firms trade (case of Indonesia’s horticulture export
persistently return back to business when the • An agro-trading industry’s export revenue was
industry profits picked up (e.g. during periods correlated with its domestic concentration,
of high demand). Their low hiring and firing as exemplified by the horticulture industry
costs contributed to their frequent exits and in Indonesia and pineapple in Ghana. This
entries and enabled them to enter and act as finding suggests that large sunk and fixed
fringe firms when markets thrived. costs constitute a barrier to entry but the
• Firms’ collective action (their behaviour and collusion or cooperation among large
linkages) contributed greatly to their coping exporting firms have increased their ability to
with trade and marketing risks and their organize responses to market shocks.
taking advantage of trade opportunities. • The benefits were split unevenly among
This was evidenced mostly in the Philippines’ firms. As expected, large firms (with large
mango and Ghana’s pineapple cases, where fixed assets, significant financial and physical
large and small firms often cooperated to capital, and high number of workers) enjoyed
share and honor large import orders that the largest share of the revenues and profits.
neither of them alone could deliver on time. • However, the size of the firms and the
• For the selected industries in this study, organization of the industry did not always
vertical integration was present but did not reflect their level of input productivity: smaller
play much role in affecting export benefit. firms were sometimes found to be as input
Because of the difficulty to access and use of productive as the large ones. The reason
land area large and suitable land, exporting seemed to be related to cost efficiency,
firms desperate to get enough raw materials because for instance the smaller firms had
for processing and export were often forced more flexible hiring and firing policies.
to cooperate with small scale growers even if Conversely, large firms seemed to resist more
the latter had no contract with the firms. (This strongly market and trade risks, or they had to
is unlike cases of vertically integrated agro- stay in business to cover large fixed and sunk
export such as banana.) The exception was costs even during hard times.
the case of horticulture exports in Indonesia, • Firms’ benefit from exports were also found
where the large commercial firms own and to be positively correlated with the skill level
operate vast areas of land. of employees, the education level of workers/
managers, the total number of years in
business, the ability to link with other firms,
and proximity to the export market.
136 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
industry levels in developing countries

Export demand remained high despite low productivity in the production of raw
export barriers materials, so bad that often the limited
amount of the bulk raw materials available
• The case studies firmly rejected the made it impossible to meet quality
hypothesis that agro-processing firms from requirements for processing and export.
developing countries struggled to access • The larger firms suffered the most, as they
large portions of the regional and global were often working below operational
markets, or that they were not linked to capacity but had to cover their fixed costs.
the market. Almost all of the interviewed
managers confirmed that they had no There were some signs of trade impacts
problem in finding export markets. (This on upstream links, especially workers and
could amount to a bias because many of farmers
the interviewed worked for those currently
exporting.) The managers stated that • All four agro-export industries selected in the
they often had to turn down orders from case studies were significant providers of direct
importers, as their production could not keep and indirect employment in the respective
up with the demand. Their main problem countries. Measuring how these industries
was to find stable (not seasonal) sources of contributed to poverty reduction was beyond
raw materials to process and export all year the scope of this study. However, interviewed
long. small landowners and farm workers
• Still, the non-tariff barriers, especially sanitary acknowledged benefits from expansion of
and phytosanitary measures in the EU and agro-trading industries.
Japan, to developed countries’ markets had • There was no particular indication that farmers
reduced potential benefits for both small and or workers linked to large firms received more
large agro-exporting firms. or less returns than those linked to smaller
• Firms also experienced more difficulties in firms. However, those linked to large firms
finding efficient means of transportation, seemed to have more stable returns.
especially during the peak of export seasons; • Workers complained about low wages
their landing costs increased and their but often put the blame on the high
competitiveness declined sharply. unemployment rate of unskilled labour and
• The lack of contract enforcement in both input lack of skills training.
and output markets limited export expansion, • Trade shocks such as the actual change in
especially in the pineapple and mango export variety of pineapple or a simulated decrease
industries. in the mango export price created long lags
of uncertainty and decreased income for
A low supply of raw materials was a growers, especially small farmers.
common problem • In the cases of small producers and farm workers
of cashew in Tanzania, the exporters had
• All four case studies revealed that the lack of oligopsony power to depress farm prices, despite
a stable supply in high quality raw materials the introduction of the so-called ‘Warehouse
constitutes the main constraint for the agro- Receipt System’ that guaranteed minimum price
trading firms and industries. levels for different cashew nut grades.
• The export industries in these four countries
had similar features: their productions Inconsistent and costly policies adversely
were all constrained by seasonality and affected exporters and importers.

• Aware of the importance of agro-export

industries, governments in the selected
 Chapter 6: Conclusions and implications 137

countries (especially in Tanzania and the and non-tariff barriers, the key finding from this
Philippines) devoted efforts to build production study was that there were lucrative market niches
policies around direct or indirect subsidies for for specific industries, especially tropical fruits and
farmers involved in the agricultural export horticulture, but that the agro-export industries
chain. in the selected countries could not keep up with
• However, many forms of export restrictions the rising demand in these niches even during the
like direct taxation or licensing remained fruit season. Another problem linked to unstable
in place and cancelled out the production and inadequate supply is lack of competitiveness
subsidies. Interviewed managers claimed that due to low productivity and high transaction
these restrictions, despite on-going reforms, (transportations, taxes) costs. The main implication
constituted major barriers to agro-trade is therefore to give more attention to raw material
expansion. production and to promote efforts enabling farmers
• Similarly, though the imports of essential input and growers to provide a stable and adequate
and equipment had been liberalized and tariffs supply to the exporting firms. These efforts would
on these inputs were minimal, the impact require partnership between public and private
on input price remained mixed because the officials to include appropriate trade and industrial
input import business was concentrated in the policies aimed at creating production and trading
hands of a few importers. environments that help local firms deliver quality
• The cashew nut export in Tanzania exemplified products to these markets. The recommendations
how the production and trade policies for that deserve priority are as follows.
agro-industries remained complex and in need
of thorough review. Small producers were Provide technical assistance to producers,
subsidized but had no bargaining power on processors, and exporters in order to
prices. Moreover, exporters belonged mostly increase the availability of high quality
to foreign-based companies that compensated inputs and outputs
for the losses due to export tax via high
markups based on the low price of raw This may be done by increasing productivity
cashew. through better extension and research programs
and by encouraging cooperation among exporting
firms and farmers. The example of the Ghana
6.2 Implications for the pineapple sector industry shows that despite the
promotion of agro-industry low labour cost and proximity to the European
market, return per acre of land or per unit of
growth raw pineapple remained much lower than those
of other competitors (e.g. Costa Rica), not just
Results of the preliminary research and case because of high transaction costs, but because of
studies indicated that many developing countries low yields at both the farm and firm levels.
had made significant efforts to diversify While reducing the seasonality of production
agricultural exports and especially to promote remains a tall order, tackling productivity by
high-value or processed products in order to improving the quality of post-harvest operation is
retain value added within the country, to reduce feasible. This will increase the amount and quality
poverty and spur growth and employment. of the products to be exported. Efficiency will
Government efforts ranged from providing increase with increases in physical and financial
assistance to growers, manufacturers, and capital, and especially human capital (production
exporters to relaxing the tight control on export and managerial skills), from farms to the factories.
licensing. Training of farmers and workers that have been
Although in general, developing countries’ clearly lacking skills as reported in the case studies
agro-export industries still face tariff escalation would increase efficiency.
138 Analysis of the size and distribution of the impacts of agricultural trade at the firm and
industry levels in developing countries

Improve infrastructure and quality of public a key. Agro-exports like mango or cashew always
services through increased investments have been sources of government revenue,
and it is true that reducing export taxes would
Market infrastructure and information are directly reduce government revenue. However,
important to agro-export industries. Upgrading such revenue loss can be compensated for by tax
the poor infrastructure will allow firms to revenue from the widened tax base of increased
cut transaction costs and increase their employment and firms’ revenue if the agro-export
competitiveness. For instance, fixing the frequent industries expand.
energy supply cuts and bad roads will surely Under oligopsony by foreign-based importers,
reduce post-harvest losses and improve the as in the cashew nut industry of Tanzania,
quality of the final products. Storage facilities for government subsidies on production benefited
the highly perishable tropical and horticultural only the foreign importers and inflicted a net
products are also required along the supply loss to the country’s already scarce resource.
chain. Similarly, providing market information Governments should instead promote partnership
especially information related to operating costs among the traders (exporters or foreign importers)
and requirements in importing countries will and farmers so that the latter enjoy larger
allow timely adjustment in production and export benefits as input owners. Conversely, if the
decisions of the firms. industry appears to be less concentrated with
The majority of key stakeholders no oligopsony power on raw material purchase,
interviewed agreed that increases in public, and supporting producers to increase the level
especially private, investments are important and quality of production would prove more
to ensure enough resources are available beneficial.
to help both small and large firms benefit
from trade opportunities. These investments Strengthen market institutions
would contribute to the upgrade of market
infrastructure (roads and storage facilities) to One of the biggest needs for the countries in
ease the flow of goods and services as well as the case studies was to overcome the lack of
information. They may include farm extension comprehensive institutional supports to spur
and research programs that contribute to agro- competitiveness of their agro-trading industries.
trading firms’ meeting the market requirements Although these case studies were limited to
for high quality raw materials and processed four types of agro-industries, they showed
products. Key stakeholders interviewed during that promoting diversification of agro-export
the surveys pointed to examples of successful depended on policy dialogue with agro-industries
non-agricultural sectors in their countries to and the firms.
conclude that having foreign investment would Therefore, organizations of farmers, workers,
help them to bridge gaps in market links such manufacturers and exporters need to be
as appropriate insurance services and efficient encouraged rather than shunned, since they
means of transportations. constitute platforms for dialogue among these
stakeholders and with policy makers. Managers
Institute more consistent and effective of pineapple exports in Ghana confirmed that
trade policies by taking into account the their industry overcame some of the negative
organization of the agro-trading industries impacts of the change in pineapple variety
through consultations with the exporting firms
All the interviewed firm managers still ranked and growers. Similarly, strengthening the
government policy (or lack of clear policy) high existing local quality control entities will increase
among barriers to trade expansion indicating that industries’ credibility and will reduce the cost of
more policy work remains to be done. Lowering the importers’ certification processes. Moreover,
trade barriers (both tariffs and non-tariffs) remains because the production of tropical products in the
 Chapter 6: Conclusions and implications 139

studies depended greatly on weather conditions, small firms have remained in business, though
access to risk management tools would help intermittently, invites more thought on the
reduce production and marketing risks. roles of product differentiation, exposure to the
One of the problems revealed in the case product market, marketing sale strategies, and
studies was parties breaching contracts because especially on firms’ costs (sunk costs and flexibility
of the weakness of national contract enforcing in hiring and firing inputs). Such a focus would
institutions. Although having professional identify what actions might help these small firms
organizations of actors (e.g. farmers, exporters, endure risk.
or transporters) helps reduce the number The third and most important task for future
of incidences of contract breaches that may studies is to dig more into the link between
discourage transactions, there is no substitute for the firms’ benefits or losses and the welfare
strong contract enforcing measures backed by distribution among their input suppliers, including
public authority. growers and workers. It is for instance important
There is also the need to consider inter- to investigate how large firms with large benefits
regional cooperation among the agro-exporters. decide on the returns to factor owners asking
For instance, the mango season in East Africa is question such as ‘Do larger firms pay higher
the counter-season for firms in the Philippines, input prices, or wage than smaller firms do and
and there is a need to study whether exploiting why?’ . All of these proposals for future studies
such complementarity to reap benefits from point towards ways to enhance developing
the stable and high export demand is feasible. countries’ trade benefits from agro-industries for
Similarly, any policy allowing capital and firms and their upstream links through increased
technology to flow between the two sides may competitiveness of the firms and industries.
prove beneficial for both. For pineapple, the
use of by-products such as fibers for clothing
industries has been widely developed in the
Philippines, but less so in Ghana, and some forms
of cooperation can be envisaged there.

6.3 Looking ahead

This investigation of agricultural trade impacts
at the firm and industry levels in developing
countries provides guidance for future studies.
Three areas of study deserve immediate
attention. One is refining the trade-impact
indicators, including the estimates of total factor
productivity measures at the firm level. This
requires enormous data collection efforts but will
increase understanding of how much technical
assistance firms of various sizes may need to
improve technical and allocative efficiencies. Such
information will confirm whether productivity
increases due to agricultural trade depend on the
firm size.
The second area worth further exploration
is the causes of the exporting firms’ entries
and exits. More important, focusing on why
T he size and distribution of trade impacts revealed that although firms with large assets held large market
shares, small and medium firms resiliently survived…

….the size of the firms and the organization of the industry did not always reflect their level of input
productivity: smaller firms were sometimes found to be as input productive as the large ones. The reason
seemed to be related to cost efficiency, because for instance the smaller firms had more flexible hiring and
firing policies. Conversely, large firms seemed to resist more strongly market and trade risks, or they had to
stay in business to cover large fixed and sunk costs even during hard times.

…Firms’ benefits from exports was also found to be positively correlated with the skill level of employees,
the education level of workers/managers, the total number of years in business, the ability to link with other
firms, and proximity to the export market

Although in general, developing countries’ agro-export industries still face tariff escalation and non-tariff
barriers, the key finding from this study was that there were lucrative market niches for specific industries,
especially tropical fruits and horticulture, but that the agro-export industries in the selected countries could
not keep up with the rising demand in these niches even during the fruit season.

…. Almost all of the interviewed managers confirmed that they had no problem in finding export markets.
(This could amount to a bias because many of the interviewed worked for those currently exporting.) The
managers stated that they often had to turn down orders from importers, as their production could not
keep up with the demand. Their main problem was to find stable (not seasonal) sources of raw materials to
process and export all year long…..

… Another problem linked to unstable and inadequate supply is lack of competitiveness due to low pro-
ductivity and high transaction (transportations, taxes) costs. The main implication is therefore to give more
attention to raw material production and to promote efforts enabling farmers and growers to provide a
stable and adequate supply to the exporting firms. These efforts would require partnership between public
and private officials to include appropriate trade and industrial policies aimed at creating production and
trading environments that help local firms deliver quality products to these markets.

Food and Agriculture Organization

of the United Nations
Viale delle Terme di Caracalla
00153 Rome, Italy
Tel: (+39) 06 57051
e-mail: [email protected]
www.fao.org I5130E