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GLOBALIZATION IN THE FOOD INDUSTRY The impact on market structures and firm strategies

Introduction. Two misunderstandings: (a) mixing up different types of globalization and (b) countries cannot benefit from competitive advantagesEmphasis on economic globalization in the Ricardian senseFocus on meso level of market structures and micro level of firm strategies. Review. Quite a fe

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GLOBALIZATION IN THE FOOD INDUSTRY The impact on market structures and firm strategies

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    1. GLOBALIZATION IN THE FOOD INDUSTRY The impact on market structures and firm strategies Arjen van WITTELOOSTUIJN October 19 2007 Professor of economics and advisor in economics for the Dutch parliament. No expert in food industry and agriculture. Try to give info on general visions.Professor of economics and advisor in economics for the Dutch parliament. No expert in food industry and agriculture. Try to give info on general visions.

    2. Introduction Two misunderstandings: (a) mixing up different types of globalization and (b) countries cannot benefit from competitive advantages Emphasis on economic globalization in the Ricardian sense Focus on meso level of market structures and micro level of firm strategies Countries cannot having a benefit advantage but have a comparative advantage. If firms compete one of them will win market share. There is no win win situation. One of them will loose. Countries cannot having a benefit advantage but have a comparative advantage. If firms compete one of them will win market share. There is no win win situation. One of them will loose.

    3. Review Quite a few studies on globalization and / or liberalization in the food industry (see, e.g., European Review of Agricultural Economics and Food Policy) But, all in all, a focus on the macro level of countries and regions Consensus: globalization and / or liberalization promote(s) welfare in the longer run, both in the developed and developing world Key mechanisms: lower prices (consumer surplus) and international specialization (producer surplus)

    4. Some stylized facts FDI growth outpaces trade growth Developing world is catching up The leading food companies are growing Low large-firm sales share (about 3 % only) Trade is not that important (about 10 % of sales) Favorite path to growth is by acquisition Consumer preference (taste) convergence Regional differentiation Niche development (bio-energy, eco-food, health …) Impact on market structures and firm strategies? FDI Foreign D Investment. Profit and ownership will start to move over the globe. On average trade is not important, not an issue. 2) Trade from Developing world has become larger. Much is related to China and India. 3) Figures later. 4) Market is dominated by middle and small firms. 5) 6) 7) Like McDonalds. You can buy it all over the world. 8) Simultaneously regional taste is getting attention. 9) 10) FDI Foreign D Investment. Profit and ownership will start to move over the globe. On average trade is not important, not an issue. 2) Trade from Developing world has become larger. Much is related to China and India. 3) Figures later. 4) Market is dominated by middle and small firms. 5) 6) 7) Like McDonalds. You can buy it all over the world. 8) Simultaneously regional taste is getting attention. 9) 10)

    5. Market shares in food processing Market share in the big firms. 1 is the number 1 in the market, 3 is the number 3 in market. C3 is the cumulated worldwide market share of the 3 biggest producers of the product.Market share in the big firms. 1 is the number 1 in the market, 3 is the number 3 in market. C3 is the cumulated worldwide market share of the 3 biggest producers of the product.

    6. Global sales shares Big Six in 2002 You see that the big ones are not having a big market share at a level of worldwide sales. You see that the big ones are not having a big market share at a level of worldwide sales.

    7. Cumulated sales growth 1998-2002 The big firms do grow. But there growing form a low platform. Europe is a laggard. The big firms do grow. But there growing form a low platform. Europe is a laggard.

    8. Classification of globalization effects What will happen now? 2 dimensions: Some activities can be transformed to other places. I.e. ITC to India etc. In terns of globalizations this has a huge implication. Some activities can be substitutable, others not. I will not buy bread in Being. I buy bread at home. What will happen now? 2 dimensions: Some activities can be transformed to other places. I.e. ITC to India etc. In terns of globalizations this has a huge implication. Some activities can be substitutable, others not. I will not buy bread in Being. I buy bread at home.

    9. Resource-based theory Supply side Exploitation economies (Scale and scope) Market structures Firm strategies Resource shapes (Centre and periphery) Demand side

    10. Market structure examples Density is number of firms competing in one market. Density is number of firms competing in one market.

    11. Firm strategy examples

    12. Market form examples Condensed resource space and scale economies Oligopoly Condensed resource space and scale diseconomies Perfect competition Tailed resource space, scale economies and scope diseconomies Fringe oligopoly

    13. Impact of globalization Globalization Exploitation economies Market structures Firm strategies Resource shapes

    14. Two baseline propositions Proposition 1 (exploitation economies): Globalization will increase the opportunities to reap scale and scope economies. Proposition 2 (resource shapes): Globalization will increase taste convergence and the love for variety, implying larger peaks and expanded peripheries.

    15. Three market form propositions Proposition 3 (market concentration): Globalization (a) will increase market concentration in the food industry, from which (b) a subset of the generalist food companies across the value chain will benefit. Proposition 4 (market density): Globalization (a) will increase market density in the food industry, from which (b) a subset of incumbent and many newcomer specialist food firms across the value chain will benefit. Proposition 5 (specialist viability): (a) The density effect will be stronger than the concentration effect, implying that (b) particularly specialist viability in the food industry will increase in the slipstream of globalization. There will be a limited set of big firms with worldwide scale advantages but smaller firms with niches will have a bigger effect on the sales. There will be a smaller number of big ones but there will be a lot more smaller firms. There will be a limited set of big firms with worldwide scale advantages but smaller firms with niches will have a bigger effect on the sales. There will be a smaller number of big ones but there will be a lot more smaller firms.

    16. Consumer taste convergence and love for variety Tailed resource space with increasing peak and expanding periphery

    17. Example of the US beer brewing industry

    18. Bottom line GLOBALIZATION AND REGIONALIZATION Higher concentration and higher density Large-firm growth and small-firm viability Multi-product generalists and single-product specialists ConclusionsConclusions

    19. THANK YOU VERY MUCH FOR YOUR ATTENTION!

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