World Investment Report 2009: Transnational Corporations - Unctad

CHAPTER III 107
Figure III.3. A typical agribusiness global value chain in a developing economy and types of TNC players
Stages or segments along a
“typical” value chain
Input suppliers are
“upstream” relative to the
production (farming) stage.
Traders, processors,
retailers and others are
“downstream” relative to
the production stage.
Types of TNCs involved
in each stage or segment
The types of TNC involved
vary by Industry, e.g. food
industries versus biofuels;
or fresh fruit against
processed foods within
the food Industry.
Source: UNCTAD.
Propagation of seeds, seedlings, bulbs,
rootstock etc., which constitute inputs to
farming, are also a type of agricultural
production in their own right. While R&D
is normally done by laboratories in the
home country, many TNC seed producers
are farming them in developing countries
and is roasted in developed countries.
Input supply
Seed
propagation
Production
(farming)
(or the “eclectic paradigm”, first formulated by
John Dunning, 1993) to internationalization in the
context of agribusiness GVCs (box III.3). In doing
this, one can distinguish horizontal international
expansion by TNCs located in a particular segment
of the value chain from vertical expansion and
international coordination of activities undertaken
along the segments of a value chain. In the former,
an agricultural, manufacturing or retail TNC moves
to a host country and establishes an affiliate or a
contractual arrangement for production in the same
activity as that in which it is engaged at home (e.g.
establishment of a supermarket by a retail company),
or undertakes a subset of the activities it carries out
in the home country. Thus, as box III.4 shows, an
agricultural firm with competitive advantages might
be drawn to a particular host economy because of
the country’s locational (L) advantages, including
agricultural endowments and a favourable policy on
land ownership; furthermore the TNC can choose to
operate in that location through direct investment in
a plantation by using its ownership or competitive
advantages (O), such as technical knowledge or
management expertise, or by making such assets
available to host-country firms through a licence, or a
management contract or other arrangements. Which of
these modalities of operation a TNC chooses rests on
Basic
processing
Trading and
logistics
Processing Retailing
International upstream stages Developing country
International downstream stages
Suppliers of seeds
and chemicals, e.g.
Seed companies
Fertilizer
producers
Agrochemical producers
(e.g. herbicides)
Discussed in
section E.2
Equipment
suppliers, e.g.
Farm
equipment
Irrigation
equipment
Basic or initial processing of agricultural
commodities can occur either close to
production or further downstream. For
example, cane sugar is refined close to or
at cane plantations, while coffee in most
instances undergoes only basic
processing in developing countries
and is roasted in developed countries.
Agricultural
producers, e.g.
Plantation
companies
Growershippers
Discussed in
section E.1
Trading and
logistics, e.g.
Wholesalers
Specialists
traders
Transportation
companies
The order (or even presence) of stages
can vary by specific product or company
supply chain (e.g. fresh fruit does not
need to be processed; and can even be
shipped to retailers); for instance, TNC
supermarkets might cut out wholesalers
from their supply chains and go direct
to farmers.
Processors, e.g.
Food
manufacturers
Textile
producers
Biofuel producers
Discussed in
section E.2
Retailing, e.g.
Supermarkets
Fastfood chains
Coffee and
tea houses
the internalization decision (I) (i.e. whether it is better
to own and run the plantation itself (through FDI or
not). This decision is influenced by factors such as the
relative profitability and risks involved in the various
choices, and whether a mutually acceptable price can
be agreed on for the sale of its knowledge assets.
TNCs coordinating a network of activities
along a GVC can also have both the motives and the
capabilities to participate in agricultural production.
Examples of motives are to secure commodity inputs
and sell seeds, while examples of capabilities include
a subset of ownership advantages that facilitate value
chain coordination, such as control of, and expertise
in, distribution and procurement systems. TNCs
can participate in, or influence, relevant agricultural
production in countries with the necessary locational
advantages (such as the availability of land, water
and labour), especially in countries in which they
are already present in the upstream or downstream
activities (box III.3, figure III.3). Whether TNC
participation in agricultural production through such
vertical expansion of TNCs occurs and what form it
takes depend on a number of factors, including:
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advantages relevant to value chain coordination.
For instance, supermarkets are extremely proficient
supply chain coordinators;