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The Dominant Presence of MNES in Agro-Food GVCs: Implications for the Developing Countries

Rajneesh Narula and M. Shakil Wahed

Introduction

The last few decades have effectively changed the existing patterns of global economy, and arguably this has affected the developing countries most dramatically. Economic liberalization has played a significant role, first, through across-the-board global harmonization of trade rules through the agreements and protocols associated with the World Trade Organization (WTO). Second, and concurrently, most developing countries have shifted from import-substituting economic policies to more open and export-oriented policies. This has had two primary effects (Collinson et al. 2016) both associated with growing economic interdependence. First, it has led to a higher degree of economic integration between countries and regions, and second, it has promoted the increasing interdependence of firms. Certainly, both these trends are concatenated with the growing role of Multinational Enterprises (MNEs)

R. Narula (h) • M. Wahed (h)

Henley Business School, University of Reading, Reading, RG6 6UD, UK

© The Author(s) 2017 71

G. Mergos, M. Papanastassiou (eds.), Food Security and Sustainability,

DOI 10.1007/978-3-319-40790-6_4

in the world economy. MNEs are best able to benefit from opportunities that allow them to leverage their ability to internalize cross-border markets, and coordinate complex networks of actors in multiple locations.

It is by no means accidental that—driven partly by significant technological changes associated with information and communication technologies, as well as improved transportation and logistics—there has been a growing tendency of MNEs to engage in foreign markets through different modes of governance that allow them to act as meta-integrators (Narula 2014), coordinating between a variety of actors, and depending less upon wholly owned subsidiaries (WOS) and foreign direct investment (FDI). MNEs in certain sectors have demonstrated a tendency to exercise control through a variety of operational modes that do not involve ownership. In short, MNEs have found ways to control value chains across borders without fully integrating these activities through common ownership. It is perhaps too early to describe these activities as being ‘global’, but the term ‘Global Value Chain’ (GVC) is in common use as a means to describe these sorts of complex cross-border chains that engage a rich network of actors that are linked through a variety of equity and non-equity means within specific sectors.

Not all these chains are dominated by MNEs, but many of the firms engaged in such value chains are indeed MNEs. In 2012, more than half of total global exports comprised of intermediate products and services pointing to the growing trend of value chains becoming increasingly fragmented and dispersed around the globe (Kaplinsky 2013 : 4). In certain sectors, nonetheless, MNEs have been able to take advantage of these trends to disintegrate their previously vertically integrated activities into complex networks that include both WOS as well as arm’s-length suppliers which happen to be located in various locations. This tendency of firms to use networks of spatially distributed actors within networks creates opportunities for firms in developing countries to participate in such MNE-dominated GVCs.

The agro-food sector is especially affected by this tendency, and is of great importance to developing countries given their comparative advantage in primary sectors. There are two distinct types of MNEs that dominate agro-food GVCs. First, there are large integrated MNEs such as Nestle, Unilever, and Kraft. These firms rely on significant ownership (O) advantages that derive from their ownership of brands, considerable adver?tising and marketing abilities, in addition to their R&D capabilities, organizational skills, and large economies of scale. They are large MNEs with sales in tens of billions and a geographic footprint that is global, and tend to have oligopolistic power in many developing and developed countries.

On a lesser scale, the second group of MNEs that operate GVCs in the agro-food sector are multinational supermarket chains, although they tend to dominate the retail industry in developed economies, and less so in developing economies. The top five retailers control 80 percent of agro-food sales in the developed countries (Traill 2006 cited in KPMG International 2013: 34). With the help of their dominant market power, these MNEs are lead firms in many agro-food GVCs. The trend is toward concentration of market power in the hands of a few multinational supermarket chains and large retailers (Konefal et al. 2005). Due to huge market power concentrated in the hands of a few firms, most of the agro-food GVCs are buyer-driven.

The dominance of these MNEs in shaping their supply chains is an important issue from an economic point of view. For the developing countries, access to these MNE-dominated agro-food GVCs are windows of opportunities to meet the various developmental challenges. Therefore, the policymakers from the developing countries look for ways and means through which their domestic firms can gain access to these GVCs. At the same time, it is not clear whether such access is always welfare-improving. It is not always clear whether high levels of participation in agro-food GVCs lead to net economic gains, because not all actors benefit equally within GVCs (Kaplinsky and Morris 2001). Therefore, it is important to understand how domestic actors can best engage with MNE-dominated agro-food GVCs.

Over the last half century, international business (IB) has developed as an important area of study looking into the issues related to MNEs and their behavior (Dunning 1980, 1981, 1988; Dunning and Rugman 1985; Dunning and Narula 1996; Buckley and Casson 1976; Buckley and Casson 2009; Rugman 1981, 2010; Hennart 1982). In parallel, Gereffi and his coresearchers (Gerffi et al. 1994; Humphrey and Schmitz 2000; Kaplinsky and Morris 2001; Gereffi et al. 2005) have developed an analytical framework for GVCs keeping the roles of governance and upgrading at the center. One of the core areas of current research is the need to reconcile these two fields of analysis, and this chapter seeks to engage with this discussion.

In this chapter we make some tentative observations about the role of MNEs in agro-food GVCs, paying special attention to the potential for actors from developing countries to engage as suppliers within these networks. We highlight that the shift away from full internalized MNE subsidiaries to non-equity modes (NEMs) and more arm’s-length linkages with suppliers in host developing countries depends crucially on two factors. First, domestic actors need to be formally organized sector, with access to financial and knowledge capital. Second, the host economy needs to be able to make available the appropriate location (L) advantages that create the conditions that allow MNEs to engage with domestic firms. This means developing stable and consistent institutions that permit MNEs to enforce contracts and reduce shirking costs, in addition to the necessary infrastructure associated with public goods. Unfortunately, most developing countries—while well-endowed with natural resources—are deficient in both domestic actors with O advantages and the necessary L advantages.

 
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