The Problems of Engaging with Agro-Food MNES
MNEs usually possess a combination of three types of O advantages. First, asset-type O advantages include brands, patents, technologies, and knowledge embedded in personnel. Second, transaction- type O advantages include knowledge of external markets, institutions, relational capabilities, and ‘advantages of common governance’ (Narula 2014: 6), also termed as ‘economies of common governance’ (Narula 2016) and referred to as managerial capabilities of MNEs to organize intra-firm activities across different locations efficiently. Third, there are recombi?nant advantages that allow firms to recombine, or bundle, or substitute existing assets with other internal and external assets (Verbeke 2009; Hennart 2009; Narula 2014). Different firms possess different configurations of these assets, and they provide the basis of their competitiveness in markets.
The degree to which firms are able to generate economic rents from the ownership of such assets depends upon how they can utilize these assets in combination with the L advantages of countries. For agro-food MNEs, there are two aspects of L advantages that matter: first, those associated with accessing inputs needed to manufacture their products (resource-seeking investments), and second, those associated with their markets (market-seeking investments). The first group permits MNEs to ‘buy better’, that is, to reduce their production costs, while the second is associated with ‘selling more’, that is, in increasing their revenues (Narula and Cuervo-Cazurra 2015).
Developing countries are important for both these reasons. Developing countries are important markets for MNEs in the agro-food sector. From a developmental and policy perspective MNEs in the agro-food industry that engage with consumers matter because they improve consumer surplus, and due to increased competition can spur domestic competitors to improve their own O advantages. However, our focus in this chapter is on the ability of developing country actors to engage with these value chains as suppliers, and their L advantages that make them attractive as suppliers within the GVCs.
L advantages can be classified into two main types. The first are those that are exogenously determined, such as fertile land, the availability of natural resources, suitable climate, and unskilled labor. The second are endogenous, and largely associated with infrastructure and the institutional environment. Basic infrastructure (roads, ports, electricity, telecommunication, education) matters because it is a public good and is essential for extracting and utilizing exogenous resources effectively. More advanced infrastructure matters for higher value-adding activities, and includes universities, standards, and research institutions, in addition to the associated organizations that shape and create efficient markets. These are often associated with formal and informal institutions
(Narula and Santangelo 2012). In general, the weaker the L advantages available to MNEs, the less likely that the location will attract MNEs, whether directly or through arm’s-length linkages, and the less likely it will be home to competitive firms that can act as suppliers to MNEs.