Up- And Downstream Restructuring, Foreign Direct Investment, And Hold- Up Problems In Agricultural Transition

Reform in the transitional economies can be characterized by large falls in agricultural output and by strong decapitalization of the agricultural production system. A key factor has been the disruption caused by the breakup of the pre- reform, vertically integrated, centrally planned, contracting system within the agri- food supply chain. This paper analyses how restructuring in the up- and downstream levels of the agrifood chain is affecting the production level, particularly the impacts of hold-up problems usually seen as excessively long delays in the payment for delivered product. Standard institutional solutions used to overcome hold- up problems, including supply contracting, cooperatives and vertical integration, have problems as short- to- medium term solutions. Empirical evidence indicates that FDI in the processing level can solve these hold- up problems, as well as produce important positive spillover effects within the sector and across adjacent sectors. Empirical observations indicate strong output, yield, and investment responses when hold- up problems are solved. This suggests that solving these problems should be a priority for stimulating growth, efficiency and profitability in Central and Eastern European agriculture.