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Supply Uncertainty and Foreign Direct Investments in Agri-food Industry

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  • Mankan M. Koné
  • Carl Gaigné
  • Lota Dabio Tamini

Abstract

We investigate whether and to what extent agricultural uncertainty drives the location of capital in the food processing industry. We show that when a risk-neutral food company has the possibility of exercising market power as both seller and buyer, the impact of agricultural uncertainty on the decision of producing abroad depends on whether the multinational makes the pricing/production decision before or after uncertainty is revealed. An econometric study is then needed to identify the mechanisms at work. The theoretical implications are tested by using a gravity model on European countries' and the United States' outward FDI stock, detailed by destination country in the agri-food industry. Overall, our results suggest that a higher agricultural volatility in the home country triggers investments abroad and that a host country exhibiting low agricultural uncertainty attracts relatively more foreign capital. Moreover, international di erences in agricultural uncertainty generate incentives for vertical disintegration by food companies, especially when trade costs are suciently low.

Suggested Citation

  • Mankan M. Koné & Carl Gaigné & Lota Dabio Tamini, 2017. "Supply Uncertainty and Foreign Direct Investments in Agri-food Industry," CIRANO Working Papers 2017s-22, CIRANO.
  • Handle: RePEc:cir:cirwor:2017s-22
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    More about this item

    Keywords

    Multinational firm; Uncertain input supply; Vertical fragmentation; Trade costs;

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • Q13 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Markets and Marketing; Cooperatives; Agribusiness
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • L66 - Industrial Organization - - Industry Studies: Manufacturing - - - Food; Beverages; Cosmetics; Tobacco

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