Supply Uncertainty and Foreign Direct Investment in Agri-food Industry

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 countriesÕ and the United StatesÕ 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 differences in agricultural uncertainty generate incentives for Vertical disintegration by food companies, especially when trade costs are sufficiently low.