External Factors Effective at the Regional and National Levels The survey of external factors can be continued at lower geographical levels

The factors effective at the regional and national levels can be grouped into general and CEE-specific forces.

The most important general factor on the national economic level that influ-ences the array of food processing industries on the FDI-concentration maps is the economic policy of the respective country. Public policy can drive an indus-try in virtually any direction on the map.

The general aspects of economic policy, particularly the attitude towards for-eign direct investments, affect movements on the horizontal axis. Beyond this, the emergence of extreme cases, i.e. points Q and S as opposed to point 0, will be detennined by (1) the size of the region or country examined, and (2) the costs of capital investments:

The larger the size of the host market, the more foreign investments it will attract. This is outlined in the framework of the gravity model in the FDI literature (Brenton et al. 1998; Barrel and Hol-land 1999).

Transaction costs, which play an important role among the installa-tion and operainstalla-tional costs of investments, are determined by the general legal, economic and infrastructural environment of the host country (Figure 35).

Competition policy and SME policy will determine the vertical positions of industries. A crucial aspect of competition policy is supervision and the right to intervene in M&A cases in monopolistic, dominant company or oligopolistic markets, in other words to ensure adequate conditions for competition. SME pol-icy includes the measures by which governments are able to influence entry bar-riers by enhancing conditions for the establishment and development of small and medium-sized enterprises.

100 % competition policy protect. ng

market dominance , market size — economies of scale technical development of food industry

- i 1

antitmst and antimonopoly competition policy SME policy

administrative, economic, legal and technical conditions of market entry

size of market — economies of scale i

I I F 1 I 1 1111

0%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

influence of foreign capital in the industries

Figure 35. External factors at the level of the national economy that determine the positions of industries on national FDI-concentration maps.

Besides political factors, which affect market structure, the vertical extremes

— i.e. the emergence of point P or R instead of 0 — will he driven by relations of market size and economies of scale. The pursuing and achieving economies of scale would result in a much more concentrated market structure in a smaller market, than in a larger market.

The level of technological development in the food industry in a particular country may influence concentration within industries,58 but this is not a neces-

58 The idea is based on the following logic: the high cost requirements of developing/purchasing and ap' plying new techniques or technology imposes a kind of technical threshold, since com-panies are able to utilise these opportunities only above a certain magnitude. The application of the new technology has "spiral repercussions", since it further consolidates the large com-panies and reinforces concentration.

sary determinant. Entry barriers can also modify the position of food processing industries on the vertical axis, and there are administrative, economic-financial, legal and technical conditions for the entry of new ventures into a market, some of which can also he ascribed to forces that operate at the national leve1.59 8.2.1.3. CEE-Specific External Factors

The Central and Eastem European countries started their transition from a com-mand economy to a market economy over a decade ago. The main direction of the fundamental economic and social reforms in ali the national economies has been the same throughout the region, but the initial stage of development, the pace of the reforms and the set of policy measures have varied considerably from country to country. Since this geographical extension uses FDI-concentration maps to compare the food processing industries of the five selected CEE coun-tries, a separate review is required of CEE-specific extemal driving forces.

Privatisation policy and its concrete implementation are the most essential external factors of the CEE-specific driving forces on the national FDI-concen-tration maps, where the positions of food processing industries in the horizontal plane are determined by (1) the pace and (2) the type of privatisation:6°

Protracted privatisation may hold back the arrival of foreign invest-ments, whereas multinational companies will he keen to exploit privatisation that is launched early and implemented rapidly.

The type of privatisation is another essential factor modifying the proportion of a food processing industry in foreign ownership.

Voucher-based privatisation, or privatisation favouring the inter- ests of local actors in the agrifood chain will result in a very low presence of foreign investments. Consequently, the industries would be located around point S as opposed to point 0. Commer-cial privatisation, on the other hand, would engender a location around point Q instead of point 0.

Apart from privatisation, the stability of the host country will affect foreign investments. A predictable operational environment will stimulate foreign par-ticipation, while a quickly changing economic environment or political instabil-ity will restrain it. Consumer demand is another factor affecting the horizontal axis, in that greater purchasing power or a higher national income will attract foreign capital, while a permanently low level of disposable incomes will obvi-ously impede foreign investments.

59 The levels of entry barriers vary from one industry to another, so that this is also listed among the internal factors in Figure 37.

60 Holland and Pain (1998) present a comparative country matrix which encompasses the entire Central and Eastern European region and use this to confirm the impact of the type of privati-sation on FDI.

The most influential of the CEE-specific factors determining the position of industries on the vertical dimension is again privatisation. Some of the privatisa-tion strategies in the region left the food processing industries in a concentrated position around point P, where they used to be located in the command economy era. Conversely, the decentralised privatisation employed by many countries in a number of industries induced location in the proximity of point R as opposed to point 0. The establishment of competition offices as part of the institutional re-forms and the policy of enhancing conditions for small and medium-sized enter-prises became important factors in determining market structure. Similarly, bankruptcy and liquidation laws were enacted in most of the countries of Central and Eastern Europe. Legal and institutional reforms applied differently in the emerging market economies.

• type of pnvatisation (market structure conserving attitude)

• competition policy

T

- • _ pace and type pace and type

- of privatisation of privatisation

• ^stable

weak and/or strong and/or

declining increasing

- purchase power purchase power

- .

Ii

type of privatisation (decentralisation) competition policy

SME policy

— 0%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 00%

influence of foreign capital in the industries

Figure 36. External factors at the regional and national levels — CEE-specific driving forces determining industfy positions.

Of the external factors, global factors exert their effects at the level of the world economy, while the regional or national factors encompass determinants that are effective in certain groups of countries or in individual countries. Never-theless, since the external factors alone are unable to provide a sufficient expla-nation for the arrangement of the food processing industries on the FDI-concen-tration maps,61 a review of internal factors derived from the attributes of indi-vidual industries is also necessary.