Foreign Capital in the Estonian Food Processing Industries

The dominance of the dairy industry is immediately evident in Figure 47, with fish processing as the second largest industry. It was not accidental that these two sub-sectors ended up in the same cluster, as they share several common features. Both industries are highly export-oriented, with fish processing being directly dependent on exports, since 88 percent of its output was exported in 1997. The balls refer to the proportion of production output, measured in value

Vegetable oil 100%

Confectionery

Beer Soft drinks 90%

Fruit and Vegetable 80%

70%

Feed 60 5

40% Mitling

I • - concentration rati

30%

20%

10%

Meat

Fish

terms on the basis of the 1998 data, which already include the first signs of the recession caused by the Russian crisis of August 1998.

In the industries of the global cluster, huge foreign investors attained on over-whelming influence through acquisition of the dominant companies. In the beer industry, Baltic Beverages Holding, owned by the Scandinavian consortium Hartwall-Pripps-Ringnes, acquired the Saku Brewery, the largest investment in fruit and vegetable processing was concluded by the Swedish Procordia AB in acquiring Pöltsamaa Felix, while Coca Cola, the largest foreign investor in the Estonian food industry, dominates the soft drinks sector. A list of the major for-eign investors who had arrived by the beginning of 1998 can be found in Annex 12.

0%

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

proportion of registered company capital in foreign ownership Figure 47. FDI-concentration map of Estonian food processing on three dimen-sions of investigation, based on 1998 data.

Dairy processing is by far the most significant food industry in Estonia, ac-counting for one third of the total food manufacturing output in 1998 (Figure 47). In the early 1990s the dairy industry consisted of 11 large companies, which were decomposed to 36 processing facilities and sold separately to the milk pro-ducers' cooperatives, and to a less extent to other domestic investors in the framework of decentralised privatisation (Sepp and Loko 1999). This decentral-isation pushed the CR4 concentration ratio down somewhat, but it started to increase spectacularly from the middle of the decade.67

Partly because of the privatisation policy that preferred domestic ownership and partly due to the distorted capacity structure and outdated production-sales structure, foreign investors entered the Estonian dairy industry at a slow pace.

Their caution is demonstrated by their indifference towards the market leaders and their strategy of purchasing healthy, medium-sized processors, which are easier to manage and in which changes in management, technology, marketing and product mix can be accomplished more easily than in big companies. The proportion of the dairy industry' s total sales revenues attributable to foreign-owned companies was over 25 percent in 1997. The Finnish dairy concem Valio Oy stands out among the investors in terms of growth perspectives, as it controls the high-priced segment of the Estonian dairy market through the corporate growth of one company. Finnish investors may well want to expand and rein-force their position in the future by acquiring other processors.

The biggest problem for fish processing in the Baltic region is the product mix, which relies entirely on the demands of the FSU market. The proportion of the product structure of the Estonian fish processing industry accounted for by canned fish exported to eastern markets decreased from 100 percent to 77 per-cent in the product structure of the industry between 1990 and 1998, while that of frozen, filleted and other culinary fish products that are well marketable in Westem and Central Europe increased from zero to 23 percent. Despite the evident problems, fish processing is still more successful in Estonia than in the other Baltic states in terms of modemisation and product-mix reform. Even so, it has not yet attracted any appreciable foreign capital, for a variety of reasons:

67 There were three processing alliances in the Estonian dairy industry as of 1998: Chinermd Meiereid (United Dairies), the ETFC Group and the Eesti Piim (Estonian Milk) Central Coop-erative. Only the dairies belonging to ETFC had common owners that time. Chinenud Meiereid had long been an association of four independent processors with joint purchasing, marketing, and export functions, while Eesti Piim was similarly established as an umbrella organisation to coordinate the sales and product strategy of 12 independent dairies (Eke Ariko 1998, p. 26). Thus only the companies in the ownership of the ETFC Group were taken as one market player when calculating the concentration ratio for the Estonian dairy industry.

There are no multinational giants in the fish industry which domi-nate international or European capital flows as some companies do in other industries.

The Estonian fish processing industry is relatively well concen-trated, and its dependence on the unstable eastern markets still serves as a warning to foreign investors. The 20 percent market shares of the two leading companies suggested good export posi-tions for 1997, but did not necessarily mean equally great power on the much more reliable domestic market.

Fish processing is an essential component of any rural development strategy, and it is therefore subordinated to several ministries and organisations at the same time. The insecurity of fishing is further increased by the annual changes in catch quotas in the Baltic Sea.

In some isolated instances, the foreign investors have been turned away because they represent a threat or rival to the current owners or raw material producers rather than an investing patron (Jansik 2001b).

Only a few small Scandinavian investments had reached the Estonian fish processing industry by the middle of the decade, and some of these have already been withdrawn. Apart from the Scandinavian owners, there is also some Rus-sian capital invested in the industry. The fish industry is rarely a large recipient of FDI in the CEE region, and hence it is a regular member of local clusters in the national FDI-concentration maps.

The position of the meat industry can be explained by two large foreign in-vestments that have taken place alongside some very tiny projects. The Finnish HK Ruokatalo acquired a majority share in Estonia' s largest and most modern meat processor, Rakvere Lihakombinaat, and a group of Northern European stra-tegic and financial investors have attained a notable level of ownership in the largest poultry processor, Tallegg.

8.4.4. Latvia

8.4.4.1. Privatisation

The first version of the Act on the Privatisation of State and Municipality-owned Companies in Latvia was passed in 1992, with an amendment approved in 1994.

The act covered many food processing firms, although privatisation in the most significant industries such as dairy and meat processing, milling, bakery and the sugar industry was regulated by. separate laws.

The 1992 version of the Privatisation Act prescribed certain shares for the state (5 percent), employees (5-20 percent) and private investors (50-90 per-cent), the maun objective being to equalise the ownership structure out among

these groups (Miglavs et al. 1999). This method was used to privatise the major companies in the confectionery and fruit wine making industries. The disadvan-tages of the method soon became clear, however, namely that it resulted in com-plicated corporate decision mechanisms brought about by the interlaced owner-ship relations. The modified privatisation law already allowed the acquisition of a majority share by a strategic investor, and this provided serious incentives for foreign companies, which promptly made use of the opportunities, so that the main companies in the starch, tobacco and fruit and vegetable processing indus-tries had been sold off by 1995.

The special laws for privatising the first-stage processing industries, passed in 1993, simply allowed the rights of ownership over smaller dairy cooperatives to he distributed among the milk producers for free. Although the privatisation of the large dairy, meat and grain processing companies involved real money (in practice mostly credits or bank loans) and to a less extent compensation cou-pons, priority in ownership terms was still given to the producers of the respec-tive agricultural raw materials. Farmers did not fully utilise the ownership rights which would have been allotted to them by law in most of the industries, how-ever, and the unsold shares in the dairy companies and considerable stakes in other indebted dairy firms were taken over by financial institutions. The privati-sation of the dairy and meat industries had been completed by the beginning of 1996, while that of milling industry started only in 1995 and proceeded more slowly. The special privatisation laws resulted in high ownership by agricultural producers in the first-stage processing industries concerned, in that they ac-quired a 70 percent stake in the dairy industry, 50 percent in the milling industry and 30 percent in the meat processing industry.

8.4.4.2. Cluster Analysis

The FDI-concentration map for Latvia is an excellent demonstration of the trend in interaction between market concentration and FDI penetration. The dendro-gram shows the path by which the cluster analysis proceeded (Figure 48), which resulted in four distinct groups, the tight clustering within each being illustrated on the map (Figure 49).

The composition of the global [1], local [3] and middle clusters [2] evolved primarily in a comparable manner to that observed in the other CEE countries, with two surprising exceptions:

(1) The beer industry, which belongs to the global cluster [1] every-where else, is situated only in the middle cluster [2] in Latvia, largely on account of the considerable cOmbined market force of the small domestic breweries. Also, foreign investors have not at-tained notable positions in the medium-sized companies, although they have done so in the overwhelming market leader, Aldaris.

Cluster 4

Sugar Distilling Confectionery

Cluster 1 Starch Fruit and vegetable Tobacco Cluster 3

Cluster 2

Meat Dairy Fish Animal feed Bakery Soft drinks Milling Beer Vegetable oil

Number of clusters in the agglomeration process

15 14 13 12 11 10 9 8 7 6 5 4 3 2 1

Figure 48. Dendrogram of the cluster analysis of the Latvian food processing industries, based on 1998 data.

(2) The other surprising exception is the milling industry, which is usually located in the local cluster in Central and Eastem Europe, where foreign investors do not show any serious interest in milling.

The milling industry in Latvia has recently moved into the appeal zone of bakery industry, however, with a strengthening of vertical relations, and thus both the largest bakery company and the largest mill were purchased by Nordic, i.e. predominantly Swedish-Finn-ish investors (Vaasan & Vaasan, Cerealia AB and Melia Oy). The close business relations between these companies in their resident countries also connect them as owners in Latvia, and hence the re-inforcing of the vertical relations in Latvia is not surprising. The milling industry, as elsewhere in the region, is struggling with problems of the under-utilisation of its capacity, outdated techno-logy, shrinking markets and dozens of newly established enter-prises. In such a situation, the dominant bakery company, which itself emerged as the result of the merging of ttn-ee large bread fac-tories in the mid-1990s, "dragged" the milling industry into the middle cluster [2] through its vertical relations and supply chains.

100 %

proportion of registered company capital in foreign ownership Transitional

cluster [4]

Figure 49. Four-cluster classification of the Latvian food processing industries, based on 1998 data.

The results of the cluster analysis, shown in Figure 49, demonstrate the ac-centuated presence of the transition cluster [4] in Latvia, and thereby reveals a previously undetected peculiarity of some interest: that out of ali the countries whose food processing industries are examined here, the interrelation between politics and economics is strongest in Latvia.

This phenomenon was manifested in the active participation of politicians in the process of privatising the food industry. The holding companies established by the leading politicians had an insider view of the financial status and market prospects of the processors to be privatised, and this enabled the best-known corporate investor to acquire the dominant companies in a number of food processing industries such as confectionery and distilling.68 The elite among the

68 The most powerful holding company of this kind was Ave Lat Group, which was founded by the Latvian prime minister and other politicians.

domestic owners also shared the ownership of a major company in the bakery industry with foreign investors, the first case of its kind in that country, since surprisingly, they let the foreigners take over the majority share.

8.4.4.3. Foreign Direct Investment in the Latvian Food