IIMMMINUMMIN ENIMMEMMINIUM
8. Central and Eastern European Comparison
8.1. Introduction — Food Industry and FDI in Hungary, Poland, Estonia, Latvia and Lithuania
8.1.3. Foreign Direct Investment in the Food Industry
Both the changes in the external economic environment and the internal restruc-turing placed a severe financial burden on the food processing companies of Central and Eastern Europe. Maintaining the previous production levels proved to be a great challenge, and the revolving credits used for raw material procure-ment imposed excessive interest burdens on them. More and more firms were forced to postpone investments, and even the replacement of fixed assets. Since
Table 24. Proportions of foreign-owned registered company capital in the food processing industries of Central and Eastern Europe on December 31, 1998 (in million USD).
Hungary Estonia Latvia Lithuaniaa Registered company capital 1,756.2 134.4 249.4 620.7"
of which: foreign-owned 1,099.6 58.9 71.1 124.8 b
Source: FOSZ (1999, pp. 2, 37); ESA (2000a, p. 94); LCSP (1999a, p. 11); SDL (1999b, pp.
22-23).
Notes: al Data from 1999 first half. Equity figures.
52 Calculation of the classical labour productivity indicator would have required figures for value added in the food industry, which were unavailable.
the state had withdrawn from subsidising their investments and the banking sector was developing concurrently with the reforms in the agricultural and food sector, an acute shortage of capital emerged. This coincided with the change in ownership of the food processors. The new owners were required to finance the purchase prices for the companies and their modernisation investments at the same time.
There were realistic chances of succeeding in these two things simul-taneously only with the involvement of external resources, and in this respect foreign investors proved to be financially strong new owners who could afford to inject sufficient capital into the daily operations of the companies and into tech-nical improvements and modernisation. They showed great interest in food processing in Central and Eastem Europe from the outset, and foreign capital started to flow in immediately after corporate restructuring had been completed.
Although the changes in ali the countries of the region practically coincided in time, foreign investors showed varying interest in the food industries of the different countries. A marked disparity emerged among the five countries as far as foreign capital penetration was concemed (Figure 33), the reasons for which will be investigated below.
70%
60%
50%
40%
30%
20%
10%
0%
Hungary Estonia Poland Latvia Lithuania
Figure 33. Proportions offoreign-owned registered company capital in the food industries of the five CEE countries examined as of December 31, 1998.53
53 For Poland: 1997 data, sales by foreign-owned companies as a proportion of total sales in the food industries.
8.1.3.1. Distribution of FDI between Food Industries in Poland and in the Baltic States
Foreign direct investment in the food industry followed an uneven distribution among countries, and also among the individual segments of the food industry in each country. The general tendencies for the distribution of FDI among the food processing industries of the CEE countries have already been presented in sec-tion 5.1, and these overall trends also held good in Poland and in the Baltic states.
The case of Poland is quite peculiar in terms of the arrival agenda for FDI and its distribution among the food processing industries. Foreign investments flowed in slowly in the early 1990s, even in the case of the internationally very popular segments, but later on, from the middle of the decade onwards, the influ-ence of foreign capital increased sharply in the soft drinks, beer, tobacco and confectionery industries and a medium level of foreign participation was re-corded in the potato, fish and fruit and vegetable processing. Foreign invest-ments have entered the largest seginvest-ments, such as meat and dairy products, very cautiously (Table 25), obviously on account of the large size of these industries.
In the Baltic states it was the industries manufacturing high value added products such as tobacco, confectionery, soft drinks, beer and sugar that were sold first, whereas foreign capital was slow to enter the bakery, meat and dairy industries, and almost no interest has been shown towards the milling industry, except in Latvia (Table 25).
Table 25. Proportions of foreign ownership in the food processing industries of Hungary, Poland, Estonia, Latvia and Lithuania (in percent).54
Hungary Polanda Estonia Latvia Lithuania
Dairy 59.2 17.7 9.2 0.5 32.6
Meat 41.7 13.3 69.8 18.1 4.1
Fish 27.3 2.1 14.4 4.5
Sugar 33.0 15.8 32.0 67.0
Bakery 30.6 16.1 44.7 41.3 6.7
Brewery 90.3 78.3 81.8 61.3 82.1
Tobacco 93.3 87.6 81.0 98.8
Source: EFOSZ (1999, p. 37); GUS (1999d, pp. 436-441); direct data: ESA, Industry and Energy Statistics Section; LCSP, Industry and Fishery Statistics Section; Latvian and Lithuanian industry sources.
54 Baltic states and Hungary: proportion of foreign-owned registered company capital, 1998 data. Poland: 1997 data, sales by foreign-owned companies as a proportion of total sales in the food industries.
Dairy industry has been the flagship of food processing in ali three Baltic states. So far, Lithuania has attracted an appreciable amount of foreign capital into its dairy industry almost entirely in the form of financial investments, while the dairy industry of Estonia has lured a few strategic investors. The other impor-tant segment, meat processing, has aroused the interest of foreign investors mostly in Estonia, where they already own nearly 70 percent of the industry. The bakery industry has been a popular investment target in Estonia and Latvia, and its attractiveness is also expected to increase in Lithuania in the future. The sugar and confectionery industries in Lithuania are predominantly in the hands of foreign investors.
Foreign investors purchased the tobacco monopolies in ali three countries in the early phase of privatisation,55 and the beer industry proved equally attractive in all three countries. Beer consumption in the Baltic region started from a rela-tively low level but showed a brisk recovery, and this was definitely among the major motivating factors.
8.1.3.2. National Characteristics of FDI in the Food Industry
The characteristics of foreign direct investment in the food industries in Hungary were discussed in Chapters 5 to 7, and we will now focus below on the corres-ponding major tendencies in the other four countries.
Poland, having a market of nearly 40 million consumers, attracted a remark-able amount of foreign capital. The largest investors were multinational enter-prises that favoured the manufacturing of high value added products. These dis-tinct preferences of investors have resulted in a sharp anomaly in the investment structure within food manufacturing. Modernisation of the companies is pro-ceeding dynamically in the expanding industries that are subject to foreign influ-ence, such as tobacco, soft drinks, beer and vegetable oil, which primarily supply domestic markets. On the other hand, the amount of investment in sugar, meat and dairy processing has remained below the desired level for international com-petitiveness.
Inward foreign direct investment possesses numerous interesting characteris-tics in Poland. The primary reason for the slow inflow was the indecisive and unclear process of privatisation of the food industry. An illustrative example is the tobacco industry, which enjoyed the greatest popularity among foreign in-vestors throughout the whole region. This was in the hands of foreign inin-vestors in Hungary, and even in the Baltic states, as early as 1993, but the same level of penetration was reached in Poland only in 1996. The impatient foreign investors
55 The Estonian company has ceased production since the acquisitions. The story of the Estonian tobacco industry is discussed in section 8.5.6.
resolved the problem of slowness and lack of transparency in privatisation by means of green-field investments in some industries, where this strategy resulted in two features: (1) foreign influence increased slowly due to the size of the in-vestments and the time interval they required to mature, and (2) a considerable technology gap arose among processing companies in the same industries.
A common characteristic of the Baltic states is the small size of their markets, as even the combined number of consumers remains under 8 million. Market size affected the inflows of foreign direct investment in several ways:
Firstly, the largest investors set foot in only one of the countries and supplied the entire Baltic market from there, taking advantage of the Baltic Free Trade Agreement (BAFTA).
Secondly, the multinational enterprises, pursuing an even broader perspective, did not establish production facilities there at ali, but considered the Baltic market an extension of Poland.
Thirdly, the magnitude and proximity of the Baltic markets have best suited food processing investors in the adjacent Nordic coun- tries (Table 26).
Despite the fact that privatisation policy shared many similar characteristics in the three Baltic states, the pattern of FDI in the food industries showed some discrepancies between Estonia, Latvia and Lithuania. Since a detailed account of the disparities and common characteristics will be given in section 8.4, the following list will highlight only some particularly important and interesting factors:
In Estonia, the receipt of foreign capital in the food industry has been deter-mined by the country's renowned liberal economic policy. The removal of ali import duties, including those on foodstuffs, in the early 1990s was a truly unique political measure for the whole of Europe. Outside observers expected this to reduce the inflow of foreign capital, since the substitution threshold for food imports as opposed to domestic production was very low. This caused the country' s food trade balance to sink sharply to a deficit, but the foreign investors did not entirely stay away. Apart from a couple of multinational enterprises, the majority of the investments originated from Finland, which has close linguistic and cultural ties with Estonia. Foreign capital increased its ownership ratio to a very high figure, reaching 43 percent in 1998. This can be attributed to the small size of the country and its food industry, so that the acquisition of a few compa-nies elevated the proportion immediately.
Latvia presents two interesting characteristics. Privatisation resulted in not-able overlaps between the new owner groups and political leaders at the state and local levels. Although this phenomenon is familiar in many other transition econornies, the interconnection between active politics and corporate ownership has been particularly strong in Latvia. The other peculiarity is the high share of
"foreign investments" with a domestic background. The number of "off-shore"
enterprises is exceptionally high in the Latvian food industry by comparison with other post-socialist countries. In fact, domestic ownership is behind many of these investments. These are rarely strategic investors, the nature of the in-vestments tending rather to be financial, a geographical detour aimed at taking full advantage of the special financial or taxation incentives offered to foreign investors.
Lithuania has a fair-sized food industry, especially in relation to its size and geographical location. Some multinational enterprises entered the country and built bases there, and one special characteristic of foreign investments in the Lithuanian food industry is the relatively high proportion of financial invest-ments. Almost ali dairy investments and some of those in the animal feed indus-try originate from development and investment funds, or from other financial institutions. As opposed to the general tendency in Central and Eastern Europe, there are also numerous companies with less than a 50 percent share in foreign ownership in Lithuania.
8.1.3.3. Geographical Origin of FDI in the Food Industry
The giant multinational enterprises that have invested in food processing facili-ties in Hungary and Poland have naturally influenced the distribution of FDI by geographical origin (Table 26). The most active countries in the Hungarian food industry have been the Netherlands, the United Kingdom and the USA, repre-sented primarily by multinational companies, and Austria and Germany, which took advantage of their geographical proximity.
The investments made by a few large multinational companies also deter-mined the rank order of investing countries in Poland, where the leading coun-
Table 26. Top three investing countries in the food industries of Hungary, Poland, Estonia, Latvia and Lithuania in 1998.
Hungary Poland Estonia Latvia Lithuania
g
2
i > Netherlands USA Finland Finland USA
Austria Germany USA Great-Britain Denmark
> o
c.) Germany Netherlands Sweden Sweden Finland Source: KSH (2000b, pp. 70-89); LCSP (2000a, p. 11); SDL (1999c, p. 14); direct data:
PAIZ; ESA, Industry and Energy Statistics Section.
tries were the United States, the Netherlands, Switzerland and the United King-dom, while Germany also showed notable investment activity utilising its geo-graphical proximity through the agency of its small and medium-scale investors.
The minor differences between the Baltic privatisation policies largely influ-enced the advance of foreign capital into the individual states. Estonia was the most successful in attracting foreign direct investment, largely on account of its manner of privatisation and its geographical proximity and close cultural rela-tions with Finland and to some extent Sweden. These two adjacent Nordic coun-tries have accounted for two-thirds of total inward food processing investments in Estonia. The food processors of Northern Europe generally attempted to take advantage of the investment prospects in the Baltic region.
Foreign investments arrived in the Baltic states in two waves. Some multina-tional companies appeared in the first wave in the early 1990s, while the North-ml European investors arrived in the second wave and have gradually increased their influence ever since.
The following two conclusions can be drawn from the distribution of FDI in the food industry by geographical origin in the five selected countries:
Two large groups of investors can be identified: (1) multinational companies and (2) enterprises in adjacent or nearby developed countries which take advantage of their geographical proximity.
The multinational companies have been more active in the larger host countries, whereas investors from the adjacent countries have had a greater weight in the FDI stock of smaller host countries, whose markets are considered marginal by the transnationals.
Based on the review of the major characteristics and indicators of the state of FDI and food processing in Hungary, Poland and the Baltic states, we can conclude that the FDI penetration pattems into the food industries comply with the general trends for Central and Eastern Europe in ali five countries.