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© 1998 Oxford University Press and the Foundation for the European Review of Agricultural Economics

research-article

Up- and downstream restructuring, foreign direct investment, and hold-up problems in agricultural transition

HAMISH R. GOW*, and JOHAN F. M. SWINNEN**,

Policy Research Group,Department of Agricultural and Environmental Economics,Katholieke Universiteit Leuven Kardinaal Mercierlaan 92B-3001 Leuven, BelgiumCornell University, USA and Katholieke Universiteit Leuven, Belgium
European Commission and Katholieke Universiteit Leuven, Belgium

Received March 1, 1998;

Summary

Reform in the transitional economies has been marked by falls in agricultural output and by decapitalisation of the agricultural production system. A key factor is the disruption caused by the break-up of the pre-reform, vertically integrated, centrally planned, contracting system within the agri-food supply chain. This paper analyses how restructuring up- and downstream from production is affecting output levels, particularly the impacts of hold-up problems characterised by excessively long payment delays for delivered products. Standard institutional solutions to the hold-up problem, including supply contracting, cooperatives and vertical integration, have disadvantages in the short-to-medium term. FDI at the processing level is shown to be capable of solving hold-up problems, whilst producing important positive spillover effects within the sector and across adjacent sectors. Empirical evidence indicates strong output, yield, and investment responses when hold-up problems are solved.


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