Academic journal article Economic Review - Federal Reserve Bank of Kansas City

Agrifood Foreign Direct Investment and Waves of Globalization of Emerging Markets: Lessons for U.S. Firms

Academic journal article Economic Review - Federal Reserve Bank of Kansas City

Agrifood Foreign Direct Investment and Waves of Globalization of Emerging Markets: Lessons for U.S. Firms

Article excerpt

European and U.S. trade and foreign direct investment (FDI) into the agrifood sector of developing and emerging economies in Africa, Asia, and Latin America have been important for 500 years. As the economic and policy context has evolved, globalization has proceeded in three recent (in the past 500 years) waves. The first wave, from the 1400s to the 1970s, focused mainly on European (and later U.S.) FDI into and trade with Africa, Asia, and Latin America. Importantly, this wave included only "vertical FDI," with plantations, first-stage processing, and trade "entrepots" in those regions and second-stage transformation and receiving facilities in the home countries.

The second wave of globalization, from the 1980s to the present, focused again on European and U.S. FDI into and trade with the emerging economies (which we simplify to emerging markets, or EM) in Africa, Asia, and Latin America. This wave followed the liberalization of national EM trade regimes and the global agrifood economy. It was also motivated by the rise of the EM domestic markets. The second wave thus continued with some vertical FDI, but also included extremely large horizontal FDI to make and sell inside the EMs themselves.

The third wave of globalization differs from the first and second waves not by the market but by the actors. In particular, the third wave features exports from and FDI by EM agrifood enterprises, both domestic and regional, and increasingly EM-based global multinationals. These EM firms took off in the 2000s and 2010s, emerging out of the rich soil of the rapidly growing and transforming EM markets-just as U.S. firms like Cargill, ADM, and Dole had taken off over a century prior, a time of similar, albeit more gradual growth and transformation of the U.S. agrifood economy. The new EM firms compete with or sometimes partner with U.S. and European firms.

This paper discusses the evolution of the three waves of globalization, focusing on the roles and strategies of FDI and trade of agrifood firms (those involved in farm inputs, farming, wholesale, processing, and retail) in EMs. Section I presents definitions and concepts. Section II briefly reviews information from the first wave, which is well treated in the historical literature. Section III discusses the second wave and links the external firms' FDI and trade strategies and actions with the evolution of domestic EM food economies. Section IV delves into the nature of the emerging third wave, a relatively new topic and not yet adequately treated in the literature. Section V uses the evolution of these waves of globalization to draw lessons for U.S. firms undertaking current and future global strategies.

I.Definitions and Concepts

In addition to imports and exports, U.S. and European firms have sent into Africa, Asia, and Latin America both vertical FDI and horizontal FDI (terms introduced by Horstmann and Markusen [1992], Markusen [1984], and Helpman [1984]). "Vertical FDI" is undertaken when supply chains are spatially fragmented over their vertical stages, such as FDI in a banana plantation in Central America and ripening and wholesale distribution facilities in the United States. "Horizontal FDI" is undertaken when a company sets up FDI affiliate operations- such as farms, factories, or service firms-in a country in which it wants to sell at least part of the products from those operations to host country consumers or firms (such as McDonald's making and selling burgers in Mexico).

The demand-side condition for horizontal FDI is that the FDI firm perceives effective demand in that country. The supply-side condition for vertical or horizontal FDI is that the FDI firm has some advantage in the host economy, such as being a "first mover" in a product or technology, having lower capital costs, or having specialized knowledge. Examples include FDI from General Foods and Nestlé into Mexico in the 1980s and FDI from Walmart into Mexico in the 1990s.

Theorists have set out models of firms' choice of vertical versus horizontal FDI. …

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