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Supply Uncertainty and Foreign Direct Investments in Agri-food Industry

Mankan M. Koné, Carl Gaigne and Lota Tamini ()

CIRANO Working Papers from CIRANO

Abstract: We investigate whether and to what extent agricultural uncertainty drives the location of capital in the food processing industry. We show that when a risk-neutral food company has the possibility of exercising market power as both seller and buyer, the impact of agricultural uncertainty on the decision of producing abroad depends on whether the multinational makes the pricing/production decision before or after uncertainty is revealed. An econometric study is then needed to identify the mechanisms at work. The theoretical implications are tested by using a gravity model on European countries' and the United States' outward FDI stock, detailed by destination country in the agri-food industry. Overall, our results suggest that a higher agricultural volatility in the home country triggers investments abroad and that a host country exhibiting low agricultural uncertainty attracts relatively more foreign capital. Moreover, international di erences in agricultural uncertainty generate incentives for vertical disintegration by food companies, especially when trade costs are suciently low.

Keywords: Multinational firm; Uncertain input supply; Vertical fragmentation; Trade costs (search for similar items in EconPapers)
JEL-codes: F23 Q13 L23 L66 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-agr and nep-int
Date: 2017-11-15
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Persistent link: https://EconPapers.repec.org/RePEc:cir:cirwor:2017s-22

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