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

Abstract

Reform in the transitional economies can be characterized by large falls in agricultural output and by strong decapitalization of the agricultural production system.A key factor has been the disruption caused by the breakup of the pre-reform, vertically integrated, centrally planned, contracting system within the agri-food supply chain.This paper analyses how restructuring in the up-and downstream levels of the agrifood chain is affecting the production level, particularly the impacts of hold-up problems usually seen as excessively long delays in the payment for delivered product.Standard institutional solutions used to overcome hold-up problems, including supply contracting, cooperatives and vertical integration, have problems as short-to-medium term solutions.Empirical evidence indicates that FDI in the processing level can solve these hold-up problems, as well as produce important positive spillover effects within the sector and across adjacent sectors.Empirical observations indicate strong output, yield, and investment responses when hold-up problems are solved.This suggests that solving these problems should be a priority for stimulating growth, efficiency and profitability in Central and Eastern European agriculture.