Food Processing and Manufacturing in Developing Countries

DRAFT – NOT FOR QUOTATION
Food processing and manufacturing in developing

countries: driving forces and the impact on small farms
and firms
John WILKINSON
Paper prepared for the FAO technical workshop on

“Globalization of food systems: impacts on food security and nutrition”
8-10 October 2003, Rome, Italy

Information on the Author:
John Wilkinson
Universidade Federal Rural Rio de Janeiro, CPDA/DDAS
Av. Pres. Vargas 417/8. andar
Centro - Rio de Janeiro
20071-003, RJ - Brasil
E- mail: jwilkins@uol.com.br
Disclaimer: Ideas expressed in the paper are those of the author(s). Mention of any firm or licensed
process does not imply endorsement by FAO. The designations employed and the presentation of
material do not imply the expression of any opinion on the part of FAO concerning the legal status
of any country, territory, city or area or of its authorities, or concerning the delimitation of its
frontiers or boundaries.
1
Food processing and manufacturing in developing

countries: driving forces and the impact on small farms
and firms
John WILKINSON
1. Introduction
In this paper, the processing and manufacturing sector is understood as covering
both the production of final foods and ingredients or additives, either for home cooking,
industry or “food services”. In terms of enterprises, it ranges from transnationals and the
mix of domestic firms in developing countries through to primarily locally oriented, rural-
based processing and artisan activities. At the same time, it incorporates the broader notion
of “value-added”, which more clearly recognises the historical complementarity and tension
between transformation and preservation technologies. “Minimally processed” products,
which are assuming strategic importance both in domestic and export markets, with the
packing-house linking the farm directly to the retail sector, will also, therefore, be included
in the review.
In the agroindustrial studies of the seventies and early ´80s, the food industry was
analysed as the hege monic actor in the production chain with the focus of interest largely
confined to oligopoly forms of competition and to new backward linkages with agriculture
of an explicit or implicit contract nature. These were characterised as forms of quasi-
integration, and today receive renewed attention in the light of the pressure to stricter forms
of co-ordination, promoted largely by desverticalisation and more demanding quality
considerations. As from the ´90s, the food industry is clearly no longer the hegemonic actor
in the agrofood system, ceding this place to the large-scale retail sector. Any analysis of
tendencies in the food-processing sector, therefore, must also take into account the pressures
deriving from forward linkages, which increasingly define the terms of the food industry’s
strategic options.
Given the precocious internationalisation of the agrofood system with primary

processors already setting up foreign subsidiaries by the end of the nineteenth century and
final foods firms following suit in the early years of the twentieth, it was never possible to
analyse this sector in developing countries without also considering the strategies of the
leading international players. This is even truer today as liberalisation, deregulation and the
various factors accelerating globalisation (financial, technological and cultural) accentuate
the importance of foreign trade, direct investment flows and cosmopolitan consumer habits
on the dynamic of the domestic food processing sector in developing countries.
We will begin this paper, therefore, with a consideration of trends in the food-
processing sector of developed countries before turning our analysis to developing country
dynamics. Pride of place will be given to the combined phenomena of international trade
and FDI, which are coming to play such an important role in reshaping the food-processing
sector in developing countries. Within this context, the relevance of the emergence of
regional blocs will also be considered. At the same time, a range of domestic factors -
2
income levels, urbanisation, infrastructure, changing patterns of occupation, particularly as

it effects the organisation of the family - which are currently influencing the profile and
perspective for the food processing sector must be taken into account. In addition to
evaluating the current significance of the food-processing sector for developing country
strategies, the paper will focus on the opportunities and challenges which these tendencies
represent for the small farm and firm sector. Our analysis will be based on a selected review
of the literature and secondary data sources.
A word of caution, however, is necessary with regard to the term “developing”

which is still used to describe an increasingly heterogeneous range of countries.These may
be grouped by levels of income – low, middle and high, a conventional classification when
dealing with aggregate data. Such an approach, however, in bringing together, let us say,
India with Honduras, Bolivia with Indonesia or even Uruguay with Brazil does not allow for
an appreciation of the impact of domestic market size which is a crucial structural and
strategic investment variable. At the same time, it is clear that differing cultural traditions,
which influence food consumption habits, limit the homogenising effects of similar income
levels. This is apparent even within relatively similar economic blocs – Europe and milk
products being a good example -, but is more marked in the case of Asian food systems. The
consolidation of economic blocs, in its turn, and the emergence of regional agrofood
systems, represent an equally important complementary approach to aggregation as
investment decisions are increasingly affected by the regional dimensions of targeted
markets.
A similar consideration could also be applied to the developed countries, where, in

spite of globalisation, trade flows and the profile and dynamic of the agrofood system are
sharply influenced by historically consolidated regional specificities, clearly reflected in the
negotiations and conflicts within the WTO. In our discussion of the food processing
industry in developed countries, therefore, we will try to take into account the very different
realities of North America, Europe and Japan.
2. Some Major Tendencies in the Food Processing Sector of

Developed Countries
2.1 The U.S. Food Processing Sector
The strategic significance of food processing for developing countries can be gauged
when we consider its continuing importance in advanced industrial economies such as the
US where the food and beverage processing industry still accounts for 15% of total
manufacturing activity and employs 1.7 million workers. 1 Overall growth in US food
processing, however, has slowed to around 2% annually as most markets become mature
and new product launc hes are directed preferentially to select sectors such as convenience
foods, organics and natural products and functional foods. Continuing consolidation and
concentration mark the industry as the leading firms try to compensate slow growth through
greater plant efficiency and market share. The pressure of the retail sector is a further factor
here, although, in the US, brands still account for 80% of total food sales, (as against only
63% in the UK, already in 1992), and are being extended to fresh produc e. A key strategy to
compensate slow growth has been to increase the share of value added which advanced 23%
from 1992-7. The potential for adding value, however, is markedly different between
1
This section draws heavily on the USDA, AEC Report No. 811, The US Food marketing System, 2002
3
sectors favouring the highly processed segments, convenience foods and soft drinks, at the
expense of more traditional activities in meats, dairy and fats/oils.
The US processing industry has traditionally had a strong international presence but
the globalisation of its leading firms and products has been accelerated both by the maturity
of its domestic market, changing regulatory regimes and the potential for exploiting global
brands. US firms now account for 40% of the world´s top fifty food processors and the US
is the world´s largest exporter and importer of processed foods and drink. Exports at US$30
billion in 2000 have stagnated and fallen off in the second half of the ´90s, whereas imports
at US$37 billion in 2000 have increased considerably in the same period. The principal
exports are meat products, miscellaneous foods, grain mill, fats/oils, fruit and vegetables.
The strength of the dollar has had a negative impact on price sensitive commodity exports
but has not affected exports of branded products. It has also been an important stimulus to
imports where the major increases have also come from branded, highly processed final
products. By order of importance the five principal importers of US processed foods and
drink are Japan, Canada, Mexico, Thailand, South Korea and Hong Kong. Imports, in their
turn, come primarily from Canada, Mexico, Thailand, France and Italy. Three tendencies of
trade in processed foods can be noted here: the importance of regional blocs, the
westernisation of diets in the developed Asian economies, and the competitiveness of high
quality European products.
Since the middle ´90s, foreign direct investment (FDI) by US food processing firms
has become more important than exports reaching US$33.9 billion in 1998 with sales by
foreign affiliates totalling US$133.1 billion. The number of affiliate firms rose from 764 to
823 between 1995-8, formed primarily through joint ventures rather than green field
investment. 75% of FDI in 1995 was located in three major trading zones – the European
Union, NAFTA and the Mercosul. The relation between exports and FDI has been the
object of many studies, as has the impact of FDI on the host country in terms of rates of
growth of GDP, possible crowding effects vis-à-vis domestic investment, re-exports and the
repatriation of capital (Gopinath, 2000). The importance of the Mercosul for US FDI attests
to the latter´s relevance for the analysis of food processing in developing countries,
although here it is clear we are dealing with a regional dynamic which in strategic terms
includes the FTAA. In addition, 60% of this FDI is concentrated in this region´s leading
country, Brazil, although recent studies have shown that new investments in any of the
Mercosul countries are increasingly based on regional considerations (Wilkinson,1999). On
the other hand, countrie s other than these three regions received no less than US$7.5 billion
in US food processing FDI in 1995. The evaluation of these investments is clearly of key
importance as processed food exports account for an ever greater share of developing
countries total agrofood exports.
2.2 The Food Industry in the E.U

According to the Confederation of Agrofood Industries (CIAA), 2 the food and
drinks industry in Europe is the leading manufacturing sector in terms of both production
(13.4%) and employment (11.8%), and occupies third place for value added (10.7%) behind
chemicals (11.4%) and machinery/equipment (10.8%). France, Germany and the UK
account for some 60% of gross production. In Ireland, Denmark and Spain, a quarter of the
manufacturing work force are employed in the food and drinks sector, and in Holland and
2
http://www.ciaa.be/uk/library/statistics
4
Spain this sector is responsible for 26% and 20% respectively of total manufacturing
production. While 70% of total turnover comes from firms with more than 100 employees,
some 90% of the total number of firms are small and medium. These may account for a
minority of total employment in the sector, but their participation is significant, reaching
40% in Italy and over 30% in Portugal and Belgium. In the remaining countries, the figure
is around 15% with a low of just less than 10% in England. The food and drinks processing
sector therefore remains a key component of production and employment even in the most
developed economies, with important employment and business opportunities in the SME
sector.
The sector experienced 19% growth in production value at constant prices between
1990-2000, increasing from Eur.460 to Eur.548 billion. The category, “other food products”
(bakery, pastry, chocolate, confectionary products and similar items) is by far the most
important (Eur.156 billion), followed by meat (Eur.113 billion), beverages (Eur. 98 billion)
and dairy products (Eur. 95 billion). Germany dominates the first two categories, while
England leads beverages and France dairy products.
In contrast with the US, the EU has a trade surplus in the food and drinks processing
sector, exporting Eur.45.015 billion as against imports of Eur. 36.369 billion in 2001. The
US is by far the leading destination country (Eur. 9 billion), followed by Japan (Eur.3.7
billion), Switzerland (Eur. 2.6 billion) and Russia (Eur. 2.6 billion). The ASEAN countries
(Brunei, Indonesia, Malaysia, Philippines, Singapore, Thailand) received 3.7% of EU
exports, the Mercosul, 1.6% and the Andean Group (Bolivia, Colombia, Ecuador, Peru,
Venezue la) 1.5%. On the imports side, Brazil, the US and Argentina account for some 30%.
As a result, in regional terms, the leading position is occupied by the Mercosul (18.7%),
with the ASEAN region responsible for 8.8% and the Andean Group 2.7%. The
Mediterranean countries are a significant trading region, responsible for 10.7% of EU
exports and 6.8% of its imports.
If trade is examined by product category, beverages (Eur.13.256 billion), “other food

products” (Eur. 11.494 billion) and dairy products (Eur. 5.163 billion) lead exports and
show large surpluses. Animal oils and fats and prepared animal feeds reveal a strong deficit
corresponding to imports from NAFTA, the Mercosul and Thailand. The two other
categories where the EU has a heavy trade deficit are in processed and preserved fish and
fish products, with imports at Eur. 11.077 billion and exports of only Eur. 1.874 billion, and
processed and preserved fruit and vegetables, where imports stand at Eur.4.926 billion and
exports at Eur.2.554 billion. These two categories, as we shall see below, have been
identified as key export opportunities for developing countries.
Only four European firms are among the world´s top 15 agrifood companies by
value of sales: Nestlé (2), Unilever (4), Diageo (8) e Danone (11), as against 10 US firms
and I from Japan. Nevertheless, Nestlé had 138,000 employees and Eur. 34.9 billion sales
outside Europe; Unilever 204,000 employees and Eur. 11.9 billion sales; Diego Eur. 14.9
billion sales, and Danone 63,000 employees and Eur. 5.3 billion sales outside Europe.
Numerous other firms in the “other food products”(Cadbury Schweppes, Associated British
Foods, Tate & Lyle), drinks (Heineken, Interbrew, Allied Domecq, Carlsberg, Pernod
Ricard), and dairy (Parmalat, Bongrain) sectors have a strong international presence. FDI
became very important in the ´80s when the weak dollar attracted a large volume of
European food industry investment to the US market. With the formation of the single
market in the early ´90s, intra-EU FDI became substantially more important. In the most
5
recent period, it is the new candidate members and the countries of the former Soviet Union
which have become a privileged focus of FDI strategies ( ).
2.3 Japan´s Food Processing Sector

Although Japan has only one company in the world´s top 15, it is, as we have seen
above, a major trading partner of both the US and the European Union. 3 Processed foods
now account for two thirds of Japan´s food consumption which is heavily dependent on
imported final products from Japanese subsidiaries in neighbouring countries, in addition to
a rapidly increasing percentage of western products. The food processing industry
represented 10.9% of all manufacturing firms in 1999, and is the third largest industrial
sector after the electronics and vehicles sectors. In 1994, 12.2% of the country´s
manufacturing workforce was employed in food processing. 41% of Japanese firms have up
to 50 employees and are responsible for 26.4% of total output. If we were to include firms
up to 100 employees, their share in the total number of firms would increase to 57.6% and
45.1% of total output.
Imports of final food products make up 28% of processed food consumption and, in
calorie equivalence, 64% of the ingredients for processed foods are imported. Exports, on
the other hand, are limited to a few specialities and are insignificant as a proportion of total
exports (<1%). In 2000, total food imports were US$50,5 billion whereas exports were only
US$2.3 billion. Japanese subsidiaries overseas have only 22% of their total sales in the host
market, as against 45% in the case of European subsidiaries and 33% for US firms overseas.
The dominant strategy of Japanese food multinationals, therefore, is that of developmental
imports - off-shore production for the Japanese market.
The five leading exporter countries of processed food to Japan are: US, Australia,
China, Thailand and Taiwan. In 1970, Australia was the principal exporter with 17.62%
which, however, had declined to 7.35% in 1996. The US, which was in second place in
1970 with 16.84% becomes the clear leader in 1996 with 30.98%. China, which was in
fourth place with 2.90%, comes next with 9.29%, followed by Taiwan, increasing its
participation from 3.39% to 7.80%, and in fifth place Thailand which also improves its
share from 1.86% to 5.74%. Other relevant developing country exporters include,
Indonesia, Korea, Malaysia, the Philippines and Singapore. More recent data shows China´s
share to have increased to over 12%.
Australia, as the dramatic loser in this period, promoted a number of studies to

identify the causes of its lack of competitiveness which have been analysed by Trewin
(Japan Market Study, 2003). In his review, Trewin draws attention first to the conclusions
of an earlier piece of research by Athukorala and Sen (1998), arguing that developing
countries tend to have a comparative advantage in food processing because this sector is
generally labour intensive and has benefited disproportionately from improvements in
transport and storage. Trewin´s explanation for Australia´s loss of export market share to
Japan gives pride of place to the more voluntaristic aspects of competitiveness (especially
management performance) and policy measures, although the importance of structural
variables are recognised (resource endowments, population, income growth), and further
3
This section draws on the Rural Industries Research and Development Corporation report, Japan Food
Market Study,chapters 2,3 &4. January, 2003
6
investigation of such as factors as labour costs, investment linkages and export subsidies are
recommended.
Japanese FDI has fluctuated substantially since the ´70s with Australia and East Asia
declining relative to the US and the EU. In 2000, East Asia´s share was 12.4%, the US
accounted for 28% and the EU, 45.2%. In part, this is to be explained by the severe
restrictions on equity participation in East Asia. By contrast, this latter region has by far the
largest number of Japanese affiliates, 212, followed by North America with 86 and the
European Union with 65. In the East Asian region China has 85 affiliates, Hong Kong, 31,
Thailand, 23 and Singapore 21. Although there is still very little incoming FDI, both exports
and imports are positively correlated with FDI flows, although in recent years, the
proportion of sales inside the host countries has increased significantly. The studies
consulted suggest that resource advantages tend to be offset by stringent non-tariff measures
in the case of imports of processed food, particularly relating to sanitary conditions,
weakening, therefore, the competitive advantage of developing country exports. Japanese
trade in processed food, as in other sectors, has a strong intra- firm profile and independent
access to the Japanese market is notoriously difficult.
3. Processed-Food Export Trends and Developing Countries

The food-processing sector has recently received attention within the framework of
discussions on export- led industrialisation in developing countries. Athukorala and Sen
(1998) have elaborated a general analysis of this dynamic arising from their earlier
reflections on the performance of Chilean agrifood and fishing exports. The share of
manufacturing exports in total world trade has increased from 66% to 81% from 1970-1994,
and developing country share in manufacturing exports has leapt from 6% to 24%. At the
same time, processed food as a proportion of world non-manufacturing exports increased
from 26% to 37%. This trend was global, but developing countries´ share of processed food
in non- manufacturing exports increased from 23% to 38%, while the corresponding figures
for developed countries was 28% to 36%. With notable exceptions (Bangladesh), middle
and high- income developing countries have performed better than low- income countries.
The authors note that non-food manufacturing exports from developing countries
tend to have a faster growth record, although this is by no means universal. More
importantly, they observe that there is a strong correlation between manufacturing export
growth and food-processing export growth, which leads them to conclude that, for
manufactured products, the key determinant is the domestic policy framework rather than
resource endowments, which should be seen rather as a necessary pre-condition, although it
remains the critical factor in the case of primary product exports.
Five developing countries – Argentina, Brazil, Malaysia, Thailand and Taiwan were
responsible for 40% of total processed food exports by developing countries, but the
evidence points to a continuous increase in the number of developing countries participating
in such exports. Countries with a superior overall export record – Chile, Thailand,
Indonesia, Malaysia, Turkey, Tunisia, Guatamala, El Salvador and Sri Lanka – have also
been most notable in the increase of processed food in their share of total non- manufactured
exports. It should be noted, however, that particularly in the case of middle and high- income
developing countries, the growth rate of manufacturing exports has far exceeded that of
processed foods. Nevertheless, for more than half of the 37 developing countries selected
7
for analysis, processed food exports represented at least 20% of total ISIC manufacturing
exports in 1994.
The authors also note, what they see as a remarkable shift in the commodity
composition of processed food exports since the ´70s with current export growth coming
from products which were of less importance in the initial period. Processed fish, whose
share in total processed food exports from developing countries in 1970 was 8.8%, occupied
30,7% of total exports in 1994. Less spectacularly preserved fruit has also continued to
increase its share over time. For most developing countries these two products account for
some 40% of total processed food exports. For as many as 17 countries, processed fish
alone has accounted for 40% of total exports. On the other hand, traditional products –
meat, sugar, animal feeds, vegetable oils – have either fluctuated wildly or declined in
importance.
Having established the strategic role of processed food exports, the authors then
consider their implications for employment, terms of trade, knowledge and technology spill-
overs. They note that there is no clear relation between income levels and export growth and
that, furthermore, the final stages of food-processing tend to be labour intensive, particularly
canning and fish-processing. The authors, also provisionally, conc lude that trade
implications are positive when compared to primary products based on income and price
elasticity of demand trends and in this sense processed foods are similar to traditional
manufactured products as a whole. Their spill-over effects, however, would seem to be
superior to traditional manufacturing since they are less dependent on imports, involve a
greater degree of learning through interaction with exporters, and have to respond to more
demanding quality specifications.
A similarly optimistic assessment can be found in the UNCTAD report:

“Opportunities for Vertical Diversification in the Food Processing Sector in Developing
Countries” (1997) which analyses the prospects for four groups of food products:
horticulture, fish, meat and tropical beverages. Trade opportunities are identified in three
major country blocs: higher income developing countries such as South- East Asia as a result
of market expansion; the economies of Eastern Europe and the Russian Federation as a
consequence of the transition effect; developed and advanced developing countries through
the impact of changing life-styles. The principal problems of market access are identified
with sanitary and quality demands, the control of marketing channels by the established
transnatio nals and the reliability of supplies, which places great demands on logistics.
Favourable factors mentioned include, geographical and cultural proximity on the one hand
and the existence of a large domestic market, which allows for economies of scale and
scope. (Evidence from Brazil for the fruit sector in comparison with Chile would suggest,
however, that a large domestic market might serve as an easy alternative to the effort
required to create and sustain export markets). Three areas for further analysis were
identified for developing countries seeking to promote processed- food exports in these four
sectors: the new conditions for market access as a result of the WTO regulatory framework;
the types of corporate strategies appropriate for seizing market opportunities; the ways to
use the domestic market as a platform together with the promotion of adequate supporting
structures.
The horticulture sector in this study includes fruit juices, frozen and dried products,
minimally processed products (salads), canning and processing, with world trade being
8
calculated at US$15 billion in 1995.4 Tropical and temperate climate products are seen to
face a demand, on a global scale, which is both dynamic and increasingly diversified. At the
same time, a tendency by transnationals to farm out the primary processing stages to
developing countries was identified, leading to the phenomenon of “bright cans” imports,
which would then be labelled for final retail and sales. Such a tendency parallels strategies
of out-sourcing in other manufacturing sectors. Nevertheless some brand strategies by
developing countries were seen to have been successful (Thailand, Philippines, Jamaica),
and while most markets are increasingly dominated by transationalised circuits this has not
prevented the successful entry of new countries, such as Chile and the Dominican Republic.
In the major markets, tariffs on processed fruits are often double the average applied MFN
rates and additional levies may be imposed, although the Andean and the ACP countries
have duty free access to the EU market. In spite of this, of the ACP countries, only
Swaziland, Côte dÍvoire, Kenya and Jamaica have gained important levels of access, and
the market leaders are Brazil, Thailand and the Philippines.
The importance of fish products has already been mentioned above and the size of
world trade in processed fish - US$45 billion in 1995 – fully justifies the attention it has
been given in the literature. 5 40% of this trade is for frozen fish and 38% for frozen
crustaceans. Canned fish make up a further 10%, with fish- meal and oils accounting for 7%.
On the demand side, associations of convenience and health are leading to an explosion of
product innovations, and dynamic markets prevail in all three of the major trading blocs –
NAFTA, EU and Japan, which are responsible for 85% of total imports. The strong
presence of Japanese, Korean and Nordic firms, together with the regulatory-driven shift to
new fishing grounds has led to the development of many new trade circuits and the entry of
a wide range of countries. Argentina and Uruguay (hake), Thailand (canned tuna), India
(frozen products), Chile (congrio), Mexico and Peru (processed squid), Morocco (canned
sardines) Pacific Islands (tuna eyes and stomachs) are cited as important cases of market
success, often developed in the form of joint-ventures. Tariffs in the EU are higher than in
either Japan or the US, although again the ACP and the Andean countries are exempt from
duties, as in this case is Argentina. Similarly, in the US, fish products from the LDCs, the
Caribbean and NAFTA countries enter duty-free. A key access issue is that of regulatory
sanitary controls, which now demand the adoption of HACCP procedures in all fish
processing exported to these trading zones.
World trade in processed meats (beef, pork and poultry) amounted to US$22 billion
in 1995 with an 8% annual growth rate in the preceding five years. 6 Market opportunities
and trade flows are markedly distinct for each of these major categories, but, in contrast to
the two previous groups of products discussed above, meat consumption in developed
countries (with the exception of Japan) has tended to stabilise, while demand in developing
countries has increased, leading also to a pressure for higher imports, particularly in the case
of poultry products. 90% of trade is still restricted to chilled and frozen meats, although
health and convenience products are on the increase and quality thresholds have been
ratcheted upwards. Developed countries are responsible for 80% of beef exports with
developing country suppliers being restricted to Latin America, India and Southern Africa.
The US is the largest market, followed by the former Soviet Union, Japan, the Middle East,
4
This section is based on Trade Opportunities in the International Processed Horticulture Markets by John
Giles, UNCTAD, n/d
5
The section on fish was based on: Trade Opportunities for processed Fish by Helga Josupeit, UNCTAD. n/d
6
This section is based on Trade Opportunities for Processed Meat by Lionel J. Colby, UNCTAD, n/d
9
Egypt and Korea. Price and entry barriers divide the world market between the Pacific and
Atlantic zones, with the former virtually excluding developing country exports through their
“zero-risk” policy on foot-and- mouth. The export market is, therefore, limited to the Middle
East/North Africa, the Rus sian Federation and Eastern Europe, with prices and market share
affected by the competition of EU subsidised beef. Four well established exporting
countries account for 75% of world trade in pork – Denmark, Canada, the US and Taiwan
with Japan (45%) and the US (15%) dominating imports. The opportunities for developing
country exporters are largely limited to the commodity end of the market directed at the
Russian Federation, Eastern Europe and more recently Korea.
Trade in chilled and frozen poultry has increased 20% per year in the 1990s. A large
increase in demand from developing countries, combined with domestic supply shortages,
especially in the Russian Federation, which has now become the major import market, are
responsible for 80% of world trade. Although competition is strong from established
exporters, poultry production facilities are the easiest to set up, given access to competitive
supplies of feed, and successful developing country exporters include China, Brazil and
Thailand. The developed countries, however, still dominate this trade, with the US and the
EU accounting for 75% of total exports. Meat products are especially sensitive in terms of
both animal health and hygiene in processing plants and increasingly stringent quality and
health demands constitute important technical barriers for market access.
The world market for tropical beverages - coffee, cocoa, tea - at US$29 billion is
larger than for both meats and horticulture but is subject to strong fluctuations. 90% of
coffee is traded as green beans with processing taking place in the importing country. Brazil
and Colombia are the leading soluble coffee exporters. In the case of cocoa, on the other
hand, under a half of trade is in the form of beans with chocolate accounting for 20%, cocoa
butter 14%, cocoa powder and cake for 12% and cocoa liquor for 6%. Nevertheless the bulk
of this trade is in the form of re-exports and cocoa producing countries export 79% in the
form of beans, with cocoa butter representing 10%, cocoa powder 7%, cocoa liquor 3,5%
and chocolate products less than 1%. Brazil. 7 Some 90% of tea is similarly traded as raw
material with packaged tea accounting for less than 10%.
Access to markets for tropical beverage products, in addition to confronting higher

tariffs, have to meet stricter labelling and health requirements. Further obstacles include the
need to provide blended products, the sophistication of packaging, and the high levels of
industry concentration. On the other hand, the transnationals which dominate processing,
are increasingly investing in producer countries both for export and for the host market, and
in these products it would seem that a large domestic market is an advantage for subsequent
exports, both from the point of view of scale and segmentation by quality. Nestlé has coffee
plants in the Côte dÍvoire, Brazil, Indonesia, Thailand and China. Cacao Barry, Hosta,
Cargill, ED & F Man and Mars have operations in major producer countries: Côte dÍvoire,
Cameroon, Brazil, Indonesia. Nestlé, Unilever and James Finley also dominate tea-
processing in producer countries with the exception of Tata Tea in India. Processors in Asia
serving regional markets tend to be less dominated by transnationals.
7
This phenomenon even extends now to Fair Trade initiatives going mainstream where tariffs barriers, quality
and logistical considerations have led Traidcraft to produce their chocolate chip cookies in Belgium while
their Geobar sold through the British Waitrose retail outlet is produced in Wales, both on the basis of imported
raw materials (Humphrey, L. 2000).
10
These studies converge with the literature discussed earlier on the key role of new
non-traditional products in the export dynamic of processed food products from developing
countries. In line with the positive interpretation of the significance and opportunities for
developing countries of processed food exports adopted by Athukorala and Sen (1998),
much research has focussed on the obstacles to access posed by considerably higher tariffs
for processed products when compared to raw material exports (Rae & Josling, 2001), and
more importantly by technical barriers consequent on greater rigour with regard to quality
and food safety. Following on the decisions of the Uruguay Round, protectionist measures
will tend in the future to be based increasingly on those barriers, which can be justified
within the terms of the Sanitary and Phytosanitary (SPS) and the Technical Barriers to
Trade (TBT) agreements (Valdimarsson et al, TAFT, Iceland, 2003). An important
Workshop on Food Safety Management in Developing Countries, organised by the FAO
and CIRAD in 2000, explored these issues in detail with examples from country
experiences in Asia, Africa and Latin America (Hanak, Boutrif, Fabre & Pineiro, 2000). A
premium therefore becomes attached also to the ability to negotiate the dispute settlement
mechanisms of the WTO (Athukorala et al, 2002). In their conclusions to a recent
contribution on this theme, Athukorala & Jayasuriya, (2003) argue: “Unlike conventional
trade policy reforms, SPS regulations cannot be implemented simply through legislative
declaration. Their effective implementation in developing countries requires that binding
commitments are made to provide adequate financial and technical assistance. In particular,
there is a need for a global framework to support national capacity building and improve the
design of international standards.” (p17)
A less sanguine interpretation of the increasing importance of processed food

exports from developing countries has been developed by environmentally oriented research
which would see this tendency as part of a broader mo vement either to export “dirty”
industries to, or deplete the resources of, countries with less rigorous legislative and
regulatory controls. The fishing industry has particularly come under attack in this sense. A
United Nations Environment Agency (UNEP) Report (2001) has warned of the dangers of
selling rights to fishing stocks under the pressure for short-term export cash, particularly
when the developed countries are subsidising the fishing vessels. This study analysed trends
in the fishing industries of Argentina and Senegal, which have opened their waters to fleets
from Europe, Japan, Korea and South-east Asia. In the case of Argentina, in spite of a five-
fold increase in the number of factory vessels, catches have fallen dramatically. In Senegal,
on the other hand, the study identified a “massive wastage of fish caught” since the fleets
were only interested in species of specific export interest. The report warns that this
exploitation of developing country fisheries may seriously affect local food supplies and
fishing communities and is largely based on the concession of fishing rights to foreign
vessels rather than on an effort to developing the domestic fishing industry of developing
countries. 8
Another critical line of research has been developed by the global commodity or
value chain approaches which would see this surge in processed exports as part of a broader
out-sourcing strategy of production chains dominated by transnational firms, which are
taking advantage of trade liberalisation and regulatory flexibility, to harness the cheaper
labour and abundant resources of developing countries. The strategy is no longer now
limited to raw materials but includes basic processing activities, to the extent that value
8
The Economist, however, presents a much more optimistic in its article: “The Promise of a Blue Revolution”,
August, 7, 2003
11
added is increasingly concentrated clo ser to the activities directly related to final demand in
the consuming countries (Gereffi, 1994, Fitter & Kaplinsky, 2002). The UNCTAD Trade
and Development Report (2002) gives strong support to such an interpretation when it notes
that, with the exceptio n of a small number of newly industrialising East-Asian economies,
“high technology” manufactured exports from developing countries often represent “the
low-skill assembly stages of international production chains organised by transnational
corporations (TNC)” (p V op.cit.) with the technology and skills embodied in imported parts
and components. It further adds that, while developed countries now “have a lower share in
world manufacturing exports, they have actually increased their share in world
manufacturing value added over this period” (p. V op. cit.). In line also with the global
value chain analysis, the report argues that “perhaps a more decisive influence on product
dynamism has been the strategy of TNCs,” and that “trade based on specialisation within
such networks is estimated to account for up to 30 per cent of world exports.” (p VI. op.
cit.)
Particularly interesting examples of this line of analysis are the studies of the
horticulture commodity chain, which, after fish products, is the most dynamic food
processing export sector for developing countries, being carried out by the Institute of
Development Studies, Sussex. Building on Gereffi´s distinction between supply and
demand driven commodity or value chains, these studies analyse the out-sourcing strategies
of British retail, particularly in relation to African supply bases (Kenya and Zimbabwe) and
note the tendency to locate the preparation and packaging stages increasingly in the supplier
countries. This ensures that there is less wastage on arrival in the consumer country and
allows products to be on the shelves only twenty-four hours after they have left the farms.
On the other hand, the quality and logistical demands of this pattern of outsourcing provoke
greater concentration, within the agricultural sector of the producer countries, marginalizing
small farmers and consolidating large farms based on casual, predominantly female labour
(Barrientos, 200). In addition, the competitive advantage of producer countries is constantly
undermined as production bases can be quickly mobilised in other countries with similar
material and human resources. Sensitivity to negative publicity on labour conditions in these
supplier countries is leading to the adoption of ethical trade standards, based fundamentally
on ILO and United Nations definitions of labour and basic rights. While the worst features
of “spurious competition” are, therefore, avoided, quality and “ethical” considerations
appear to be accelerating the exclusion of small farmers and firms from these global
horticulture value-chains (Dolan, Humphrey & Harris-Pascal, 2002). The impact of the
global change in agrifood grades and standards on developing country and particularly
small producer access to domestic and export markets has also been extensively studied by
Reardon and colleagues, who focus on the differential strategies of transnationals, medium
to large domestic farms and small firms and farms in relation to grades and standards. In
particular, they argue that “Governments should build the capacity of the poor to invest to
“make the grade” implied by the new G(rades) and S(tandards)” (Reardon, Codron, Busch,
Bingen & Harris, 2000).
4. FDI, Imports and Food Processing in the Domestic Market of

Developing Countries
Studies on the transnationalisation of the British food industry are notable for their
focus on the way retail is constructing new global value chains (IDS, 2001; Marsden, 2000).
Studies on European food FDI initially focussed on US-EU flows (Green, R. 1990) and
12
more recently intra-european investments related to the consolidation of the single market..
Japanese FDI studies as we have seen are focussed on their role in creating, first regional
and now global, supply bases for their domestic market. Research on US FDI, on the other
hand, probably reflecting its leading role in global food industry FDI, has tended to focus on
the impact of the transnationalisation of food processing firms on the host countries in terms
of their effect on a series of variables, ranging from domestic capital formation, growth
rates, efficiency, repatriation of profits, exports x imports, employment, changes in diet and
consumption patterns (Gopinath M. 2000). At the same time, important research has been
carried out on the impact of food processing FDI on the innovation dynamic of developing
countries (Rama, 2000)
Bolling (1999) in his overview of US FDI, notes that in earlier decades investments
were primarily directed at primary processing facilities both for export and for the domestic
market, particularly in the grains and oils sectors. In the nineties, on the other hand, these
have declined relative to investments directed to final food demand in the domestic markets
of the host countries, most notably in beverages where FDI more than tripled and “other
processed foods”, which saw investments more than double.
Given the importance of NAFTA, which has accelerated the creation of a regional
North American food industry, US investments in the Mexican food industry are of
particular note, increasing from US$210 million in 1987 to US$5 billion in 1997, generating
US$6.5 billion in sales in 1998. Investments were stimulated by changes in FDI law, which
permitted a majority foreign capital share for firms in Mexico. (Similar laws have been
enacted in many other countries to attract FDI, Brazil being a notable case in Latin
America´s Southern Cone). According to Bolling, Elizalde & Handy, (1999) these
investments are fundamentally directed to the Mexican domestic market and are heavily
concentrated on convenience and highly processed foods, especially snacks, beverages,
instant coffee, mayonnaise, breakfast cereals. In many cases the ingredients for these
products (vegetable oils, dried milk, flavourings) are imported from the US on the basis of
intra- firm transactions. These investments therefore accelerate trends to the adoption of
highly industrialised global diets, which have come under considerable attack in recent
years for their negative impact on health (indices of obesity, precocious diabetes), and may
be leading to a substitution of domestic raw materials and ingredients through imports.
Sustained economic growth, higher incomes and population trends are seen to be the
principal stimulus for these FDI flows. It should also be noted that Mexican firms are
beginning to establish affiliates in the US market also, with investment, increasing from
zero in 1990 to US$664 million in 1996, largely stimulated by the demand for Hispanic
foods.
Similar tendencies are identified for Brazil and Argentina by Bolling, Neff and
Handy in their 1998 Report: “U.S. Foreign Direct Investment in the Western Hemisphere
Processed Food Industry”. In the cases of these Mercosul countries, however, investments
to control key exporting sectors (oils, grains, coffee, fruit-juice) are considerably more
important. Canada, Mexico, Argentina and Brazil are responsible for 90% of all US FDI in
the Americas. The authors see FDI as complementary to US exports and argue that “FDI
seems to have beneficial effects on the economy of the host country”, pointing to
improvements in food production infrastructure, lower costs of domestic production vis-a-
vis imports, job creation, gains in efficiency by local firms faced with competition from the
multinationals, products and process innovations, contribution to gross domestic product
and foreign currency earnings. Studies conducted within the Mercosul countries have given
13
greater importance to the increase in industry concentration, which has occurred in the wake
of the acceleration of FDI (Belik & dos Santos, 2000, Guezan, 1999, Gutman, 1999),
together with the regional character of recent investments, which have led also to a greater
number of green- field initiatives (Wilkinson, 1999). Other authors have emphasised the
importance of the new institutional environment (deregulation, liberalisation), which tends
to make greater transnationalisation compatible with increased competition, price stability
and an acceleration of new product, process and logistical innovations (Farina &Viegas,
2003).
In his review of the FDI literature, Gopinath (2000) identifies three schools of
thought. The first, based on Bhagwati´s “immiserizing growth” thesis, would stress the
lock-in consequences of tariff induced FDI in small countries where cheap labour becomes
comb ined with the increasing import of capital intensive components and equipment. In
these cases, Athukorala and Sen (1998) have argued that food processing would be one of
the lesser affected sectors to the extent that it has a lower dependence on imports. This,
however, may only be the case for processed food exports. We have seen above the
combination of exports and FDI in the case of Mexico, and this tendency is well
documented in the literature (Friedman, 1988) and in line with the complementarity thesis
identified by much econometric analysis of trade and FDI flows (Marchant, Saghaian &
Vickner, 1998). The second approach, associated with Markusen, identifies a trade-off
between increased technical efficiency and increased monopoly power, where the existence
of competition between transnationals would be sufficient for the establishment of welfare
benefits in terms of prices. Here the size of the domestic market and/or the nature of the
institutional framework would seem to be crucial. And finally, the third approach, that of
new growth theory, would give pride of place to the institutional framework, seeing positive
benefits to the extent that export promotion policies, deregulation and liberalisation
characterise the domestic policy regime. As Farina & Viegas (op.cit.) point out, however, it
is impossible to know whether, in a changed institutional climate, domestic firms would not
have developed the same competitive strategies. In this case, the entry of FDI, especially in
the form of acquisitions may ha ve had the effect of “crowding-out” potential domestic
investment.
Be that as it may, there has been a virtual universal adjustment of domestic regimes
in developing countries to create an attractive environment for FDI. As we noticed earlier,
US food processing FDI alone was responsible for US$133.1 billion in sales, four times
more than its food-processing exports. This is heavily concentrated in the EU, NAFTA and
the Mercosul regions, but some US$7.5 billion was invested in other developing countries
in 1995 and, in all, the US food-processing sector had 8223 foreign affiliates in 1998. FDI,
therefore, especially in the case of small countries, may have a decisive impact even with
low levels of investment, and, to the extent that it is accompanied by imports, it will also
involve a displacement of domestic raw material supplies.
Most discussion of FDI and trade flows focus on generic variables (growth rates,
technical efficiency, concentration etc), but our earlier discussion of the major developed
blocs made clear that that the bulk of investments were related to highly processed food and
drinks, especially snacks, convenience foods and soft drinks. This second generation of
FDI, therefore, is not now focussed so much on primary processing, which involved a shift
from local grains and oils to wheat, corn and soy based products, but on final foods for the
domestic market, deepening the pressures for substantial changes in diet. In developing
countries, where these investments are more solidly implanted, in addition to the emergence
14
of new dietary associated diseases, where malnutrition predominates, the perverse

combination of des- nutrition and obesity is now in evidence. Whether this should be
associated with the “westernisation” of dietary practices (Richter, 1998) or the structural
consequences of urbanisation and changes in family and work practices, especially the
opportunity cost of female domestic labour is an area of debate particularly as this process
begins to affect Asian countries where convenience foods would seem to be adapting to
local tastes ( ).
European and U.S. exports to developing countries, however, are not restricted to
the “highly processed products” category but involve also the heavily subsidised
commodities of the “fordist” diet, involving a shift from a vegetable to an animal protein-
based diet which is, at the same time, subject to more rapid and more individualised
methods of food preparation and consumption. Milk powder and white meats, particularly
poultry are the two anchor products of this diet, both heavily subsidised exports by the two
major trading blocs. We saw earlier that world trade in the case of poultry was largely based
on developing country demand, and that it is a sector, which can be rapidly put into place in
developing country economies. Nevertheless 75% of this trade remains is controlled by the
EU and the US, with only Brazil, Thailand and China able to compete with their subsidies.
With a more level playing field, a number of developing countries would have greater
opportunities for the development of a domestic poultry industry. Similar considerations
could be made in the case of world trade in dried milk.
5. The Food Processing Sector and the Domestic Markets of

Developing Countries
Since the UNCTAD study: The Food Processing Sector in Developing Countries:
Some Recent Trends in the Transfer and Development of Technology (1980) the macro
economic and regulatory climate has suffered a sea-change. Import substitution has given
way everywhere to export orie nted growth strategies and most developing countries have
now adjusted to the post-Uruguay Round WTO framework. An increased participation of
developing countries in the share of global manufactured exports is seen to vindicate and
point the way for future development (Global Forum of Industry, 1995). The dominant
orthodox view focuses primarily on the need for macro economic and regulatory
adjustment, which is seen to be the basic strategy for integrating developing countries into
global economic growth under the coordination of transnationals in the form of FDI or
external sub-contracting. According to this scenario, sectorial measures would be focussed
on policies to promote SMEs, combined with initiatives directed at poverty alleviation.
Other analysts have pointed to the selective character of FDI, particularly in the case of the
least developed countries where de- industrialisation (Africa) or a de- intensification of
industrialisation (Latin America) have been identified in this period, and have stressed the
need for more pro-active industrial strategies at domestic level. The case of South Korea
and other Asian countries, on the one hand, where FDI was less important, and the
inspiration of the “Third Italy” for the development of cluster strategies, wo uld provide the
principal support for this approach.
A further fundamental change has been the shift to the formation of regional blocs
which has accompanied globalisation and which has now also become a feature of the
developing world. In Latin America, Mexico became integrated into NAFTA, while the
Southern Cone developed the Mercosul, complementing earlier blocs, such as the Andean
15
Pact, with similar initiatives in Central America and the Caribbean. In Asia, Japan had long
been the focus of regional integration, but more recently the ASEAN countries have
established a free trade area with China, principally as a strategy for benefiting from FDI
flows. After many setbacks in Africa, a new regional dynamic is emerging in the SADC,
with South Africa as its hub. These tendencies to regionalisation are now reinforced by the
global strategies of the TNCs, which, as we have seen in the case of the Mercosul,
increasingly adopt regional considerations when defining their investment options.
At the same time, the heterogeneity of the developing world has increased markedly
in this period. Alongside newly industrialising Asian countries, this category also includes
the 49 least developed countries (LDCs), with 10% of the world´s population but which
contribute only 0,4% to global manufacturing value added. On the other hand, the impact of
liberalisation and deregulation on the giant, but low-income economies of China and India
has radically transformed trade and investment flows in the developing world.
In increasingly open economies, where an export orientation is combined with rapid

rates of transnationalisation, it is more difficult to distinguish specifically domestic
tendencies. On the one hand, exports have less of an enclave character and on the other the
domestic dynamic is being radically transformed by the presence of transnational firms.
Nevertheless, for the food processing industry of developing countries, trends in population
growth, rural- urban migration, income levels and their distribution, particularly the size of
the middle class, are seen to be crucial differentiating variables.
As much as 97 percent of the increase in world population from 2000-2050 will

occur in today’s developing countries with the developed countries´ share falling from 20
percent of the total in 2000 to only 13 percent in 2050. 9 Africa will undergo the most rapid
growth, increasing from 784 million in 2000 to nearly 1.8 billion in 2050. India will
overtake China as the most populous country, rising from just over 1 billion to more than
1.5 billion between 2000 and 2050. Although rural to rural migration continues in certain
countries of Latin America and Africa, rural- urban migration is the most significant and
relevant trend from the point of view of the food processing industry. On a world-scale, half
of urban growth is still based on rural- urban migration. Globally, urban areas are currently
growing at a rate of 2.2% as against 0,4% for rural areas and rates of urbanisation in
developing countries are much higher than in developed countries. Generational differences
between developed and developed countries also have an important bearing on food
consumption, both in terms of niche markets (baby foods) and broader changes in the
composition of food demand. A Japanese study ha s shown that, in this country, the younger
generation consume more beef and beer whereas older people eat more rice, vegetables and
fruits. The enormous differences in the generational distribution of the population between
developed and developing countries, and consequently for food consumption, can be
appreciated in the Figure contained in the Annexes.
As an indication of the impact of urbanisation on food consumption and the

processing industry, in the context of rapid and sustained economic growth, we can take the
example of China. 10 With some 50% of its 1.3 billion population still in the countryside,
China plans to shift 40 million people to the cities in the five years 2002-2007. A Chinese
9
The data in this section are taken from
10
This paragraph draws on “China´s Food and Agriculture: Issues for the 21st Century”, F. gale (ed),
ERS/USDA, 2002
16
household survey showed that urban per capita consumption of meat was 40% higher than
in rural areas, fish consumption three times higher, and egg and poultry production 2,5
times higher. On the other hand, urban grain consumption was three times lower than that in
rural areas. Here we can detect the basic elements of the “Fordist” diet discussed earlier.
Higher- income urban residents in the same survey were seen to consume more of most
foods on a per capita basis than low- income urban residents, but particularly so in the case
of milk, fruits, beer, poultry, meat, fish, eggs and vegetables. Food processing output value
in China, increasingly of final food products is said to have grown 14% per cent a year
during the ´80s and ´90s, while 15% of urban food spending is now “away- from- home”.
The estimated number of supermarkets for a major Chinese city is now calculated at 1,2000,
with the number of hypermarkets reaching 90. While maintaining a remarkable degree of
self-sufficiency, China has become a major exporter of high-value labour-intensive
processed food products and an equally major importer of bulk commodities used as
intermediate inputs. The world´s leading retailers and food and drinks processor are all
investing heavily in the Chinese market, which has become a major destiny for FDI. Both
internal and global pressures are leading to demands for greater food quality in what is
essentially a market-driven growth dynamic. A low- input “green food” sector has emerged,
a complete reform of the meat slaughter sector is under proposal (which raises a more
general question of the informal food processing sector in developing countries which will
be discussed below), and a Government-promoted strategy of contract farming is being
widely implemented to respond to new quality and logistic demands.
If we contrast this scenario with that of the least developed countries (LDCs) we
find that the food processing sector, is if anything more strategic for economic development,
but here we are dealing fundamentally with primary processing, combined in certain
countries with processed food exports (Bangladesh in fisheries, and some African countries
in fruit and vegetables and also fisheries), while the final foods sector is still heavily
dominated by artisan cooking and street-sales. 11 These countries recall the PL480, “aid-to-
trade” analyses (Friedman, 1988) showing a heavy reliance on imports of rice and grains,
which undercut local production and break down dynamic relations between urban
consumption and agricultural production. The LDCs receive only 2.2% of FDI flows to
developing countries (concentrated in mining and energy) and rely more on aid,
international loans and the actions of NGOs. Their manufacturing sectors represent less than
10% of GDP, but the food and drink agroindustries make up some 35% of total
manufacturing value added (MVA), rising to 50% in many of these countries, and over 80%
in 17 of the 37 African LDCs. In Asian LDCs, on the other hand, while the share of food
manufacturing in MVA was lower, the import content of food manufacturing industries was
near to ze ro.
The promotion of processing activities related to domestic crops such as millet,

maize, sorghum and cassava would theoretically both improve food security and
employment in the African LDCs, but it remains to be seen whether changes in urban food
consumption patterns have not already taken on an irreversible character. Opportunities are
identified primarily in grains, fish, oilseed and sugar processing. In all of these, however,
new knowledge and technology are pre-requisites for further progress, which involves
greater integration in global networks. Regional integration with more advanced developing
countries is seen to be key to gaining access to the benefits of information technology
11
This paragraph draws on “Building Productive Capacity for Poverty Alleviation in Least Developed
Countries (LDC´s)”, UNIDO, 2001
17
decisive for integration in global demand-driven agrofood markets, and in- line with which
most LDCs have adjusted their regulatory environments.
Even in the above highly polarised cases, which we have briefly presented, it is clear
that behind the growing heterogeneity of the developing world a number of similar patterns,
challenges and opportunities emerge. Rather than present an exhaustive account of the food-
processing sector in developing countries, which would involve discriminating countries by
human and natural resources, income levels, size of market, geographical position,
consumer and cultural practices, degrees of regional integration, types of access to
developed country markets, trade flows and FDI, together with each country´s regulatory
system, we will try present some stylised facts which may subsequently guide policy
considerations.
Firstly, what has emerged from our review is that, in varying degrees, internal
deregulation and external liberalisation of markets, together with legislative reform
favourable to foreign investments is now a general feature of all developing countries,
including the LDCs. This has led to an intensification of foreign trade and investment with
priority being given to the development of processed- food exporting capacity, based on
intensive use of human and labour resources, which is combined with efforts to attract FDI
as a substitute for domestic capital and “know how”. This has led to an intensification of the
trans-nationalisation of the food-processing sector, either directly in the domestic market or
as part of a “global value chain”. Even in LDCs, where trans-nationalisation is much less in
evidence, this latter remains a key strategic objective of local governments and regional
blocs. While this overall strategy has brought important results in food- manufacturing
growth rates, to the extent that more and more countries become involved, there is a greater
risk of producing the “fallacy of composition”, to which the UNIDO Trade and
Development Report (2002) draws attention.
This combination of liberalisation and trans-nationalisation has a range of

implications, which vary from country to country but apply to the developing world as a
whole. There tends to be a weakening/elimination of the dualism between the domestic
market for urban consumption and export/import sectors, which accelerates with the
consolidation of an urban middle class. Brazil is a world leader in poultry exports, but 70%
of total production is consumed domestically and per capita consumption has increased
from 2 kg per capita in 1970 to 26 kg per capita in 2000. Similarly 30% of soy meal and
70% of soy oil are consumed domestically. The same tendencies are now at work in other
products – fruit-juices, coffee consumption. While, however, the dualism of domestic
market versus exports is becoming attenuated, a dualism based on income differentiation
persists in the prevalence of the informal sector, which even in a country such as Brazil
registers levels of 30-50% in meats, milk and soft drinks, and which now comes under
heavy attack in the efforts to implement new minimum standards of quality.
Liberalisation and transnationalisation has increased the competitive structure of the
food industry, leading to more rapid product and process innovations, and has accelerated
the homogenisation of food consumption patterns. At the same time, it has been
accompanied by a significant de-nationalisation of leading domestic food firms, increasing
concentration and the elimination of many medium-sized firms, as market segments become
dominated by at most three leading brands. While there is a clear trend towards a protein
diet based on fish, meat and dairy products, together with a sharp increase in prepared fruits
18
and vegetables, the integration of local products would seem to depend on their adaptability
to the pressures for convenience foods.
As in manufacturing more generally, there is a tendency for the food-processing

industry to externalise many activities: design, market studies, transport, distribution and
even manufacturing, as the leading firms concentrate on brand promotion and competitive
strategy. Opportunities are therefore opened up for the emergence of SMEs, often in a long-
term relation with the leading firm, although there are also pressures for concentration
within these activities.
As we mentioned at the beginning of this review, the food and drinks industry is no
longer the hegemonic player in the overall food system, which has now been assumed by
large-scale retail (Wilkinson, 2002). In addition, large-scale retail is as heavily involved in
FDI as the food-processing sector itself, and depending on the level of development of the
food system in each country, it tends to reproduce the strategies which it has developed in
the industrialised countries. The rise in supermarket own brands is particularly notable in
some Latin American countries. At the same time, we have seen that the leading food-
processing firms involved in FDI tend to concentrate their activities on highly processed
products and convenience foods. This may point to opportunities for SMEs and local firms
in less sophisticated food-processing activities or in earlier phases of the production chain,
either for the leading food firms or for retail.
A common characteristic of the global food system is the adoption of ever more
stringent quality criteria to which developing countries are increasing being forced to
adhere. To the extent that developing country governments do not impose international-
level standards, private standards are being implemented by the leading players in retail and
food-processing (Reardon & Farina). HACCP, ISOs, traceability systems, and private
quality labels, are becoming entry tickets to international markets and increasingly the
reference for quality in the domestic market of developing countries. This has led to an
acceleration of obligational contract relations with raw material suppliers, involving detailed
specification of production and delivery conditions. There is much evidence to suggest that
this is leading to a considerable degree of exclusion of small farms and firms, an issue to
which we will now turn in our final section.
6. The Participation of Small Farms and Firms

There is a sharp contrast between the literature which focuses on the combined
exclusionary effects of scale and quality for SMEs, and that which sees SMEs as the main
opportunity for employment creation, as strategies of “downsizing” in large firms have
produced the phenomenon of growth without employment. In addition to studies
demonstrating the numerical importance of SMEs in the economies of the industrialised
world (OECD, 1990), the role of SMEs in innovation (Lundvall, 1997, Cooke, 2000), in
local development and the promotion of industrial districts on the cluster model (UNIDO,
2001), and as components of global value chains (UNIDO, 2001) have been the focus of
much research. At its most emphatic, and inspired by the work of Piore & Sabel (1984),
SMEs are even seen as the basis for a new model of economic development.
In our review of the European and Japanese food-processing sectors above, we have
shown the continued importance of SMEs, both numerically and in terms of manufacturing
value-added. At the same time, the trends to concentration are evident as, increasingly,
19
different products segments on the retail shelves are reduced to three or four leading brands.
The reduction in farm numbers and the successive increase in minimum viable cultivation
sizes are also evident in the industrialised countries, and in this case we are faced with an
absolute reduction of the agricultural economically active population to levels of 5% and
under, which pose an enormous challenge to developing countries, where the economically
active population in agriculture can range from 20% to as much as 50% of the total EAP.
It is clear that a detailed consideration of the dynamic of SMEs in the food-

processing sector of developing countries would have to take into account the sharp
differences according to the agrofood product involved , both as regards processing and raw
material supplies. In this sense, the rice-based activities of many Asian countries have a
totally different dynamic than the readily mechanisable agriculture of much of Latin
America, parts of Africa and indeed other parts of Asia. Many traditional processing
activities, especially in grains, oil, and sugar have reached levels of scale and automation,
which offer virtually no space for SMEs. Recent developments in the dairy sector, so
critical to the small-scale farming sector of many developing countries would seem to be
advancing in this same direction (Dirven, 1999). On the other hand, the surge in demand for
prepared fruits and vegetables, affecting developing countries in all continents, is based on
labour intensive on and off- farm activities, where the possibilities for participation by SMEs
would appear to be significantly higher.
The opportunities and challenges facing SMEs in food-processing and related

activities derive, therefore from the impact of the new competitive environment on scale,
minimum quality, and the perspectives for non-traditional products. At the same time a
distinction should be made between traditional SME activities/actors and what we might
call “new entrants”, which may be SMEs in new activities or new actors in traditional
activities. This relates to a point made earlier when discussing the LDCs, that size as such is
not necessarily the barrier to competitiveness, which is increasingly located in the greater
learning intensity of all activities in a demand-driven market environment. From a strategic
point of view, where possible, policies should be directed at increasing the capacity of
traditional actors, through retraining and the provision of services, rather than focussing on
new, often “urban” entrants with professional experience.
Six areas can be identified as potential spaces for strengthening the presence of
SMEs, each of which should therefore be the subject of appropriate policy initiatives:
1. Traditional activities, which still escape the effects of scale and new quality
demands . Lack of adequate physical infrastructure (“weather-proof” roads,
transport, cold storage, household fridges), especially in the case of highly
perishable products, can favour local supplies, where short distance and time
between production and consumption can make traditional supplies compatible with
basic criteria of hygiene and sanitation. Low-density communities can also make
villages and small towns less attractive for modern distribution systems. Extreme
income inequalities and the prevalence of high levels of absolute poverty ensure the
persistence of informal food-processing activities, which demand appropriate quality
control support measures, which are neither punitive nor unrealistic in their
requirements.
2. Innovative firms supplying niche markets, services and technologies. These may
be urban, often emerging from university or local government “incubator” policies
specifically to promote SMEs. Artisan bakeries and confectionaries are also
20
emerging to compensate in part the marginalisation of traditional SMEs in this

sector (Scarlatto, G., 1999). They may also emerge in rural areas through the
introduction of new crops and livestock. Very often these are individual initiatives
and have become the object of generic policies to promote “entrepreneurialism”.
3. Suppliers for large firms. We have already mentioned how out-sourcing by food-
processing firms and large-scale retail are opening opportunities for small firms. It
remains to be seen to what extent, this sector is also suffering the effects of scale
economies.
4. Obligational Subcontracting. New quality demands, preoccupations with health
hazards, supply management and efficient consumer response techniques are all
leading to a marked increase informal contracts with raw material suppliers, based
on clear specification of production and delivery conditions. In many cases, this has
been seen to be associated with a shift from small farms to medium or large farms
runs on business-lines. Adequate resource support however, (IT, credit, technical
assistance, market information services), combined with organisational initiatives
for the promotion of associativism and cooperatives have shown themselves to be
effective in integrating small farmers into these more demanding coordination
networks.
5. Autonomous Networks. These have been traditio nally associated with the industrial
districts of Italy and the notion of clusters. Most examples in developing countries
seem to be associated with light industries based on local raw materials but for non-
food markets – footwear, clothing, wood-work. In Latin America, the notion is being
associated with the development of territorial strategies for local and regional
development based on SMEs. In Brazil, the notion of clusters of small rural
agroindustries is currently being promoted as a solution to the problems of scale for
SME, which are located primarily in the areas of management practices, market
access and technical support.
6. Special Quality, Artisan Products. In many cases the most realistic short term
strategy for small farms has been to engage in organisational innovations (new
forms of associativism) and technological modernisation to accompany the more
stringent conditions of agroindustry. Medium and long term prospects, however,
would seem to be on firmer ground to the extent that they are based on strategies for
establishing the market value of process and product characteristics typical to family
farming and its traditions. The model here would be the European strategy of
denominated origin products, which has now received some support in the
framework of the WTO, but in the case of developing countries this would clearly
include many specific features – indigenous products, products associated with
sustainability (particularly non-wood forest products), products based on social
criteria (faire trade, products from agrarian reform areas), together with products
which represent the preservation of biodiversity and traditional cultures. There are
indications that the modern retail sector may prove to be an important catalyst for
these markets.
7. Conclusions
This paper has prevented an overview of the main trends in food processing and
manufacturing in developing countries with a specific focus on their impact for the small
farm and firm sectors. Given the centrality of the transnationalisation of the food
processing sector of the major industrial blocs and the importance of regional and global
trade flows for developing countries, we first provided a succinct profile of the food-
21
processing sector in the U.S., Europe and Japan. This was followed by a more detailed
consideration of the combined strategies, which have predominated over the last decade in
developing countries, of promoting processed- food exports and adapting their internal
regulatory and legislative framework to attract foreign direct investment into this sector. We
then considered the internal dynamic of the food-processing sector in developing countries,
focussing on population, rural- urban migration and consumption trends, together with the
impact of the new regulatory regimes and FDI on this sector´s competitive environment. In
the final section we identified the principal opportunities and challenges facing SMEs in the
food-processing sector of developing countries.
22
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24
Annexes
25
Table 1 US Trade in processed food, 2000

thousand dollars
Industry group and industry Export Import
Total processed food 30,044,099 36,771,933
Meat sector 8,939,915 4,156,057
Dairy products and ice cream 1,092,828 1,530,225
Preserved fruit and vegetables 3,257,166 3,833,596
Grain mill products 3,959,532 1,220,416
Bakery products 466,139 1,031,119
Sugar and confections 1,909,013 3,470,997
Fats and oils 3,272,857 1,531,589
Beverages 2,469,906 8,057,864
Miscellaneous foods and food products 4,676,743 11,940,070
Source: USDA/ERS , US Processed Food Trade Data System
26
Table 2 US: Leading exporters of processed foods to the US

and top recipients of US processed food exports
Share of Change
Imports processed food
US imports from:
2000 imports 1998-1999 1999-2000
million dollars percent percent
Canada 8,400.5 22.8 12.6 8.4
Mexico 2,933.5 8.0 11.6 11.3
Thailand 2,233.9 6.1 11.7 9.3
France 1,964.8 5.3 17.8 -3.5
Italy 1,578.4 4.3 4.4 9.9
Australia 1,398.6 3.8 8.1 27.0
Netherlands 1,221.4 3.3 6.8 18.1
United Kingdom 1,199.8 3.3 15.5 2.9
New Zealand 1,073.2 2.9 -1.3 12.9
China (mainland) 1,025.8 2.8 16.3 17.3
Share of
Exports processed food Change
US exports from:
2000 exports 1998-1999 1999-2000
million dollars percent percent
Japan 6,213.6 20.7 6.1 3.3
Canada 5,746.5 19.1 3.7 5.6
Mexico 3,369.0 11.2 1.0 16.9
South Korea 1,839.6 6.1 46.1 32.9
Hong Kong 885.3 2.9 -12.3 -4.8
United Kingdom 741.3 2.5 -1.1 -11.9
China (Taiwan) 730.2 2.4 4.7 -0.2
Netherland 704.6 2.3 1.1 -5.2
China (mainland) 661.5 2.2 -46.3 46.3
Germany 497.3 1.7 -20.7 1.7
Source : USDA, ERS
27
Table 3 Profile of Foreign affiliates of US firms, 1995-98

million dollars
Investment position Change
Sector
1995 1998 1998-1995
Direct foreign investment by the United States: 1
Food manufacturing 28,896 33,871 17.2
Wholesaling 2,466 3,968 60.9
Foodstores 951 804 -15.5
Eating and drinking places 4,592 5,690 23.9
Total 36,905 44,333 20.1
US - owned subsidiaries
All food manufacturing 113,166 133,141 17.7
Grain mill and bakery 22,202 27,448 23.6
Beverages 36,958 42,127 14.0
Meat 4,980 NA NA
Dairy 4,093 NA NA
Fruits and vegetables 7,989 9,801 22.7
Other foods 36,944 42,540 15.1
Food Wholesaling 18,848 20,176 7.0
Foodstores 13,165 8,618 -34.5
Eating and drinking places 12,145 NA NA
Food marketing 157,324 161,935 2.9
Number of companies
Parent
Food manufacturing 77 72 -6.5
Food wholesaling 13 14 7.7
Foodstores 7 7 0.0
Eating and drinking places 13 9 -30.8
Food marketing 103 102 -1.0
Affiliates
Food manufacturing 764 823 7.7
Food wholesaling 223 216 -3.1
Foodstores 19 16 -15.8
Eating and drinking places 106 117 10.4
Food marketing 1,093 1,172 7.2
Footnotes:
NA: not available.
1 US direct investment abroad.
Source : Based on data supplied by UNIDO.
28
Table 4 The food and drink in the top 3 activities of the EU manufacturing industry, 1999
percentage
First Sector % Second Sector Third Sector
% %
Production Food and drink 13.4 Motor vehicules* 11.5 Chemicals 10.5
Value Added Chemicals 11.4 Machinery and equipment 10.8 Food and drink 10.7
Employment Food and drink 11.8 Machinery and equipment 11.3 Metal 9.3
Footnotes:
(*) 1995
Source: Eurostat; NACE Rev.1
29
Table 5 EU: Structure / production by country, estimated 2000

billion euro
Production Value Employees No of
Country
(*) Added (**) Companies
Eur 15 593 133 2.666 26.095
B 23 5 62 754
DK 16 4 83 275
D 119 27 548 6.035
H 5 1 43 1.036
E 60 13 363 3.040
F 121 21 400 3.645
IRL 15 4 47 687
I 63 12 197 2.844
NL 35 6 103 876
Ö 11 3 77 664
P 11 2 112 1.916
SF 8 2 43 1.785
S 15 3 54 338
UK 91 30 534 2200
Footnote:
(*) current price
(**) x 1000
Source : Based on CIAA
30
Graphic 1
Graphic 1: UE F&D Industry Distribution

12 companies to size
0
10
0
80
% 60
40
20
0
I E P F D B D S U N SF
K K L
Small enterprises. Medium-large enterprises
Source: Based on CIAA
31
Graphic 2
EU: F&D Industry Distrib. of employees according to size

of the company
120
100
80
% 60
40
20
0
I P F D B DK S UK SF
Small comp. 10 to 49 Medium-large comp. +50
empl
Source: Based on CIAA empl.
32
Table 6 Top export destinantions of

EU F& D products, 2001
m illio n e u r o
Exp o rts
U S A 9.085
Japan 3.716
S w itzerland 2.617
R u s s ia 2.569
C a n a d a 1.361
P o la n d 1.157
N o rw a y 1.030
A u s tralia 776
Czech Rep 767
South Korea 741
A lg e r i a 721
Israel 528
Total 45.015
Source : Eurostat
33
Table 7 Top origin of EU F& D

im p o r t s , 2 0 0 1
m illio n e u r o
Imports
Brazil 4.038
U S A 3.438
A r g e n t in a 2.936
C h in a 1.501
N e w Z e a la n d 1.481
N o rw a y 1.345
T h a ila n d 1.284
P o lan d 1.255
S w itzerland 1.214
A u s tralia 1.095
T u rkey 1.010
C h ile 847
T o tal 38.369
Source : Eurostat
34
Table 8 Europe: Commercial balance in 2001 per sector

(euros)
Sectors export imports
15.1 Meat sector 4522 4766
15.2 Processed and preserved fish and fish products 1854 11077
15.3 Processed and preserved fruit and vegetables 2554 4926
15.4 Animal and vegetable oils and fats 2683 6534
15.5 Dairy products and ice cream 5163 1314
15.6 Grain mill products, starches and starch products 1822 789
15.7 Prepared animal feeds 1188 965
15.8 Other food products 11494 4131
15.9 Beverages 13256 3679
Others 458 188
Total: all sectors of the food and drinks industry 45015 38369
Source: Based on data supplied by CIAA
35
Table 9 Ranking of European agri-food companies by sales 2001

billion euro
Total
Sales Food Drink European Employees
Employees
Name Country
Total in Europe Affiliates in Europe Thousands in Total
billion euro billion euro billion euro billion euro Thousands percentage
Nestlé Switzerland 52.6 ... 17.7 230 92 40.0
Unilever NL/GB 32.1 20.2 11.9 279 75 26.9
Diageo GB 19 4.1 14.9
Danone France 14.5 9.2 5.3 9.2 101 38 37.6
Cadbury Schweppes GB 8.9 ... 38 17 44.7
Heineken NL 8.1 7.3 0.8 38 27 71.1
Parmalat Italy 7.8 2.6 5.2 ... ...
Interbrew Belgium 7.3 ... 38 ...
Associated British Foods GB 7.1 4.7 2.4 34 ...
Tate & Lyle GB 6.4 ... 2.1 9 3 33.3
Lactails France 5.5 ... 4.1 16 ...
Arla Foods Denmark 5 4.4 0.6 18 ...
Sudzucker AktiengesellschaftGermany 4.8 4.8 24 ...
Allied Domecq GB 4.6 2.5 2.1 10 ...
Calsberg Denmark 4.6 ... 27 ...
Scottish & Newcastle GB 7 4.4 2.6 4.4 63 63 100.0
Ferrero Italy 0
Numico NL 4.3 1.4 2.9 30 8 26.7
Uniq Plc GB 4.1 16
Bongrain France 4.0 3.2 0.8 15
Wessanen NL 4.0 4.0 1.1 17 5 29.4
Campina* NL 3.9 3.5 0.4 7
Oetker-Gruppe Germany 3.9 3.9 15
Nutreco NL 3.8 3.8 13
Krings Fruchsaft AG Germany 3.1
Westfleisch/Nordfleisch Germany 3.0
Source: CIAA
36
Table 10 Japan: Processed manufacturing enterprises by number of

employees and ouptut
Employees (1000 workers) Output
Food Food
All Enterprises All Enterprises
Manufacturing Manufacturing
No % No % No % No %
4 -19 2162 21.8 257 20.8 29892 9.3 3526 10.1
20-49 1784 18.0 249 20.2 35672 11.0 5741 16.3
50-99 1322 13.3 205 16.6 34544 10.7 6577 18.7
TOTAL 9937 100.0 1233 100.0 323072 100.0 35121 100.0
Source: MITI (2000)
37
Table 11 Japan: The share of imported ingredientes in selected processed food, 1999
Per cent of total

Wheat 91.0
Vegetable oil 71.7
Sugar 69.0
Miso (seasoning) 74.7
Soy sauce 58.4
Biscuits 70.6
Canned food 68.6
Dairy Products 57.2
Fish paste 62.6
Fisheries 35.0
Vegetables, pickles 17.0
Fruits 51.0
Beverages 48.8
Average 64.4
Source: Food Market Research Centre (1998)
38
Table 12 Country shares of total manufactured food imports into Japan

(per cent of values)
Year US Australia China Thailand Taiwan
1970 16.84 17.62 2.9 1.86 3.39

1980 20.98 17.35 3.32 2.84 6.64
1990 31.42 9.57 5.5 5.33 8.07
1996 30.98 7.35 9.29 5.74 7.8
Source: QVT - Industrial database
39
Table 13 Composition of Processed Food Export from Developing Countries

percentage shares
Categories of Processed Food 1970 1980 1990 1994
Processed Meat products 13.7 7.8 8.0 8.4
Dairy products 0.4 0.5 0.9 0.9
Processed fish products 8.8 15.1 29.1 30.7
Flour and cereals 1.1 1.5 2.2 3.0
Preserved fruits 4.4 4.4 7.9 5.4
Preserved vegetables 33.6 35.2 15.8 13.1
Sugar and Molasses 31.0 31.4 10.4 8.1
Coffee extracts and chocolates 2.9 4.8 2.9 2.7
Preserved animal feeds 13.5 10.1 10.8 9.4
Margarine and food preparations 0.8 1.2 1.9 2.5
Beverages 4.0 1.8 3.0 3.5
Tobacco products 6.1 5.2 7.6 7.6
Animal oils 1.0 0.3 0.2 0.2
Vegetable oils 9.6 12.1 9.6 12.5
Source : UN trade data, Athukorala, P-C 1998
40
Table 14 Taiwan's changing diet

(kg/person/year)
Sweet
Period Rice Wheat Meat Fish Fruit
Potato
1949-1951 133 7 66 13 12 16
1969-1971 136 25 24 25 33 43
1989-1991 68 29 2 62 45 108
Source : Huang and Bouis, 1996.
41
THE AGEING POPULATION
42

Food Processing and Manufacturing in Developing Countries

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DRAFT – NOT FOR QUOTATION

Food processing and manufacturing in developing

Paper prepared for the FAO technical workshop on

8-10 October 2003, Rome, Italy

Information on the Author:

Food processing and manufacturing in developing

Given the precocious internationalisation of the agrofood system with primary

income levels, urbanisation, infrastructure, changing patterns of occupation, particularly as

A word of caution, however, is necessary with regard to the term “developing”

A similar consideration could also be applied to the developed countries, where, in

2. Some Major Tendencies in the Food Processing Sector of

2.2 The Food Industry in the E.U

If trade is examined by product category, beverages (Eur.13.256 billion), “other food

2.3 Japan´s Food Processing Sector

Australia, as the dramatic loser in this period, promoted a number of studies to

3. Processed-Food Export Trends and Developing Countries

A similarly optimistic assessment can be found in the UNCTAD report:

Access to markets for tropical beverage products, in addition to confronting higher

A less sanguine interpretation of the increasing importance of processed food

4. FDI, Imports and Food Processing in the Domestic Market of

of new dietary associated diseases, where malnutrition predominates, the perverse

5. The Food Processing Sector and the Domestic Markets of

In increasingly open economies, where an export orientation is combined with rapid

As much as 97 percent of the increase in world population from 2000-2050 will

As an indication of the impact of urbanisation on food consumption and the

The promotion of processing activities related to domestic crops such as millet,

This combination of liberalisation and trans-nationalisation has a range of

As in manufacturing more generally, there is a tendency for the food-processing

6. The Participation of Small Farms and Firms

It is clear that a detailed consideration of the dynamic of SMEs in the food-

The opportunities and challenges facing SMEs in food-processing and related

emerging to compensate in part the marginalisation of traditional SMEs in this

ITDG, Food Chain, passim

Table 1 US Trade in processed food, 2000

Table 2 US: Leading exporters of processed foods to the US

Table 3 Profile of Foreign affiliates of US firms, 1995-98

Table 5 EU: Structure / production by country, estimated 2000

Graphic 1: UE F&D Industry Distribution

Source: Based on CIAA

EU: F&D Industry Distrib. of employees according to size

Table 6 Top export destinantions of

Table 7 Top origin of EU F& D

Table 8 Europe: Commercial balance in 2001 per sector

Table 9 Ranking of European agri-food companies by sales 2001

Table 10 Japan: Processed manufacturing enterprises by number of

Per cent of total

Table 12 Country shares of total manufactured food imports into Japan

1970 16.84 17.62 2.9 1.86 3.39

Table 13 Composition of Processed Food Export from Developing Countries

Table 14 Taiwan's changing diet

THE AGEING POPULATION

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