After the presentation of the recent developments in the Polish yoghurt market there remains the task of explaining these developments in terms of the trade theory hypotheses as well as evaluating the prospects for the future international competitiveness of yoghurt production in Poland. This task is performed by launching the following explanatory hypotheses drawing upon the ‘traditional’ and
‘modern’ trade theories.
Hypothesis 1.
There are several theoretically conceivable sources of competitive disadvantage for Polish yoghurt producers vis-a-vis competitors from the EU. The first includes the factor intensity component of comparative advantage – the EU should enjoy a comparative advantage in yoghurt production due to the relatively high capital intensity of this activity (H-O-S). The second, and related with the first, is the comparative advantages of the EU due to the relatively high role of technological progress in
5 Broadened View of Dynamic Comparative Advantage - A Case Study of the Yoghurt Market 127 yoghurt production69. Technological advancements may be characterised by the limited international mobility of some innovations providing for, at least temporary, productivity advantages (neo-technology trade theory). The third is the role of increasing returns to scale equipping the competitors who have evolved in the EU single market with a ‘first mover advantage’.
All three hypothesised effects can occur simultaneously. The measures of comparative advantage applied in Chapters 3 and 4 may have embraced these effects.
Only the two first effects are reversible - the pattern of specialisation tends to change with the change in relative factor abundance; at the same time a country may enhance its abilities to imitate and innovate. The third effect, however, may be irreversible – historically determined pattern specialisation due to increasing returns to scale is difficult to change.
Yoghurt production can be classified as an activity in which scale efficiency matters significantly. The differentiated nature of the product and the fact that competition relies heavily on product innovation, rather than only cost reducing innovation, make R&D and marketing two areas where considerable fixed costs are generated. However, in industries characterised by a high minimum efficient scale the ability to gain scale efficiency depends on the market size – the greater the (domestic) market the more firms have the chance to reach an efficient scale without violating competitive market conditions (Krugman and Obstfeld, 1994). Scale efficiency can provide for the effective entry barriers or sustainable competitive advantage of existing firms over ‘potential’ ones, even if the latter have superior technology at their disposal (Markusen et al., 1995). This is conducive to a path-dependency in terms of international competitiveness and specialisation. Subsequently, liberalisation of trade between partner countries differing significantly in terms of market size (and hence firm size) may give competitive advantage to firms originating from the partner country with a greater market.
Similarly, the differentiated nature of the product, the importance of R&D and scale-related managerial skills may foster imperfect mobility of (new) technologies – firms and countries may use technologies which can only be imitated with a substantial time lag or may not be imitated at all (technology/assets specific to firms or country). In yoghurt production the example of the successful Bakoma may suggest that most technology elements are purchasable and that the delay in technology transfer is not substantial. However, it is also possible that the significance of the firm-specific assets/technologies may only become apparent under more competitive environment expected after Poland’s accession to the EU. As far as this component of competitiveness is concerned, Polish firms may seem to be in a disadvantageous competitive position mainly because of the shorter time in which the stock of comparable firm-specific assets could have been accumulated.
69 The relation between the capital abundance and the ability to innovate fast consists in that R&D tends to be capital intensive.
5 Broadened View of Dynamic Comparative Advantage - A Case Study of the Yoghurt Market 128 Although, according to the comparative advantage argument, technological lags responsible only for lower factor productivity can be compensated for by the lower factor prices (e.g. labour or raw material), the scope for such compensation is less possible for those technological advancements, which provide for superior quality. Consequently, the lower quality attainable is penalised with lower prices.
Hypothesis 2.
The underlying disadvantages listed in hypothesis 1. have been temporarily compensated for by the specific domestic market conditions associated with the transitional character of the economy and fast economic growth. The first is booming domestic consumption. The second includes institutional and other costs of importing. These have provided for a significant location advantages and, thereby positively contributed to the development of domestically located capacities in yoghurt production.
Booming domestic demand has several possible explanations related with the economic transition and growth. These have been accompanied by: (i) the temporary high costs to imports (high transport costs related with distance and lengthy border controls, underdeveloped market infrastructure and high costs of information), and (ii) the advantage of domestic producers in terms of knowledge of how to operate in an immature institutional environment.
These circumstances favoured domestically located production by offering high profitability, because the growth in demand may have exceeded the growth in new investments at high effective import price. These conditions may have had a temporary character because with the flow of time: (i) domestic distribution and retail sectors experience fast development mostly attributable to FDIs in wholesale, supermarket chains and discount operations,70 (ii) potential foreign suppliers have gained experience in operating in the Polish market and have developed their own distribution facilities (Zott’s two warehouses in Poznań and Wrocław), and (iii) ongoing real appreciation of the Polish złoty has partly ‘compensated’ for the high costs of importing.
As a result of these temporary conditions three categories of producers have emerged:
i. Domestic-capital-based firms, which have taken advantage of high profitability to develop technologically and technically and also scale efficient productive capacity (Bakoma), thus achieving sustainable competitiveness;
ii. Domestic firms which have entered the yoghurt production to exploit profits offered without, however, developing sufficient technological expertise and economic efficiency to sustain their growth and competitiveness in the future;
iii. Foreign firms, which have established production in Poland to overcome trade costs and to make use of other ‘location’ advantages (see next hypothesis).
70 See Adamowicz (1997).
5 Broadened View of Dynamic Comparative Advantage - A Case Study of the Yoghurt Market 129 This hypothesis, therefore, stresses the role of favourable domestic demand conditions in a manner similar to that of Linder (Markusen et al., 1995) or Porter (1990), though, in a different macroeconomic context; causal factors here are the demand effects accompanying the economic transition and economic growth (including convergence of consumption patterns). Furthermore, it also implies that favourable (though temporary) demand and competitive conditions have been necessary for domestic production to develop and gain the ability to compete. This dynamic effect resembles the infant industry and strategic trade policy arguments, with the difference, however, that the promotion of domestically located production has been achieved not only with the use of trade policy and input subsidy but also with the ‘protection’ of the home market via underdeveloped institutions and market infrastructure.
Hypothesis 3.
The FDI have a crucial contribution to the sustainable overcoming of the competitive disadvantages listed in hypothesis 1. The domestic market conditions described in hypothesis 2.
enhanced the rate of FDI.
The first category of beneficial effects of FDI on the competitiveness of domestic yoghurt production can be referred to as direct effects. They consist of the increased efficiency of domestic resources employed in the FDI firms, i.e. labour, farm milk and domestic capital. The effects arise from:
i. Transfer of new technologies based on the (i) knowledge capital often of a firm-specific nature, and (ii) economies of scale available through multinational operation, such as R&D and marketing inputs, hence providing advantages unattainable by domestic firms;
ii. Transfer of financial capital enabling modernisation of the existing capacities and establishment of new firms (so called ‘green-field’ investments). Although absolute volumes of the founding FDI capital were relatively small (usually shares of the enterprises taken over), most of the generated profits have been domestically re-invested, thereby, multiplying the initial values.
The second includes indirect or spillover effects conducive to the efficiency gains in the domestic (non-FDI) firms. These include:
i. Improved access to new technologies due to demonstration effects, e.g. an opportunity granted to the managers of domestic firms who can directly observe the business practices of more experienced competitors (also associated with the dissipation of some of the FDI-firm intangible assets);
ii. Promoting elimination of the existing inefficiencies and an increase in the propensity for technological change by exerting competitive pressure in the domestic market. Supposedly monopolistic practices may have been prevented in this way, although, in this regard, evidence is
5 Broadened View of Dynamic Comparative Advantage - A Case Study of the Yoghurt Market 130 mixed. On the one hand, Danone has for long been the only strategic competitor of Bakoma.
However, the capital integration of the two, which started in 1999, may threaten the competitive condition in the future;
iii. Contribution to revealing hidden domestic preferences and thereby to spurring the growth of the domestic market. This has been achieved both by introducing a variety of new products and by
‘modern’ promotional campaigns;
iv. Contribution to improved transparency and clearer incentives in the market for farm milk, in particular in terms of the remuneration for high quality.
Hypothesis 4.
Domestic sectoral policies have had an ambiguous influence on the emergence of the competitive domestic yoghurt production.
Investment subsidies and positive effective protection have helped to develop profitable yoghurt production by the co-operative sector but most induced investments were rather below the scale assuring long-term viability of projects. Short-term profitability could have been attained at the ‘cost’
of weakening the pressure for structural adjustment in the dairy co-operative sector.
An increase in import tariffs in 1999 was meant to sustain the favourable conditions (high profitability) experienced in recent years by dairy co-ops. However, this policy may have rather unexpected effects. It seems to have accelerated the decision by the major foreign competitor (Zott) to move production to Poland. For competitive position of co-operative producers, the merger of the Danone and Bakoma may have the same effect. However, the new FDI location by Zott should make a positive contribution to the international competitiveness of the sector.
Nevertheless, the rise in domestic market protection may also enable the two new market leaders (about 80% of the market is shared by two competitors: Danone integrated with Bakoma, and Zott) to exert market power. This would mean excess profits for the domestic producers, decreased consumption and welfare losses due to the consumer surplus decreases, repatriation of monopoly profits by FDI capital and, possibly, lowered production efficiency.