U.S. Food Companies access foreign markets through direct investment

Food Review, Sept-Dec, 2001 by Christine Bolling, Agapi Somwaru

U.S. food processing firms use exports to reach foreign markets and consumers, but foreign direct investment (FDI) is more effective at generating overseas revenues. FDI by U.S. food processors generated an estimated $150 billion in sales in 2000, compared with $30 billion generated by U.S. processed food exports (fig. 1).

FDI refers to investment in a foreign entity or affiliate in which a parent firm holds a substantial, but not necessarily a majority, ownership interest. Ownership of assets in a foreign affiliate enables the parent firm to exercise control over the use of those assets. The U.S. Department of Commerce defines FDI as ownership of 10 percent or more of a firm by a foreign firm. More than four-fifths of U.S. food processing affiliates in foreign countries were majority owned by U.S. parent firms in 1998.

FDI has created prominent multinational corporations. For example, Campbell Soup, General Mills, Ralston Purina, PepsiCo, and Tyson Foods are U.S. companies with a strong presence abroad. Similarly, foreign-owned multinational food processing companies, such as Nestle, Unilever, Parmalat, and Danone, have invested in the U.S. food processing industry.

FDI is often a cost-effective way to reach foreign markets. For some food products, it is economically advantageous for a firm to invest capital in overseas production rather than ship the product from a domestic source. Companies use FDI to circumvent trade barriers, gain access to less expensive resources, and tailor products to local tastes in other markets. These factors are especially important to the processed food industry.

Trade barriers, such as tariffs (taxes on imports) or import quotas, encourage companies to set up manufacturing plants in the countries whose markets they are trying to reach. For example, Canada has high trade barriers for dairy products, and large European companies, such as Nestle, Danone, and Parmalat, have entered the Canadian dairy product market through Canadian affiliates. Similarly, U.S. trade barriers for foreign wines and dairy products have led European companies to purchase wineries and build dairy plants in the United States.

Lower input costs, whether for raw materials or labor, also attract food companies to FDI. For example, sugar is less expensive in Canada and Mexico than in the United States, making it advantageous to produce confectionery and other bakery products in those countries rather than in the United States. Similarly, low labor costs in Mexico, Argentina, and Brazil have attracted foreign investment. Also, raw materials, such as wheat flour, soybean oil, and tropical products, often cost less in these countries, leading foreign firms to invest in food processing plants.

The need to tailor products to local tastes and cultural differences is another reason to locate manufacturing plants in other countries. For example, in Mexico, Japan, and Korea, recipes for well-known U.S. brands must sometimes be changed to appeal to local consumers.

Trade Agreements Spur Foreign Investment

Foreign food processing affiliates of U.S. companies generated $150 billion in sales in 2000 (table 1). U.S. FDI in foreign food processing companies grew from $9 billion in 1980 to $36 billion in 2000. U.S. companies see FDI as an opportunity to expand their markets beyond the continental United States, and liberalized investment rules that are often included in regional trade agreements allow food companies to expand their markets.

The United Kingdom, Mexico, and Canada had the most sales from U.S. FDI in food processing in 2000 (table 2). In the latter half of the 1990s, sales from FDI were especially strong in Mexico. The 1994 North American Free Trade Agreement (NAFTA), which lowered or eliminated tariffs and promotes market integration between the United States, Canada, and Mexico, boosted investor confidence.

Sales from U.S. FDI in food processing in Brazil and Argentina also increased sharply during the 1990s. These two countries, along with Paraguay and Uruguay, formed MERCOSUR (Mercado Comun del Sur) in 1991. MERCOSUR is a free-trade agreement similar to the European Union and NAFTA. Brazil and Argentina have traditionally been limited markets for U.S. food products because they produce many of the same agricultural and food products as the United States, often at lower costs. U.S. multinationals, however, used FDI as an opportunity to enter the expanded MERCOSUR market.

MERCOSUR and NAFTA have caused U.S. processed food companies to retarget their investments. FDI by U.S. food companies in the European Union grew 124 percent from 1990 to 2000, but U.S. FDI in other Western Hemisphere countries grew 183 percent. U.S. companies also increased FDI in China in the 1990s as that country liberalized foreign investment rules and prepared itself for full membership in the World Trade Organization.

FDI is likely to increase in the near future. The year 2000 was a busy one for mergers and acquisitions by U.S. and foreign multinational food companies. Unilever, jointly headquartered in the United Kingdom and the Netherlands, purchased three U.S. companies: Slim Fast Foods for $2.3 billion, Bestfoods for $8.6 billion, and Ben and Jerry's for $0.4 billion. Fosters Brewing, headquartered in Australia, purchased U.S. Beringer Wines for $1.1 billion, and Cadbury-Schwepps of the United Kingdom purchased Triarc (maker of Snapple) for $0.7 billion. U.S. acquisitions included General Mills' purchase of Pillsbury from Diageo (a United Kingdom food and beverage conglomerate) for $5.1 billion.