HOW FOREIGN DIRECT INVESTMENT HAS STIMULATED GROWTH IN THE CENTRAL AND EASTERN EUROPEAN AGRI-FOOD SECTORS: VERTICAL CONTRACTING AND THE ROLE OF PRIVATE ENFORCEMENT CAPITAL

Foreign Direct Investment (FDI) at the food processing level of the agri-food chain is well known to have important positive spillover effects, as it forces other competing processors across this level of the chain to raise their efficiency and productivity. In addition to this standard argument, we show that FDI in food processing industry produces substantial productivity, investment, and output increases at the primary production level through backward linkages. This is because FDI solves hold-up problems that have become pervasive across this section of the agri-food supply chain, causing sub-optimal resource allocations, reduced investment, and large output falls. Therefore, the impact of FDI on the overall productivity of the agri-food sector is significantly larger than is usually argued. This paper presents a theoretical model which explains how FDI at the food processing level produces these positive spillover effects at the production level through the provision of credible contractual arrangements and private enforcement capital. Case evidence from the Central and Eastern European countries is used to support the theoretical arguments