Foreign investment, organizational innovation and transformation in food supply chains : evidence from the Ethiopian barley sector

Driven by rapid urbanization, economic growth, and changes in consumption patterns, food chains in emerging and developing economies are experiencing a fundamental transformation process. This transformation is usually characterized by increased vertical coordination, growth of modern distribution channels (e.g. supermarkets), consolidation of retail markets, and an increase in export orientation. The rapid growth in demand of modern food with higher quality and safety attracts multinational enterprises to invest in agriculture and food processing in emerging economies. The appearance of multinationals in the food systems of developing countries has been claimed to have a positive impact on economic development and reduction of poverty. The multinationals have adopted modern supply chain management practices for securing a large volume and consistent supply of high quality products. They introduce new technologies that boost productivity and post-harvest management for product upgrading. While so far most research on the modernization of food systems has focused on export chains, there is growing interest in the transformation of domestic and staple food chains. Upgrading domestic food chains is needed for a more efficient supply to fast growing urban markets and to sustain access to affordable food for the rapidly growing urban consumers in sub-Saharan Africa. As domestic food value chains are more inclusive than high-value export chains, upgrading these food chains can contribute more to poverty reduction and food security. However, much remains to be understood about the process of modernization in domestic food chains and its implications for rural development. The overarching aim of this dissertation was to deepen our understanding on how organizational innovations facilitate modernization of domestic food chains using case studies from the Ethiopian barley sector. In particular, the thesis examines the effectiveness and impacts of foreign direct investments (FDI), contract farming arrangements (CFAs), producer organizations (POs), and partnerships on the upgrading of malt barley value chains and welfare of local suppliers. To address this objective, we use a combination of qualitative and quantitative research approaches. Data were analyzed using parametric and non-parametric econometric models. The findings from the empirical chapters show that: First, our analysis reveals that the appearance of foreign companies in the malt barley chain has brought important changes in the structure and economics of the barley value chain, resulting in the development of a modern chain next to the conventional chain. It is also shown that participation in modern supply chains is determined by a range of factors that include farmer and farm characteristics. Second, the results show that participation in modern supply chains has a positive and significant impact on commercialization, intensification, quality improvement and farm gate prices, ultimately resulting in increased farmer income and spillovers towards productivity of other food crops. Third, we found that POs perform diverse economic functions to enhance rural development , but tighter coordination in food value chains demands alignment of chain activities among actors which leads to changes in the strategies and functions of POs. Fourth, we showed that POs have a positive impact on farm productivity and smallholder income. However, this positive impact of POs come at the expense of inclusiveness, i.e. POs are less inclusive. Thus, there is a tension between business performance and inclusiveness of POs. Moreover, the results show that the motivation to participate in a PO is determined by demographic and economic factors. Lastly, we found that the determinants of quality improvement at farm level are socioeconomic, technological and institutional factors. Specifically, the identified factors are farmers’ level of education, age (as a proxy for farming experience), entrepreneurial attitude, PO membership, CFA participation, and type of improved seed varieties. The thesis concludes that enhancing the modernization of food value chains involving smallholders requires organizational innovation that facilitate coordination and collaborative activities among chain actors.