Impact of foreign direct investment on the performance of Lithuanian food processing
industry
Angele Kedaitiene, associate professor
Vilnius Management College
Basanavičiaus 29a, Vilnius, tel. +370 2 2133606
Vilnius University, Faculty of Economics, Department of Marketing
Saulėtekio al. 9, Vilnius, tel. +370 2 2366148
Lithuanian Ministry of Agriculture,
Department of the European Union affairs and international relations
Gedimino av.19, Vilnius, tel. 370 2 2391384
[email protected] , [email protected]
1. Introduction: the role of foreign direct investment in the economic growth of the
food processing
Foreign investment capital is recognized as an important factor of economic growth and
development of the recipient country (Dunning, 1994, Lall, 1996, Meyer, 2001, Radosevic,
2000, Caves, 1996, Krugman/Obstfeld, 2000). It constitutes a sizable supplement of domestic
investment funds. Transfer of people, knowledge, technology, know-how and other
developmental factors accompanies flow of capital.
Economic development has an evolutionally character. In a simple model, every
country begins from the stage in which easy accessible labor and natural resources are used
for production. This is followed by the stage when capital resources are increasing, which
permits to produce capital-intensive goods in different industrial branches. The third stage
brings the utilization of technical progress, innovation and high-qualified labor that means the
stressing of human capital as well as research and development activities. However, the third
stage requires some additional conditions. New techniques of production, modern
technologies and management systems are rather inaccessible in case of the closed economy.
Opening the economy enables inflows of the foreign capital, and with it a new form of
production and new generation of products. The final effect of such opening is expansion of
export and higher economic growth. Strategy for opening the economy, inflow of capital and
expansion of export could result in a super growth.
The base for the use of foreign investment in transition economies and in nowadays
new member states of the European Union (EU) was believing, that the foreign capital and
first of all foreign direct investment (FDI) will stimulate economic growth, create work
places, encourage export, stimulate modernization of the firm structures, activate the
consumption industries, increase the competitiveness of production, employ new production
techniques and technologies, improve management and general economic efficiency. All
arguments, supporting the inflow of foreign capital to transition economies and EU new
member states refer also to food processing.
However, FDI are viewed not only from positive side. In some countries they
constitute debating issues in social and political life. Massive selling of national assets is not
accepted by some part of the society. However, compared to high competitive positions of
foreign firms, national investors are lacking capital and modern technologies, managerial and
marketing competence. Most foreign companies conduct very aggressive promotion and other
competition mechanisms and tools, which are not practiced by local firms. On the other hand,
elimination of the national produces from sectors of strategic importance may be risky for
farmers supplying raw materials or for food security of the nation. In this circumstance,
economic policy should create favorable conditions for attracting FDI, however it must also
stimulate, and maybe protect on a reasonable scale, the existence and development of national
firms. Adverse effects may result not only from the lack of competition on the market, but
also from aggressive, unfair competition from foreign firms and multinational enterprises.
2. General trends of the foreign direct investment in Lithuanian food processing
industry
First foreign investors came to Lithuania about 15 years ago. Among others, they were the
large multinational companies (McDonalds“, „Philip Morris“ ir „Coca-Cola“), which started
from the scratch - investing in the greenfiled.
Amount of the foreign direct investments in Lithuania is statisticaly observed and
calculated since 1991. FDI until 1995 were negligible, but since the second round of
privatization when foreign capital was invited to participate, investments had increased
significantly.
FDI into the food processing industry also started to accelerate since 1997. Since then
to recent, FDI in food processing was increasing almost at the same speed as in the industry,
but showed the lesser growth compared to the FDI in the total economy (Table 1). Annual
FDI growth in food processing was equal to 20 per cent compared to 30 per cent for the FDItotal. This could be explained by the scheduler of privatization – majority of the greenfield
FDI in food processing, drinks and tobacco industry failed to the beginning of the 1990’s, and
the sales of the expensive companies of the telecommunications and oil industry (Lietuvos
Telekomas and Mazeikiu Nafta) were scheduled to the second half of the 1990’s.
Table 1. Comparative indicators of FDI in different sectors of Lithuanian economy in
1997-2002, begining of the year
stock, mln. Lt
Indicator
1997
1998
1999
2000
2001
2002
FDI in food,
452,22
555,95
764,78
973,96 1077,25 1157,06
beverages and
tobacco industry
FDI in the
1203,81 1609,57 2174,37 2704,44 3023,92 3124,78
industry
FDI total
2801,23 4162,47 6501,19 8252,12 9337,26 10661,93
Annual average amount of FDI in food processing, beverages and
830,20
tobacco industry
Annual average amount of FDI in the industry
2306,81
Annual average amount of FDI total
6952,70
Average annual FDI change in food, beverages and tobacco industry
+140,97
Average annual FDI change in the industry
+384,19
Average annual FDI-total change
+1572,14
Average anual increase of FDI in food processing, beverages and
20,67
tobacco industry, in %
Average annual increase of FDI in the industry, in %
21,02
Average annual increase of total FDI, in %
30,65
Source: own calculations, based on the information from the Lithuanian Department of Statistics,
2003.
Lithuanian food processing industry is diverce regarding the attracted amounts of the
foreign direct investment (figure 1). Beer industry is the leader, followed by the producers of
prepared fooder, dairy products and sugar. Other industries had attracted lesser amounts of
FDI.
Figure 1. Foreign direct investments in the sectors of the Lithuanian food
processing industry in 1997-2002, begining of the year
Stock, in th.lt.
400000
350000
300000
250000
200000
150000
100000
50000
0
Meat industry
1
2
3
4
5
6
4059
2740
4359
3741
3973
3681
Fish industry
1769
6212
7390
3649
11410
12189
Prepared fodder
35671
45618
61702
77679
139593
156393
Bread and cookies
1885
3802
4749
6364
3921
3765
Sugar
8204
9005
52848
74910
87682
104870
Total drink industry
81543
128966
269954
284263
374882
379000
Beer
71468
103259
209662
267304
355142
359977
Milk
49897
53371
54110
156891
98267
129627
Source: Lithuanian Department of Statistics, 2003
Different countries have invested into the Lithuanian food processing (table 2). But the clear
majority of FDI belongs to the USA, Denmark, Sweden and Great Britain. The same
countries are the Top investors in the total economy also.
Table 2. Foreign direct investment into Lithuanian food processing and beverages
industry by countries-investors in 1999-2002, begining of the year
stock, mln. Lt.
Country
Irland
Belorussia
Denmark
Sweeden
Estonia
1999 .
3,08
0,30
117,58
156,96
22,35
2000
2,85
0,28
220,22
161,21
34,24
2001
3,16
0,35
245,09
106,79
61,53
Spain
Great Britain
USA
Canada
Latvija
Poland
Norway
Netherlands
Panama
France
Russa
Finland
Germany
Ukraina
International financial organizations
Total
1,69
55,64
214,94
0,66
2,69
14,23
11,89
3,12
12,38
0,71
9,99
50,22
20,21
44,30
742,93
66,72
257,17
0,82
1,59
8,60
10,53
3,03
11,47
14,95
21,47
25,77
0,21
16,69
857,82
92,29
284,58
0,77
1,72
6,77
21,33
4,36
25,07
53,24
26,09
17,50
950,66
Source: Lithuanian Department of Statistics, 2003
3. Economic performance of the Lithuanian food processing industry in relation to the
ownership structure
To highlight the economic performance of the industry and to follow up the relationship
of the performance with the share of foreign capital, following indicators were calculated:







Labor intensity, measured as number of employees, producing 1 million litas of sales,
Productivity, measured as sales in thousand litas per 1 employee of the industry. The
indicator is a substitute of the ratio of labor intensity,
Capital intensity, measured as capital in thousand litas per 1 employee of the industry,
Profitability intensity, measured as net profit in thousand litas per 1 employee of the
industry,
Share of foreign capital in the industry, measured in %,
Share of domestic private capital, measured in %,
Share of state capital, measured in %.
Data of the Lithuanian Department of Statistics, got from the Division of Enterprises Statistics
and Division of Construction and Investment Statistics, were used for calculations.
Listed economic indicators of the Lithuanian food processing industry are presented in the
table 3.
Structure of the capital of the food industry was stable in 1998-2001, shares of the owners
were changing within a few per cent (figure 2). From this one can make a conclusion that
since the first years of the second round of privatization (1995-96) industry has failed to
attract the significant foreign capital inflows, relying on the influence of the domestic private
capital.
Table 3. Economic indicators of the food processing industry in Lithuania, in 1998-2001
Industry
Year
Total
food
industr
y
Meat
produc
tion
Fish
produc
tion
Fruit
and
vegeta
ble
produc
tion
Milk
produc
tion
Prepar
ed
fodder
Number
of the
enterpris
es,
in
units
Labor
intensity,
number of
employees
,
producing
1 m.lt. of
sales, in
units
Productivity,
Th. lt. of sales
per 1 employee,
in th.lt.
Profitability,
Th. lt. of net
profit per 1
employee, in
th.lt
Capital
intensity,
Th. lt. of
capital per
1
employee,
in th.lt
Share of
the
foreign
capital in
total
aggregate
d capital
of
the
industry,
in %
Share of
the
domestic
private
capital in
total
aggregate
d capital
of
the
industry,
in %
Share of
the State
capital in
total
aggregate
d capital
of
the
industry,
in %
1998
478
9,27
107,89
3,4
41,11
19
53
28
1999
2000
2001
657
722
496
9,92
9,52
8,14
100,79
104,99
122,70
1,70
-0,07
3,05
37,15
38,24
38,42
25
23
23
59
60
61
16
17
16
1998
78
10,55
94,74
1,98
20,88
2
85
13
1999
2000
2001
131
157
111
10,42
10,53
10,48
95,87
94,91
95,35
-3,16
-3,34
-5,08
19,56
19,83
22,70
2
1
0
91
91
92
7
8
8
1998
28
18,34
54,49
-3,85
191,19
2
18
80
1999
2000
2001
41
42
25
13,28
10,09
9,27
75,28
99,02
107,85
1,60
1,10
-4,39
20,16
21,23
33,10
14
9
12
53
75
88
33
16
0
1998
17
12,63
79,14
2,44
23,29
7
82
11
1999
2000
2001
22
23
16
13,40
22,06
14,10
74,60
45,32
70,87
10,31
-0,36
-0,49
46,12
49,20
31,08
4
1
1
82
92
98
14
7
1
1998
40
7,45
134,09
2,45
34,17
14
76
10
1999
2000
2001
50
51
32
9,30
9,06
7,45
107,42
110,29
134,19
-2,47
-4,77
4,29
37,79
39,68
33,06
21
13
25
72
78
72
7
9
3
1998
16
5,81
171,83
3,43
57,38
24
71
5
1999
2000
15
18
6,12
4,24
163,23
235,47
1,37
6,85
72,46
76,4
27
22
67
68
6
10
Bread
and
cookie
s
Sugar
produc
tion
Confec
tionary
Total
drink
produc
tion
Beer
produc
tion
Soft
drinks
produc
tion
2001
12
3,26
306,07
19,27
70,77
26
71
3
1998
143
19,64
50,91
2,44
10,87
5
79
16
1999
2000
2001
198
231
173
20,57
21,44
19,62
48,61
46,63
50,96
1,66
-0,15
1,24
10,66
10,98
9,12
4
4
6
81
82
81
15
14
13
1998
5
21,12
47,33
-1,48
44,57
4
38
58
1999
2000
2001
4
4
3
7,19
6,13
5,76
139,04
162,99
173,44
4,90
-2,39
6,21
95,34
97,45
82,53
57
57
68
40
41
32
3
2
0
1998
8
5,60
178,26
3,77
32,23
70
26
4
1999
2000
2001
11
12
10
5,80
5,84
5,40
172,24
171,08
184,90
9,08
13,77
7,95
35,67
34,07
36,84
68
67
65
29
30
31
3
3
4
1998
63
7,90
126,58
15,69
83,89
29
34
37
1999
2000
2001
75
85
54
8,17
7,37
6,49
122,28
135,54
153,88
11,40
7,35
10,58
75,61
84,21
92,69
31
31
18
30
30
41
39
39
41
1998
18
5,22
191,42
34,43
126,91
56
42
2
1999
2000
2001
20
25
18
7,14
5,85
5,05
140,03
170,82
197,77
17,16
11,96
20,28
74,93
82,21
99,36
64
65
38
34
33
60
2
2
2
1998
35
12,71
78,62
0,79
43,82
45
35
20
1999
2000
44
48
11,94
10,66
83,73
93,74
-0,49
-5,21
36,31
28,34
51
60
29
39
20
1
2001
27
8,83
113,13
3,86
13,13
20
80
0
Source: own calculations, based on the data from the Lithuanian Department of Statistics, 2002
However, the FDI in statistical records is not the same as the share of foreign capital in
aggregated capital of the industry. The major difference is the loans of foreign owners,
granted to theirs Lithuanian affiliates. They are calculated in domestic statistics as FDI, and
do not affect the share of foreign capital in the aggregated industrial capital. Evidently, that
the majority of FDI since 1998 could be passed to the category of loans.
The value of industry capital decreased during the 1998-2002, from 1981 m.lt. to 1511
m.lt, foreign capital – decreased from 382 m.lt in 1998 to 352 m.lt. in 2002.
Figure 2. Ownership structure of Lithuanian food processing industry
20
19
0
53
28
1998
25
59
16
1999
23
60
17
2000
23
61
16
2001
40
60
80
State capital
Domestic capital
Foreign capital
100
120
Source: Lithuanian Department of Statistics, 2003
Economic performance of the industry was improving during the 1998-2001, but it was slow
recovering. Some more visible improvement could be followed up in 2001 as the result of
technical reconstruction of the industry, completed by both – foreign and domestic private
capital. Profitability of the industry improved significantly in 2001 and reached 3 th.lt. per
employee, the labor intensity stayed stable over the 1999-2001, as the productivity also,
respectively 8,14 th. lt. and 122,7 th.lt. per employee in 2001. Capital intensity was
negligibly decreasing and equaled to 38,42 th. lt. employee in 2001, what is not the high
indicator. Capital intensity was decreasing while the labor intensity and productivity measures
– improving. This means, that the quality of the capital and effectiveness of its’ usage, better
management of the industry were the mains reasons of the improving of the performance.
Number of enterprises was fluctuating over 1998-2001: increasing in 1999-2000 and
decreasing significantly in 2001. Industry underwent the concentration in 2001. The sales
from 4 largest companies constituted 16 % in total sales in 1998 and 22 % in 2001. Hopefully,
that more significant inflow of FDI would speed up the reconstruction and the improvement
of economic indicators.
4.Analysis of the economic performance of food industry sectors in relation to the
ownership structure
Lithuanian food processing industry is inequality developed regarding different
subindustries, thus, the above-analyzed indicators for the total industry are just the aggregates
of performance of the sectors. Poor performance of ones could take out the effect of high
performance of others. Thus, the analysis of the sub-industries is required to follow up the
tendencies, the looses and the winners more clearly.
Meat production. Industry is owned by the domestic private capital, the share of foreign
capital was negligible in 1998-2002 (1-2 per cent).
As for the whole industry, meat sector experienced decrease in capital, from 15,5 m.lt in 1998
to 10,5 m.lt. in 2001. FDI stock in recent years was slightly decreasing.
The ratios of labor intensity and productivity were almost no changing over the 4 years, thus,
the dominance of domestic private capital did not improve the performance of the industry.
Profitability was worsening, industry running with the looses, which reached –5 th. lt. per
employee in 2001. More visible presence of the foreign capital and as the consequence
changing management of the subindustry, influx of know-how would speed up the progress.
Meat sector holds the largest share and number of enterprises compared to other. Even 111
firms belonged to the meat produces in 2001. This number was fluctuating during the years
and tendency to decrease could be followed up since 2000.
Fish production. Industry experienced the significant changes over 1998-2001, both in the
structure of the capital and in the labor intensity and productivity ratios. Industry got through
the privatization. Share of the state capital reduced from 80% to 0%. Domestic private capital
is dominating in the industry, share of foreign capital – small (12% in 2001), mainly from
Norway and Germany.
Despite labor intensity and productivity ratios were improving visibly over the years, the
profitability measures are negative, industry running with the looses. This could be explained
by the cocentration of the industry and bankruptcies of some companies. Number of
enterprises decreased from 42 in 2000 to 25 in 2001, number of employees from 3250 in 2000
to 1964 in 2001. Improvement of the performance (labor intensity, productivity) was
supported by the increase of the capital of new quality. FDI were increasing over the period
and reached 12 m.lt. in 2001.
Fruit and vegetable production. Economic processes in fruit and vegetable industry were
not stable over the 1998-2001. It was the improvement of the indicators (labor, sales
productivity and profitability) in 1999. However, in 2000 the situation had worsened. 2001
manifested the improvement of the situation again, and the indicators of the labor intensity
and sales had increased. However, the profitability stayed negative. Share of the foreign
capital is negligible in the industry, and domestic private capital prevails.
Indicators for 1998, when the foreign capital took 7% share were better than those for the
2001 having just 1%. Fruit and vegetable industry holds small number of enterprises: 16 in
2001 compared to 23 in 2000.
Milk production. The economic performance of subindustry was more or less stable over the
1998-2000, with the improvement in 2001. Profitability, which was negative for 3 years,
stayed positive in 2001 and amounted to 4 th. lt per employee. This is more than the average
of the food industry.
Foreign owners held 25% of dairy industry capital in 2001, compared to 14% in 1998. The
value of foreign capital increased from 61,7 m lt. to 80,7 m. lt., when the total capital value
was decreasing from 414 m lt. to 323 m lt. respectively. Instability of the performance in
1999-2000 could be impacted by the speedy technical modernization of the industry, by the
‚cleaning out‘ the bad quality FDI (bankruptcies of 2 companies, holding significant share of
FDI), etc. As the result of these and other influences, the process of horizontal concentration
accelerated, and the pressure of the competition has increased. FDI, which were decreasing in
the previous years took tendency to increase in 2001, and reached the level of 130 m. lt.
Investments from Great Britain, Finland and International financial organizations constituted
the majority. However, the results of 2003 could evident the contrary – the decrease of FDI
and foreign capital share in domestic dairy industry. At the end of 2003 European
reconstruction and development bank had announced the withdrawing of investments.
Prepared fodder. Industry was improving rapidly over 1998-2001, all economic indicators
increased almost in twice. Profitability was positive and in 2001 had reached 19 th.lt. per
employee. Contrary to other industries, capital intensity comparing 1998 and 2001 had
increased also. Share of foreign capital was above the average of the food processing and
amounted to 26 % in 2001.
Number of enterprises decreased and was equal to 12 in 2001, compared to 18 in 2000 and 15
in 1999. However, the process of concentration was not so evident here as in dairy or some
other industries. Investments from USA made the majority of FDI in the industry, and equaled
to 145 m.lt. The total FDI equaled to 156 m.lt. in 2002.
Bread and cookies production. Economical indicators in bread and cookies industry were
stable with some slight improvement over the 1998-2001. The profitability of the industry
was positive and equaled to 1,2 th.lt. per employee in 2001. Industry could be characterized
by low capital intensity (10 th. lt. per employee in 2001). Foreign capital constitutes the
minority in the industries’ aggregate capital (6%).
More tangible presence of foreign capital would improve the management capabilities and
increase the capital and labor productivity, which was low even in 2001. The processes of
concentration are weak in the industry. Russia as well as Poland were and are the major
investors.
Sugar production. Industry underwent the rapid and overall privatization in 1999, when the
strategic investor from Denmark entered the industry bringing significant capital inflow.
Economic indicators in 1999-2001 were stable and high. In 2001, the labor productivity was
equal to 5,7 empl., sales productivity – to 173 th.lt., profitability was positive and equaled to 6
th.lt., capital intensity – to 82 th.lt. These indicators are not the best among the branches of the
food processing, but they are above the average of the industry. Foreign capital constituted the
majority (68%). The remaining part of the capital belonged to the private domestic investors.
Danish capital prevails in the industry. FDI from Denmark were equal to 104,8 m.lt. in 2001,
foreign capital amounted to 74,9 m.lt.
Confectionery. Economic indicators of the industry were stable and high over the 1998-2001.
Foreign investments constituted 70% in total capital in 1998 and 65% in 2001, mainly – from
USA. The labor productivity was high – 5,4 empl. for 1 m.lt. of sales, sales intensity – high
also, capital intensity – in average 36 th.lt. per 1 empl., profitability was positive. These
indicators and theirs combination, like high productivity with relatively low capital intensity
manifest on the highly effective performance of the industry. Branch holds high degree of
horizontal concentration, four largest companies making almost all industrial sales, leaving
some negligible share to other six. Total number of companies was equal to 10 in 2001 and
stayed stable over the years.
Total drink industry. Industry was running with stable and good economic indicators over
the 1998-2001. State and domestic private capital prevail in the industry, both with the 41%
share. The remaining part belongs to the foreign owners (18 %).
Good economic performance of the industry could be explained not only by the presence of
the foreign capital, but by the type of high value added production, by good management of
the industry also. Number of enterprises in the industry was equal to 54 in 2001, and had
decreased since 1998. FDI constituted 379 m.lt. in 2001, the value of foreign capital was
equal to 103 m. lt. Drink industry could be characterized as inequality developed regarding
different branches – production of beer, soft drinks or strong drinks.
Beer production. Economic indicators of the 1998-2001 evidence on the high and stable
performance of the industry over the time. In 2001, labor productivity ratio was equal to 5
empl. for 1 m.lt. sales, sales productivity – to 197 th.lt. sales per 1 empl., profitability was
positive and equal to 20 th. lt. per 1 empl. Industry experienced significant foreign capital
inflows already at the beginning of the second round of privatization. In 1998 the share of
foreign capital constituted 56% in total, but decreased to 38% in 2001. High performance of
the industry was influenced by the several factors: presence of high quality capital, high value
added production, and high management skills, as well as by the traditionally well developed
beer production in the country. Up to 2001, industry had learned from the foreign investors
and was able to function well even with the lower FDI share. Number of enterprises and
employees were decreasing over the years and was equal to 18 enterprises in 2001 compared
to 25 in 2000. Horizontal concentration ratio of the industry is high.
Soft drinks. Industry was performing with various successes over the 1998-2001. The ratios
of labor productivity and sales per 1 employee were improving, the variable of profitability in
1999 and 2000 was negative. The share of foreign capital was high: in 1998 it was equal to
45%, in 2000 - even to 60%. Year 2001 could be characterized as the year of FDI withdrawal,
share of foreign capital drooped to 20%, capital intensity to 13 th.lt. compared to 28 th.lt. in
2000 and 44 th.lt. in 1998. Branch had experienced the speedy process of concentration over
the 1998-2001. 27 companies left in the industry in 2001 compared to 48 in 2000. The
number of employees was decreasing also. Not only the mergers, acquisitions and other sort
of concentration were taking place in soft drinks industry, but the number of bankruptcies –
also.
5. Impact of FDI on the level of concentration in Lithuanian food processing industry
The food system in general and milk industry in application, has both – the horizontal
and the vertical dimensions. Industries, first of all, are getting through the type of horizontal
integration to reach the appropriate scope, and only after – joining the sophisticated forms of
vertical integration.
A strong correlation between FDI and industry concentration is described in the
literature. It still leaves the question of primary causal direction open, whether already the
concentrated industries drew foreign investments or foreign-owned firms drive the
concentration of the industries. Dunning, while analyzing the industry of Great Britain had
found that 2/3 of the enterprises having FDI belong to the industries with high degree of
horizontal concentration (Dunning, 1993). According to Ratnayake, amount of FDI together
with the factors of the size of the industry, economy of scale, etc. are in tight correlation with
the concentration of the industry (taken from Bora, 2002). He had derived this conclusion
from the analysis of the industry of New Zeland. Finish researcher Jansik had made an
exhaustive research on the FDI in the Batic countries and found that foreign investors are
attracted by attainable dominant market power, and then they actively influence the changes
in the market structure (Jansik, 2001).
Market concentration means the number of the enterprises on the market and
the share of the market, which is occupied by some number of the enterprises. Lesser number
of the enterprises and the greater theirs diversity by the size, means the greater concentration.
Size of the enterprises can be measured using different indicators: value/or units of production
and sales, number of employees, value of capital, value of the generated value added, etc.
Concentration can be measured using different indicators, but the problem of using them often
lays in the lack of information, which is needed to calculate them. Indicator “concentration
ratio CR” is the most commonly used by researchers and practitioners. It can be calculated for
the different number of enterprises (CR3, CR4, CR10, etc.) and means the share of the market
by sales, by production, by purchases of the raw materials, etc., which the three, four, ten, or
another number of the enterprises takes. It can be calculated as the ratio having the maximum
meaning 1, or as the percentage, having maximum meaning 100%.
Lithuanian food processing industry is diverse regarding the degree of concentration. On one
hand, there are sub-industries where the ratio CR4 is equal to 1, on the other, there are subindustries with the indicator below 0,5. The greatest concentration in Lithuanian food
processing industry is observed in sugar industry, confectionary and prepared fodder
production where CR4 ration was equal or nearby 1.
Let’s examine the example of Lithuanian dairy industry to follow up the process of
concentration. Lithuanian dairy industry consists of a few larger and approximately 35 smallscale companies. Despite the fact that domestic dairy industry is already highly concentrated,
the number of the participants on the market is still too high and industry holds some degree
of the overcapacity, which could be reduced in the coming years. The primary privatization
round (1990-1995) resulted in the rapid increase of the number of milk processing entities. In
1995 about 60 dairy processing enterprises operated in the industry. Lack of management
capabilities, technical inefficiencies associated with high production costs and more severe
competition from abroad pushed the industry into financial difficulties. The high number of
participants in a saturated market inevitably resulted in the elimination of the weak
enterprises. The concentration processes in domestic dairy industry started at the beginning of
privatization, however, after 1997 with the start of the second round of privatization the
process accelerates significantly. In 1998, only 48 enterprises with milk processing facilities
were left in the sector.
Table 4. Concentration ratios in the Lithuanian dairy industry (based on the processed
raw milk) and foreign direct investment in dairy processing, in 1994-2002
in %
Concentration
ratio
1994
1995
1996
1997
1998
1999
2000
2001
2002
CR3
24.5
27.3
29.3
38.4
45.2
52.5
72.0
75.0
77.0
CR4
29.7
34.4
35.5
46.5
56.4
59.6
78.6
80.3
82.3
CR10
55.7
61.4
61.1
75.3
83.5
86.6
94.9
95.0
97.1
FDI (m Lt)
50
53
54
156
98
130
162
Source: 1) for 1994-1998 - Jansik (2001)
2) for 1999-2002 - own calculations, based on the data from Lithuanian Department
of Statistics
Table 4 shows changes of concentration ratios in the Lithuanian dairy industry between 1994
and 2002. All concentration indicators were fairy stable until 1996, but went up in the
subsequent years. In 2002 the CR3 reached 77%, the CR10 covered already almost the entire
industry, leaving just some 3% of the raw milk processing to the small dairy companies.
The figures also show that foreign investors were able to considerably increase their
ownership on the industries' assets. Thus, there is a positive correlation between ratio of
concentration in the domestic dairy industry and the industrial FDI stock.1 The empirical
evidence suggests that the FDI mainly accelerates an ongoing process of concentration.
Horizontal integration often leads to a situation, in which one company could take
over the market and, thus, get into a monopoly position. Because monopolization is
recognized as the negative phenomenon, many countries are applying various restrictions on
the exploitation of market power. Lithuania introduced an Antitrust Law a few years ago.
According to this regulation, market power is considered to be a severe problem when one
company takes control over 40% of the market sales. Domestic milk producers are still below
this limit as far as total sales are considered. In individual production lines, Rokiškio sūris is
well beyond that limit. However, the government didn't see any need for intervention so far.
1
Jansik (2001) calculated correlation coefficients between concentration and FDI for Baltic countries
food processing industries with a 1998 data set. For Lithuanian food industry, which comprised 12 sub sectors, it
was equal to 0,8817.
Despite the fact that domestic dairy industry is highly horizontally concentrated and
the positive role of FDI in the process proven, industry hasn’t got the significant strategic
investment. All the recent investments hold the character of the conglomerate acquisitions and
the level of foreign capital in the industry is below even 30 per cent. According to some
analysts, the strategic entry, bringing significant greenfield or brownfield investments, is
realistic already in the short or medium-terms. All Scandinavian countries have powerful
dairy companies, which would be capable to make the remarkable investments. Once the first
strategic investors appeared, others from Western Europe could soon follow them as it
happened in the case of the Estonian dairy industry. However, in case of the Lithuanian dairy
industry, the foreign strategic investor will face higher barriers of entry, unless it is going to
be successful in negotiation with already existing dairy top-companies. The emergence of the
strategic investments into domestic dairy industry could be stimulated by the recent political
development also – the being of the country in EU.
FDI-Concentration map. FDI-Concentration Map is a graphic demonstration of the
relation between foreign investment and market concentration for given industries at a given
time. In order to quantify the dimensions, CR4 concentration ratio and foreign ownership
share of the aggregate registered company capital were calculated for each food sub-industry
in the map.
The computed figures were organized in ordered pairs, where the first number
captures FDI, while the second signals market concentration. The pairs are then plotted
graphically on the system of Cartesian coordinates. Axis x denotes the share of foreign-owned
capital in the total registered company capital of the industry, while axis y shows the share of
the four largest companies in total industrial sales.
While computing Lithuanian food industry FDI concentration map, data from year
2002 for 10 food industry sub sectors were used. The Enterprise Statistic Division at
Lithuanian Department of Statistics provided data.
Figure 3. FDI concentration map of the Lithuanian food processing
Sugar
CR4 concentration ratio in %
100
Confectionery
Feed
Fish
80
Milk
Beer
Fruit and
vegetable
60
Soft
drink
Bread
40
Meat
20
0
0
20
40
60
Share of FDI in aggregate company capital in %
Suga
Conf ec t i o
Fe
ed
Fi s
M il
Be
Fr ui t
and
Sof
t
Br ea
M ea
Source: Lithuanian Department of Statistics, 2002
80
100
As it could be seen in figure 3, the Lithuanian food processing industry is quite scattered,
regarding relationship share of FDI in company capital – CR4 concentration ratio. The
following groups could be defined:
 (1) High concentration – high foreign participation. This group typically embraces
second-stage industries or sub sectors manufacturing excise-, high value added, or
popular food products. Sugar, beer production, confectionery and prepared fodder
could be considered in this group in a Lithuanian case and this pattern is closed
with the same in the whole Central and East Europe (Jansik, C., 2000);
 (2) High market concentration – low foreign participation. Group encompasses
mostly first-stage industries, which are highly concentrated and typically popular
targets for FDI. Milk, fish, fruit and vegetable industry could be belonging to this
group in a Lithuanian case. These industries are owned in majority by the domestic
capital and still are waiting for the strategic investors. In the future, they should
move to the group (1);
 (3) Medium concentration - medium foreign participation. Domestic soft-drink
industry belongs to this group. This industry has been characterized by
accelerating consolidation over the past years;
 (4) Low market concentration – low foreign participation. Domestic meat and
bread industries belong to this group. They are the first-stage industries; their bulk
products are low value added foodstuffs with low level of differentiation. The
reason for low level of concentration could be the influence of the scheme of
privatization, when the former state-owned huge concerns were decomposed and,
thus, lowered the industry concentration.
6. Conclusions
FDI are recognized as the important factor of economic growth in transitional countries. They
are stimulating the technological reconstruction of the companies in recipient country,
creating work places, encourage export, activate the consumption industries, and increase the
competitiveness of production. This is valid for food processing also.
To highlight the economic performance of the Lithuanian food processing in relation to the
FDI and ownership structure the following indicators were calculated for the 1998-2001:
 Labor intensity, measured as number of employees, producing 1 million litas of sales,
 Productivity, measured as sales in thousand litas per 1 employee of the industry,
 Capital intensity, measured as capital in thousand litas per 1 employee of the industry,
 Profitability intensity, measured as net profit in thousand litas per 1 employee of the
industry,
 Share of foreign capital in the industry, measured in %,
 Share of domestic private capital, measured in %,
 Share of state capital, measured in %.
Structure of capital of food industry was stable in 1998-2001, shares of owners were changing
within a few percent. However, the FDI were increasing at the better tendency than for the
total industry and economy. Foreign capital in the aggregate capital of the industry is not the
same as FDI. Majority of FDI in domestic food processing could be passed to the category of
loans, granted by investors to recipient companies. The loans are not calculated in the
aggregate company capital. Economic performance of the domestic food processing was
slowly improving over the 1998-2001. Some more visible improvement could be followed up
in 2001 and could be the result of technical reconstruction of the industry, completed by the
domestic and foreign private capital. Number of enterprises were fluctuating over 1998-2001,
were increasing in 1999-2000 and decreasing significantly in 2001.
Lithuanian food processing industry is unequally developed regarding different subindustries.
Production of dairy products, prepared fodder, confectionary, sugar and beer were the
industries having the best performance. Meat production, production of bread and cookies
could be passed to the looses.
Relationship “high share of foreign capital – good economic performance” could be
followed up for some subindustries, for example – prepared fodder, sugar production,
confectionary. On the other hand, there are industries, owned by the domestic capital and
showing good economic performance, for example milk and soft drink produces. It means,
that generally the presence of foreign capital helping to reach the appropriate standards of
economic performance. Recently, domestic private capital is gaining the power, both,
regarding the financial capacity and the knowledge, and is able together with the foreign
partners to move domestic food processing towards the economic progress.
A strong correlation between FDI and industry concentration is described in literature.
Foreign investors are attracted by attainable market power and then they actively influence the
changes in the market structure. Lithuanian dairy industry has high degree of horizontal
concentration, in 2000 CR3 was equal to 72 per cent, CR10 – to 95 per cent in terms of
processed milk.
Graphic technique, called FDI-concentration map is used to provide the demonstration
of relationship between foreign investment and market concentration. While computing
Lithuanian food industry FDI concentration map, data for 10 subsections were used.
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