Profit Persistence in the Food Industry: Evidence from five
European Countries
This study is the first that analyzes profit persistence in the European food industry. After determining the degree
of profit persistence based on autoregressive models the drivers of persistence are estimated using regression
analysis. The results suggest that a significant fraction of firms earns profits above or below the competitive
norm that persist in the long run. Nonetheless, the average degree of persistence is lower compared to other
manufacturing sectors due to strong competition among food processors and high retailer concentration. Firm
size turns out to be an important driver of persistence while firm age, risk and R&D intensity have a negative
influence.
Key words: profit persistence, competitive environment hypothesis, food industry.
1.
Introduction
Under conditions of perfect competition, firm profits that deviate from the average can
only be a transitory phenomenon. However, it is commonly observed that actual profit rates
differ heavily across firms, contradicting the proposition of the competitive environment
hypothesis (e.g. Carlton and Perloff 2005, p).
Starting with Mueller’s (1977, 1986) seminal studies, a series of contributions aiming
to analyze the persistence of such ‘abnormal’ profitability has emerged. Most of these studies
confirm the existence of a considerable number of firms with ‘abnormal’ profits that persist in
the long run. While those studies in general consider entire manufacturing sectors,
differentiated studies, which only focus on the food industry have been sparse. In order to fill
this gap, this study aims to quantify profit persistence and its determinants for food processors
1
in five European Union (EU) member countries: Belgium, France, Italy, Spain and the United
Kingdom (UK), for the period of 1996-2008.
With a share of 13% of total turnover in 2007 the food industry 1 is the largest
economic sector within EU manufacturing (Eurostat 2010). European food markets are
characterized by high market saturation and strong competition. Beyond that, food processors
are confronted by high concentration in the retail sector and by increasing price volatility in
input markets (Wijnands et al. 2007, p. 10). Due to these special characteristics and its high
economic importance, a differentiated examination of the food industry in terms of profit
persistence appears useful and necessary.
Besides being the first analysis of profit persistence in the European food industry, this
study contributes in two ways. First, contrary to most previous studies, which are either
restricted to publicly quoted firms or to a minimum firm size criterion, this study is based on
data, which have nearly no restrictions regarding firm size, making a more precise
representation of the industry possible. This is important particularly for the EU food industry
where 96% of all producers are small firms
2
(Eurostat 2010). Second, while the
autoregressive model of order one AR(1) has become the general econometric method to
investigate profit persistence, this study estimates autoregressive models up to order 4 and
then chooses the ‘best lag model’ for further analysis. This approach is crucial, since the
dynamics of firm profits can be rather complex and might not be captured by the simple
AR(1) process. In addition, dynamic panel models are estimated as a robustness check.
The paper is organized as follows. Section 2 reviews the literature on persistence of
firm profitability. The methodology used to estimate profit persistence and its determinants is
1
Manufacture of food products and beverages excluding tobacco according to NACE Rev. 1.1 division DA15.
According to the SME definition of the European Commission (2005) small firms are defined as having
employed fewer than 50 persons and total assets of less than EUR 10 million.
2
2
introduced in section 3 while a description of the data is provided in section 4. Section 5
presents the empirical results and section 6 concludes.
2. Literature Review
The question why firms have persistent ‘abnormal’ profits is an important research
theme both from a theoretical point of view and also from the perspective of strategic
management and accounting and finance. The traditional ‘Structure-Conduct-Performance’
paradigm, emerging with the seminal contributions of Bain (1956, 1968) explains persistent
profitability with the help of industry-level determinants of competition such as concentration,
economies of scale as well as entry and exit barriers (e.g. Caves and Porter 1977, Waring
1996, Slater and Olson 2002). According to this approach, the main determinants of firm level
profitability differences are the characteristics of the industries.
The so called ‘new learning’ theory in contrast emphasizes the importance of firm
level differences in explaining the variations observed in firm profitability. Several studies
find that firm characteristics, like market share, firm growth, R&D and advertising rather than
industry effects, account for the differences in long term profits (e.g. Teece et al. 1981,
Conner 1991, Levinthal 1995, Roquebert et al. 1996, Barney 2001, Hawawini et al. 2003).
Within the ‘new learning’ the ‘resource-based view’ sees in tangible internal resources like
financial and physical factors of production, as well as intangible internal resources as
technology, management skills, quality reputation and customer loyalty the main abilities of
the firm that can lead to sustained profitability (e.g. Lippman and Rumelt 1982, Wernerfelt
1984, Prahalad and Hamel 1990, Mahoney and Pandian 1992, Brush et al. 1999, Bowman and
Helfat 2001, Winter 2003).
3
In an attempt to resolve the debate about the importance of industry and firm
characteristics, Schmalensee (1985) applies ANOVA and variance decomposition analysis to
US business unit profitability data. His results reveal strong evidence for the importance of
industry effects, which account for 20% percent of the variance in business unit returns. In
contrast, Rumelt (1991) reports significant business-unit effects that strongly outweigh
industry and corporate effects. Many subsequent studies find support for stronger business
unit effects compared to industry effects (e.g. McGahan and Porter 1997, 2002). As regards
the food sector, Schiefer and Hartmann (2009), using ANOVA and COV, quantify firm,
industry, year and country effects on profitability in the EU food industry and find evidence
for the relevance of firm-specific characteristics as determinants of superior performance.
All these studies have in common that they are based on cross sectional data or on
panel data with a short time series dimension of up to five years. Most of the more recent
contributions are based on panel data with longer time series dimensions offering therefore
the possibility of examining the persistence of ‘abnormal’ firm profitability. Some relevant
studies in this area are e.g. Geroski and Jacquemin (1988), Mueller (1990), Kambhampati
(1995), Goddard and Wilson (1999), McGahan and Porter (1999, 2003), Odagiri and
Maruyama (2002), Yurtoglu 2004, Gschwandtner (2005), Cable and Mueller (2008),
McMillan and Wohar (2011).
The evidence regarding profit persistence in the food and agribusiness sector is still
sparse. Schumacher and Boland’s (2005) study of profit persistence in the US food economy
which leads to the conclusion that industry effects are more important for persistence than
corporate effects is one of the few exceptions. However, the food sector deserves further
investigation due to its special characteristics and its crucial position within manufacturing.
4
Additionally, there is hardly another sector with a more intensive debate about the balance of
market power between the food industry and the retail sector (Wijnands et al. 2007, p. 277).3
3. Methodology
The standard method4 is based on two steps where the first step examines the degree
of profit persistence by means of a simple autoregressive process of order one AR(1) at which
firm profits at a given point in time are regressed on the immediate previous level:
𝜋𝑖,𝑡 = 𝛼𝑖 + 𝜆𝑖 𝜋𝑖,𝑡−1 + 𝜀𝑖,𝑡
(1)
𝜀𝑖,𝑡 is a white noise error term with zero mean and constant variance. Profitability of firm i at
time t (𝜋𝑖,𝑡 ) is measured as the deviation of a firms return on assets (ROA) from the
competitive norm, which usually is approximated by the mean across the sample of firms.
This normalization serves two ends. First, it removes the impact of macroeconomic cycles.
Second, by taking the sample mean as a proxy for normal profit, we can interpret 𝜋𝑖,𝑡 as
deviations from the competitive norm or as ‘abnormal’ profitability.
The coefficient on lagged profit 𝜆̂𝑖 reflects the ‘stickiness’ of profits from period to
period, and can be interpreted as ‘short run persistence’, and as a measure for the speed of
adjustment to the long run level. Small values of 𝜆̂𝑖 , close to zero indicate a quick erosion of
short-run rents as well as high fluctuations in profits over time and therefore a low degree of
persistence. In contrast values for 𝜆̂𝑖 close to 1 are an indication for high profit persistence and
thus, a slow adjustment to the competitive norm as well as low fluctuations of profits over
3
See Digal and Ahmadi-Esfahani (2002) for a survey on studies regarding market power in food retailing and
Sexton and Zhang (2001) for an analysis of the US food sector.
4
A comprehensive description of the standard methodology can be found in Mueller (1990).
5
time. The mean value of 𝜆̂𝑖 across all firms in a sample usually serves as an indicator for the
degree of profit persistence within it.
The long run average of the autoregressive process, on the other hand, yields the socalled ‘long run projected profit rate’ (LRPP). The LRPP, defined as 𝑝̂𝑖 = 𝛼̂𝑖 /(1 − 𝜆̂𝑖 ) is the
steady-state equilibrium value to which, according to the model, the series is ultimately
heading. 𝑝̂𝑖 is a measure of ‘permanent rents’, which are not eroded by competitive forces and
can therefore be interpreted as ‘long run persistence’. Since 𝑝̂ 𝑖 = 0 implies a long run
projected return on assets equal to the competitive norm, the percentage of long run
projections significantly different from zero in a given sample can be used as a second
indicator of the degree of profit persistence.
This classical methodology is extended by using the ‘best lag model’. AR models up
to order four have been estimated for each company and Schwarz Bayesian Information
Criterion (SBC) has been employed in order to decide, which model best describes the
adjustment path. After choosing the ‘best lag model’, the long-run projected profit rate
becomes: 𝑝̂𝑖 = 𝛼̂𝑖 ⁄(1 − ∑ 𝜆̂𝑖𝑗 ) where 𝑗 = {1 … . 𝐿} is the number of lags of the AR process
and 𝜆̂𝑖 = ∑ 𝜆̂𝑖𝑗 is the speed of adjustment parameter. This extension is important since the
adjustment path of profitability might be more complex than a simple AR(1). Glen et al.
(2001) find e.g. that AR(2) is a better method to model the adjustment path of profitability.
Cable and Gschwandtner (2008) and Cable and Mueller (2008) point out that not only the
question of convergence is of interest but also the depiction of the convergence profile. The
‘best lag model’ allows for more general dynamics than the simple AR(1) and at the same
time enables comparison with most of the previous literature.5
5
These advantages compensate for the loss of observations.
6
Stability and convergence upon a finite steady state require that 𝜆̂𝑖 lies in the range
between plus and minus one. Furthermore the procedure used is appropriate only for
stationary AR processes, since 𝛼̂𝑖 /(1 − 𝜆̂𝑖 ), the long-run projected profit rate, is not defined
for unit root processes, where 𝜆̂𝑖 = 1. If 𝜆̂𝑖 ≈ 1, the long-run projected profit rate is poorly
defined because the denominator is close to zero. The implications of non-stationarity for
profit persistence are very important and have been discussed at length in Crespo-Cuaresma
and Gschwandtner (2006). The practice of testing for non-stationarity has its roots in
macroeconomics, where some macro economic variables can drift off endlessly. But nonstationarity seems far less likely to be a problem for profits time series because competitive
forces are expected to stop any continuous upward or downward trends in profits. The right
null hypothesis for profits time series should therefore be one of stationarity as it is for the
KPSS (Kwiatkowski-Phillips-Schmidt-Shin) test and not one of non-stationarity as for the
commonly used ADF (Augmented Dickey-Fuller) test. Moreover, it is known that the power
of the ADF test is low for time series of short time dimension. Therefore, a panel KPSS
stationary test was employed for each country analyzed.
The second step of the estimation aims at explaining persistence by regressing specific
firm and industry characteristics on the persistence parameters 𝜆̂𝑖 and 𝑝̂ 𝑖 for each country.
Nonetheless, the standard method also has its drawbacks. The basic problem is that
 i,t is a function of the error term meaning that if serial correlation in the error term is present
 i ,t 1 is also a function of the error term. Therefore the independent variable in (1) is
correlated with the error term implying that the OLS estimator is biased and inconsistent
(Baltagi 2008, p. 147). Thus a dynamic panel model as formulated in (2) is estimated for each
country using the Arellano-Bond GMM estimator (e.g. Baltagi 2008):
7
 i ,t   ( X i ,t )   ( X i ,t ) i ,t 1   i ,t
(2)
where both  and  are linear functions of the set of firm and industry characteristics X i ,t .
The impact of the elements in X i ,t on short run persistence can be evaluated by the  ‘s while
the direction of change in long run profit persistence for a given change in the variables
included in X i ,t is represented by the  ‘s. 6
In order to assure comparability to previous studies first results of the standard two step
methodology are presented followed by results of the dynamic panel estimation as a
robustness check.
4.
Data
The firm data were taken from Bureau van Dijk’s AMADEUS, a commercial panEuropean balance sheet database. The analysis is based on the time span 1996 through 2008
since for this period data availability is best. Most studies of profit persistence are based on
longer time spans of about 15-25 years. These studies however, mainly analyze entire
manufacturing sectors which makes data availability easier. In the case of the present study
the 13 year time span is the longest available for the European food industry.
Firm profitability in year t (𝜋𝑖𝑡 ) is measured as the firm’s ROA in year t subtracted by
mean ROA of that year. ROA is calculated as a firm’s profit/loss before taxation and interest
divided by its total assets. Interest are included in the numerator in order to make the profit
measure independent of the source of funds used. It has to be noted that accounting profit data
can be subject to criticism since they might be biased by profit smoothing and cross
6
A detailed description of the dynamic panel estimation is given in Gschwandtner (2011).
8
subsidization and therefore do not necessarily reflect real economic profit.7 However, also
alternative measures of performance such as economic value added (EVA) developed by Stern
Steward & Co, which measures the economic returns generated for shareholders are not
without problems. Biddle et al. (1997) show for example, that EVA is outperformed by
earnings as a performance measure. Thus, due to data availability and to assure comparability
to previous literature ROA was used as a measure for firm performance.
The data was screened by eliminating firms for which fewer than 13 years of ROA
data were available. Actually firm exit during the time span analyzed is a sign for profit ‘nonpersistence’. However due to the already short time series available it is not possible to check
for a survivorship bias by estimating persistence for firms with fewer than 13 observations.
Gschwandtner (2005) e.g. analyses survivors and exiters separately and comes to the result
that exiters have on average lower short run persistence. Additionally, all firms not assigned
to a 4-digit NACE8 industry, and firms active in the ‘miscellaneous category’ -NACE 1589:
‘manufacture of other food products not elsewhere classified’- were removed from the
database. Regarding firm size, some previous studies have either used a minimum firm size
criterion (e.g. McGahan and Porter 1999) or are restricted to publicly quoted firms (e.g.
Cubbin and Geroski 1990, Schumacher and Boland 2005).9 For the European food industry a
minimum size criterion would lead to a tremendous loss of information, since small
enterprises represent 96% of all food industry corporations. Small firms account for only 21%
of industry turnover in 2007 (Eurostat 2010) which might justify a minimum size criterion
since the estimation considers all firms in an equal way regardless of economic relevance.
However, the large number of small firms is a characteristic of the industry that should not be
7
See Fisher and McGowan (1983) as well as Long and Ravenscraft (1984) for an extensive discussion on the
usefulness of accounting profits in reflecting real economic profit.
8
NACE is the statistical classification of economic activities in the European Community. The present study is
based on NACE Rev 1.1.
9
McGahan and Porter use 10 million US$ in total assets as a cut off value.
9
neglected. Compared to other databases AMADEUS has the advantage that it has almost no
restrictions regarding firm size or legal form.
Observations, lying in the top and bottom 5% of the distribution in each year were
removed from the sample in order to prevent the results from being excessively influenced by
outliers. Similar to Goddard et al. (2005) the elimination of a single profit rate observation
means that there are fewer than 13 years of ROA data available for that firm, leading to its
overall elimination from the sample.
Table 1: Shares of observations by size class in 2007
# obs. in the sample
# obs. in the population
Belgium
841
7511
France
2786
70823
Italy
596
72691
Spain
1043
28657
UK
228
7027
4.7 (0.8)
6.5 (3.1)
18.9 (15.8)
69.8 (80.4)
3.6 (0.5)
5.8 (1.5)
16.7 (8.7)
73.9 (89.3)
5.5 (0.2)
35.4 (1.1)
51.5 (9.3)
7.6 (89.4)
5.2 (0.8)
14.9 (3.4)
37.0 (18.4)
42.9 (77.4)
30.7 (5.0)
30.7 (11.4)
32.0 (28.0)
6.6 (55.6)
Size classa
Large
Medium
Small
Micro
Note: Shares for the population in parentheses (according to Eurostat 2010). These refer to all firms
active in the manufacturing of food products and beverages (NACE DA15) in the appropriate
countries.
a
Size classes according to the SME definition of the European Commission (2005): Micro: < 10
employees and total assets < EUR 2 million; Small: < 50 employees and total assets < EUR 10
million; Medium: < 250 employees and total assets < EUR 43 million. Due to data availability firms in
the population are size-classified by the number of employees while firms in the sample are classified
by their total assets.
The countries considered were selected by data availability. Five countries are comprised:
Belgium, France, Italy, Spain and the UK. Together they account for 59% of the enterprises
and 51% of turnover of the EU-27 food industry in 2007 (Eurostat 2010). The final sample
10
comprises four of the top five countries regarding food industry turnover 10 with a total of
5,494 firms active in 30 4-digit NACE industries.
The allocation of firms on the five countries can be found in row one of Table 1. Table
1 further compares the data of the sample with those in the population by size class for each
country. Despite the fact that only a minor size criterion is used, micro enterprises are still
underrepresented in all country samples. This is true particularly for Italy and the UK.
To avoid repetitions, data on firm and industry characteristics which serve as
covariates for profit persistence are described when introduced in section 5.2.
5.
Empirical Results
This section first presents results on the two persistence parameters 𝜆̂𝑖 and 𝑝̂ 𝑖 , which
were estimated for each firm using equation 1. Results of the second step and the dynamic
panel estimations are presented in 5.2.
In order to assure convergence firms where |𝜆̂𝑖 |>1 were dropped from the analysis.11
Furthermore 𝑝̂𝑖 values which lie in the top and bottom 2.5% of the distribution of each
country sample were removed reducing the initial sample size from 5,494 to 4,676 firms. This
was necessary since for 𝜆̂𝑖 values close to one 𝑝̂ 𝑖 is poorly defined leading to extremely high
values of the latter. The remaining series were tested for stationarity using the KPSS Test,
which indicated that in each country more than 85% of the series were stationary (see Table 8
in the Appendix). As discussed in section 3 for each firm the best autoregressive model due
to the SBC has been selected. The respective distribution per country is summarized in the
10
According to Eurostat (2010) Germany, France, UK, Spain and Italy are the European leaders regarding food
industry turnover while Belgium takes eighths place. Unfortunately, Germany as the European leader regarding
food industry turnover, is not covered by the study due to a lack of data available.
11
A table with the number of firms showing 𝜆̂𝑖 ’s outside -1 and 1 can be found in the appendix (Table 7).
11
Appendix (Table 9) and reveals that even though the AR(1) is the model, which best describes
the adjustment path for the bigger part of firms models with higher order lags are more
efficient for a significant percentage of firms in all countries justifying the best lag
methodology.
5.1 Profit Persistence
Table 2 presents the frequency distribution and mean values of 𝜆̂𝑖 per country. A
striking result is the large fraction of negative 𝜆̂𝑖 values in all five countries. Negative 𝜆̂𝑖
values imply that profits fluctuate heavily over time. Especially food processors that strongly
depend on the input of raw agricultural materials which are characterized by high price
volatility due to short run shocks in supply or demand caused by weather conditions might be
affected by the phenomena of fluctuating profits. The recent CAP reform whose goal is to open
EU agricultural markets to world markets also leads to an increase of price volatility (von
Ledebur and Schmitz 2011).
Table 2: Frequency distribution of the short run persistence parameter 𝝀̂𝒊 a
Country
Belgium
France
Interval
#𝜆̂𝑖
%𝜆̂𝑖
-1 to 0
274
40.4
701
29.3
140
0 to 1
405
59.6
1693
70.7
408
Mean 𝜆̂𝑖
0.057
#𝜆̂𝑖
%𝜆̂𝑖
Italy
#𝜆̂𝑖
0.188
Spain
%𝜆̂𝑖
#𝜆̂𝑖
%𝜆̂𝑖
#𝜆̂𝑖
%𝜆̂𝑖
25.5
247
28.5
52
27.7
74.5
620
71.5
136
72.3
0.143
a
UK
0.201
0.232
Only 𝜆̂𝑖 values between -1 and 1 are considered in the analysis since only for these values convergence to the
norm is assured. Additionally 5% of LRPP (𝑝̂𝑖 ) outliers were eliminated
12
The highest mean value of 𝜆̂𝑖 can be found for the UK (0.232) followed by Spain
(0.201) and France (0.188) indicating a high degree of short run persistence. The lowest short
run persistence is found for Italy (0.143) and Belgium (0.057).
Overall mean 𝜆̂𝑖 ’s for the food industry turn out to be rather small compared to other
studies based on entire manufacturing sectors. Goddard and Wilson (1999) e.g. give an
overview of previous studies for entire manufacturing sectors based on the AR(1) model. For
six of the seven countries considered the mean 𝜆̂𝑖 values exceed 0.4.12 The high degree of
market saturation and competition in the food sector can explain the relatively low average 𝜆̂𝑖
values. Furthermore, the food retail sector is characterized by a high and still increasing
degree of concentration, which leads to strong bargaining power on part of the retailers
putting producers under pressure. In most EU countries the top 5 retail chains have a market
share of around 70 % (Wijnands et al. 2007).13 The bargaining power of retailers is reinforced
by the increasing importance of private labels, which in 2006 already achieved a market share
of 27% (Datamonitor 2006).
In order to analyze the pattern of convergence -according to the standard methodology
in the literature- the country samples were each divided into 6 subgroups of approximately
equal size. The partitioning was based on the initial profit rates (𝜋0𝑖 ) defined as mean firm
profit in the first two years of the analysis. Table 3 presents the average 𝜋0𝑖 ’s as well as 𝑝̂ 𝑖 ’s
and 𝜆̂𝑖 ’s for each subgroup and each country. The results indicate a general pattern of
convergence to profits closer to the mean. For example, the initial difference of 12.96
percentage points in the average profit rate between the top and the bottom group in Spain
diminishes by about 82% to a difference of 2.29 percentage points in the long run. All other
countries except Italy show similar reduction rates of around 80%. In Italy only 58% of the
12
13
An additional overview with similar results can be found in Gschwandtner (2012), p. 180.
Values refer to 2004.
13
initial difference disappears in the long run, which is caused by slow upwards convergence of
below average profits. Although these results indicate convergence to the norm, the process
seems to be far from complete. With a minor exception for the UK, those subgroups with the
highest (lowest) initial profit rates are the ones with the highest (lowest) 𝑝̂𝑖 ’s. This holds also
for remaining subgroups implying that the initial group ordering is stable in the long run.
Based on a t-test, the average 𝑝̂ 𝑖 ’s for the subgroups with the largest/lowest initial
profit rate are always significantly larger/smaller than zero implying that firms earning
high/low initial profit rates tend to earn high/low profit rates even in the indefinite future.
Further evidence for the existence of persistent differences in profitability can be obtained by
the correlations between initial profits and long run projected rates, which for all countries are
statistically significant at the 1% level.
One would expect that the mean 𝜆̂𝑖 values for the firms in the middle groups, which earn
initial profits closer to the mean should be relatively high, indicating that their normal profits
will tend to persist. Contrarily, firms with very high or low initial profits should have lower 𝜆̂𝑖
values since their returns should converge to the norm more quickly. However, for Belgium,
France and Spain the opposite is found. The results for these countries suggest that both, firms
earning initially high profits and firms earning initially low profits, are subject to a slower
average convergence. Italy reveals a pattern of average 𝜆̂𝑖 ’s that indicates slow upward
convergence for firms with lower initial profitability and a fast convergence for firms with
high initial profits. Market forces therefore do not seem to quickly improve the performance
of firms earning low initial profits and at the same time reduce above normal profitability
more quickly. Also for the UK average 𝜆̂𝑖 is somewhat lower in groups with higher initial
profits but overall the group averages are fairly high.
14
Table 3: Mean short (𝜆̂𝑖 ) and long run persistence parameters (𝑝̂𝑖 ) for subgroups in
each country
Country
#Obs.
Group
Mean 𝝀̂𝒊
Mean 𝒑̂𝒊
Mean 𝝅𝟎𝒊
𝝆𝝅𝟎𝒊 𝒑̂𝒊
Belgium
113
1
-0.79
0.1440
-6.51
0.259***
113
2
-0.43
0.0397
-2.54
113
3
0.89
0.0077
-0.22
113
4
0.51
-0.0206
1.90
113
5
1.66
0.0589
4.49
114
6
2.28
0.1119
9.55
France
399
1
-1.50
0.2346
-8.61
0.311***
399
2
-0.98
0.2047
-4.34
399
3
0.05
0.1384
-1.68
399
4
0.74
0.1302
1.06
399
5
1.57
0.1784
4.68
399
6
2.71
0.2422
11.03
Italy
91
1
-2.80
0.3271
-5.18
0.649***
91
2
-1.72
0.2164
-3.36
91
3
-0.50
0.1225
-1.68
91
4
-0.16
0.0969
-0.19
91
5
0.75
0.0450
1.37
93
6
1.38
0.0501
4.69
Spain
144
1
-0.54
0.2926
-5.81
0.306***
144
2
-0.40
0.2302
-2.65
144
3
0.01
0.1646
-0.92
144
4
0.50
0.1524
0.90
144
5
1.48
0.1370
3.13
147
6
1.76
0.2263
7.15
UK
31
1
-2.16
0.2670
-7.24
0.338***
31
2
-0.97
0.3018
-3.88
31
3
0.27
0.2704
-1.49
31
4
0.57
0.2443
0.69
31
5
2.48
0.1413
3.51
33
6
1.66
0.1728
8.11
*** significant at the 1% level.
Note: 𝜋0𝑖 is the initial profit of firm i rate defined as mean firm profitability in the first two years of the analysis.
𝜌𝜋0𝑖 𝑝̂𝑖 is the correlation coefficient between initial and long run profits.
Table 4 provides an overview of the profit persistence parameters per country. The percentage
of long run projected profit rates significantly different from zero in row two reflects the share
of firms within each country that do not converge to the average in the long run. This
percentage is around 40% for all countries. Rows three and four reveal the fact that for
Belgium, France, Spain and the UK the percentage of firms with a significantly positive 𝑝̂ 𝑖
value is similar to the percentage of firms with a significantly negative 𝑝̂ 𝑖 value. For Italy, in
contrast, the percentage of firms showing significantly negative 𝑝̂𝑖 ’s is much higher than the
15
percentage of firms with significantly positive values. This suggests that within the Italian
food industry competition forces operate better for firms with profits above the norm than for
firms with profits below the norm. Overall, these results show that a significant fraction of
firms tend to earn profits both above and below the norm that persist in the long run. For
firms with significantly positive 𝑝̂ 𝑖 ’s some specific advantages or industry wide entry barriers
must exist while firms with significantly negative 𝑝̂ 𝑖 ’s are likely confronted with impediments
to leave the market like sunk costs or other forms of exit barriers.
Table 4: An overview of the persistence parameters
Belgium
France
Italy
Spain
UK
679
2394
548
867
188
38.0
39.0
38.3
42.0
40.4
% of 𝑝̂𝑖 ’s significantly >0
20.6
18.1
11.5
21.7
18.6
% of 𝑝̂𝑖 ’s significantly <0
17.4
20.9
26.8
20.3
21.8
% of 𝜆̂𝑖 ’s significantly different from 0b
12.4
23.4
6.0
23.5
29.8
% of 𝜆̂𝑖 ’s significantly >0
10.5
20.9
4.7
21.0
26.1
% of 𝜆̂𝑖 ’s significantly <0
1.9
2.5
1.3
2.5
3.7
64.4
66.2
40.5
67.4
75.5
# of firms a
% of 𝑝̂𝑖 ’s significantly different from 0
2
% of equations with 𝑅 > 0.1
a
b
firms with |𝜆̂𝑖 | <1 and after elimination of 5% LRPP (𝑝̂𝑖 ) outliers. b significant at the 5% level or less.
The percentage of 𝜆̂𝑖 ’s significantly different from zero, in the fifth row, can also be
seen as an indicator for the magnitude of persistence. The higher this percentage, the higher
the number of firms for which the forces of competition were not strong enough to erode
profits within one to four years.14 These results coincide with the mean 𝜆̂𝑖 values per country,
indicating that persistence is highest in the UK followed by Spain and France and lower in
Italy and Belgium. Row 7 shows that only a small fraction of negative 𝜆̂𝑖 values is also
14
Depending on which model is best according to SBC.
16
significantly negative abating the fact that initially in each country a high share of negative 𝜆̂𝑖
values was found.
The last row of Table 4 shows the percentage of equations with an 𝑅 2 > 0.1. For each
country except Italy this share is larger than in previous studies15, indicating that the best lag
structure has higher explanatory power and is more efficient than the AR(1) model on which
most previous studies are based.
5.2 Explaining Profit Persistence
For both antitrust policy and firm stakeholders the determinants of profit persistence
might be more interesting than its pattern. This section therefore addresses the question,
which firm and industry characteristics affect the magnitude of profit persistence.
The results of the regression analysis are presented in Table 5. The first equation
always explores the impact of the industry and firm characteristics on 𝜆̂𝑖 while the second
equation always explains the impact on 𝑝̂ 𝑖 . Since both persistence measures are estimated
parameters, the equations were weighted by the inverse of their standard errors 16 according to
Saxonhouse (1976). All explanatory variables are mean values over the time span analyzed.
Market Share (MS) is measured as firm i’s total sales divided by total sales in J, where
J is the 4-digit NACE industry to which the firm is assigned by AMADEUS. 17 As the
regressions show, the impact on long run profitability is mixed. While the coefficient is
significantly positive on 𝑝̂𝑖 in Spain, it is significantly negative in Italy and the UK. Usually
one would expect a positive effect on profitability (e.g. Szymanski et al. 1993). However, the
For four of the seven countries analyzed in Mueller’s (1990) study this percentage is smaller than 50%.
The standard errors were calculated using the delta method.
17
Correctly market share should be measured as firms i’s sales in industry J divided by total sales in J. However,
AMADEUS does not provide information about the diversification of firm activity in different NACE
industriesSince in the present study the majority of firms are small and therefore presumably little diversified the
used measure should be a good way to proxy market share.
15
16
17
impact has not always been entirely unambiguous. Prescott et al. (1986) e.g. suggests that the
effect can depend on the environment in which firms operate. Thus the mixed results could be
a consequence of the wide range of different environmental and industry structures present in
the European food industry. Additionally in the Italian food industry higher market share
leads to an increase in 𝜆̂𝑖 and therefore less profit fluctuations.
Table 5: Regressors explaining the estimated parameters of equation 1
Be
(a)
(b)
Fr
(c)
(d)
It
(e)
(f)
Sp
(g)
(h)
Uk
(i)
(j)
Cons.
HHI
NF
Gr. NF
R&D
MS
Age
Ln TA
Gr. TA
Gear
1/Curr
R²
p
-0.464
(-1.209)
0.910
(0.874)
0.902*
(1.772)
0.509
(0.315)
0.000
(0.762)
0.000**
(1.990)
1.273
(0.232)
38.736*
(1.867)
-0.008
(-0.495)
-0.044
(-0.868)
0.000
(0.226)
0.000
(0.079)
-0.001
(-0.230)
-0.021*
(-1.658)
0.093**
(2.038)
-0.024
(-0.193)
0.174***
(12.395)
0.093**
(1.995)
0.000
(0.249)
0.000
(-0.351)
0.004
(0.158)
-0.125
(-1.501)
0.05
0.03
0.06
0.00
-0.508
(-2.340)
-0.214
(-0.307)
2.729**
(2.552)
6.877**
(2.319)
0.000**
(2.429)
-0.001
(-1.039)
6.010***
(3.960)
3.040
(0.681)
0.005
(0.132)
0.313**
(2.082)
0.000
(-0.449)
0.000
(0.000)
-0.001
(-0.530)
-0.010
(-1.265)
0.164***
(5.828)
-0.030
(-0.305)
0.098***
(3.312)
0.067
(1.188)
0.000
(-0.309)
-0.001**
(-2.501)
0.019
(0.791)
0.073
(1.280)
0.03
0.00
0.01
0.29
0.756
(1.264)
1.683
(1.208)
-1.493
(-0.996)
-2.346
(-0.598)
0.000
(-1.307)
0.000
(-0.128)
-0.964
(-0.723)
7.827**
(2.314)
0.135
(1.344)
-1.202***
(-5.994)
0.000**
(2.474)
0.000***
(-2.929)
0.001
(0.447)
-0.032***
(-4.514)
-0.026
(-0.436)
0.055
(0.397)
-0.001
(-0.767)
-0.006**
(-2.291)
0.000
(-0.834)
0.000
(-0.075)
0.027
(0.140)
-0.564
(-1.159)
0.05
0.02
0.21
0.00
0.322
(0.774)
-0.175
(-0.136)
1.592
(1.168)
5.831*
(1.666)
0.000
(-0.710)
0.000
(0.921)
0.004
(0.002)
-6.939
(-1.407)
-0.047
(-0.481)
-0.169
(-0.592)
-0.001
(-0.130)
0.029***
(2.773)
-0.007
(-1.281)
-0.030**
(-2.075)
0.118**
(2.511)
0.266*
(1.691)
0.976***
(3.723)
1.950**
(2.053)
0.000
(-1.420)
-0.002***
(-3.193)
-0.092*
(-1.678)
-0.755**
(-2.538)
0.02
0.04
0.04
0.00
-1.854
(-1.381)
-17.015
(-2.307)
-3.308
(-0.764)
29.238**
(2.231)
0.000
(-0.276)
0.002
(0.776)
-3.547
(-0.453)
16.269
(0.660)
0.051
(0.319)
-1.426**
(-2.188)
-0.009
(-1.581)
-0.052**
(-2.369)
0.005
(0.797)
0.001
(0.039)
0.350**
(2.408)
1.438*
(1.854)
-4.094**
(-2.126)
7.482
(0.865)
0.000
(1.504)
-0.002
(-0.817)
-0.142
(-0.385)
2.165
(0.958)
0.09
0.35
0.09
0.28
̂ 𝒊. Since the dependent variables are estimated parameters, values are divided by their
Dependent variables: Equations a,c,e,g,i: 𝝀̂𝒊 ; Equations b,d,f,h,j: 𝒑
standard errors.
Industry variables: HHI = Herfindahl-Hirschman Index; NF = number of firms in industry; Gr.NF = Growth rate of the number of firms in the industry;
R&D = Share of R&D expenditure in industry value added. Firm variables: MS = firm sales/industry sales; Age = firm age; Ln TA = natural logarithm of
total assets; Gr.TA= growth rate of total assets; Gear = gearing ratio; 1/Curr = 1/current ratio.
All variables are averages over the sample period.
***, **, * significant at the 1%, 5%, 10% level respectively.
Numbers in parentheses are white heteroskedasticity-consistent t-values. p refers to the p-value of the F-test.
For each equation the variance inflation factor (VIF) is <10 indicating that the degree of multicollinearity is not strong.
Firm age (Age) calculated by means of incorporation dates can account for lifecycle
effects. One might expect that aging decreases costs due to learning effects within the firm
and learning spillovers from other firms. Loderer and Waelchli (2010) however, show that the
relationship between firm age and profitability is negative. They argue that corporate aging is
18
attended by organizational rigidities, slower growth and assets, which become obsolete with
time. The negative impact on 𝑝̂𝑖 in Belgium, Italy and Spain reinforces their results.
The relationship between firm size (Ln TA) measured as the logarithm of total assets
and firm profitability is not uequivocal. Goddard et al. (2005) find in a recent study evidence
for the inefficiency of large firms in the case of diseconomies of scale. However, the opposite
is found for the food industry since firm size has a significant positive impact on 𝑝̂𝑖 in the UK
and Spain. The effect on 𝜆̂𝑖 is also significantly positive in all countries except Italy. These
results emphasize the fact that being of sufficient scale is a very important matter in the food
industry. Larger firms seem to be able to countervail the superiority of retailers, to offer lower
prices and furthermore seem to be less affected by administrative burdens such as pre-market
approval 18 or the handling of EU legislation regarding e.g. food safety, animal welfare or
packaging and labeling.
The impact of firm growth (Gr. TA) measured as the growth rate of a company’s
assets is mainly positive. Belgium and Spain show significantly positive coefficients for both
persistence measures. For France, the impact on 𝜆̂𝑖 is significantly positive. A negative
coefficient can only be found for 𝜆̂𝑖 in the UK and for 𝑝̂ 𝑖 in Italy. If firms aim at growing
through diversification because they have exhausted growth in their original field of action a
negative impact of growth on long run profitability may result. Dorsey and Boland (2009) e.g.
find that diversification of food processors in unrelated activities outside the food economy is
unsuccessful. The negative impact on 𝜆̂𝑖 in the UK might be a result of increasing profit
fluctuation due to high costs of growth.
Two risk proxies, one for short run risk and one for long run risk could be derived
from AMADEUS. Short run risk (1/Curr) is measured by the ratio of current liabilities to
18
Especially pre-market approval for new additives, novel foods, genetically modified organisms (GMOs) and
health claims are out of reach for the majority of small food processors in the EU (Wijnands et al. 2007).
19
current assets, which is the reciprocal of a firm’s current ratio. As a proxy for long run risk the
firm’s gearing ratio (Gear) has been used, which is defined as the ratio of non-current
liabilities plus loans to shareholders funds. According to risk theory, firms with higher risk
should on average have a higher profit level. Within the strategic management literature
however, a negative relationship between risk and returns, also known as the Bowman’s
(1980) ‘risk-return paradox', seems to be a long established fact (e.g. Andersen et al. 2007). In
contradiction with risk theory but reinforcing 'Bowman’s risk-return paradox' the impact of
firm risk appears to be negative. The gearing ratio has a significantly negative impact on 𝑝̂𝑖 in
France and Spain while the reciprocal of the current ratio has a significantly negative impact
on 𝑝̂𝑖 in Spain. Additionally, taking higher risks is expected to increase fluctuations in firm
profitability leading to a decrease in 𝜆̂𝑖 as detected for Spain. The negative risk profitability
relationship, which was already found in previous literature (e.g. Ben-Zion and Shalit (1975)
and Gschwandtner (2005)) also applies to the food industries of France and Spain.
Industry characteristics, were constructed from Eurostat’s (2010) ‘Annual detailed
enterprise statistics on manufacturing subsections DA-DE and total manufacturing’.
Concentration is the industry characteristic one would most likely expect to affect the
level of profit persistence. Firms in industries characterized by high concentration might have
the ability to prevent entry leading to a higher degree of long run profitability and smaller
fluctuations. However, there is also the possibility that high concentration leads to very strong
rivalry between a few firms resulting in a negative impact on profitability. In the present study
concentration is measured by the Herfindahl-Hirschman Index (HHI) calculated as the sum of
the squared market shares of the 50 largest firms in each 4-digit NACE industry. As expected
concentration leads to an increase in short run persistence in Belgium and France and to
higher long run profits in France, Spain and the UK.
20
Industry size (NF) is measured by the number of firms in an industry and industry
growth (Gr. IndS) is measured by the corresponding growth rate. The respective net effect on
profit persistence however, is ambiguous at the theoretical level. On the one hand in larger
industries with rapid growth the ability of incumbents to maintain their market shares might
decrease, leading to a reduction of oligopolistic discipline with stronger competition, higher
profit fluctuations and a decrease in the long run profit level. On the other hand, if industries
grow and reach a particular size due to increasing demand the pressure for firms to reduce
prices in order to reach an increase in sales is reduced and therefore high long run profits and
smaller fluctuations might result. The results indicate that firms operating in large and fast
growing industries in Belgium obtain higher long run profit values while firms in France
show smaller profit fluctuations. In addition, industry growth has a positive impact on 𝑝̂ 𝑖 in
Italy.
Research and development (R&D) measured by the ‘share of R&D expenditure in
total industry value added’ might account for some of the differences in profit persistence. It
has to be recognized though that R&D in the food industry has a different character as for
example in the electronics industry. Conventional foods and beverages have been in this
world for a long time and the invention of completely new ones is rather unusual. Overall,
innovation tends to be ‘more process, marketing and management oriented and less a
technology push based on science’ (Wijnands et al., 2007 p. 11). In general one might expect
that R&D is a basis for product differentiation and for the creation of entry barriers. Waring
(1996), e.g., finds a positive impact of the industry-level R&D intensity on short run
persistence. Surprisingly R&D has a negative influence on 𝑝̂ 𝑖 in Italy and the UK. Only for
France a positive effect on 𝑝̂ 𝑖 was found. The results for Italy and the UK corroborate
Stewart-Knox and Mitchell’s (2003) findings that the vast majority of new food products (7288%) fail. However, only 7-25% of these new launched food products can be considered as
21
being truly novel. Hoban’s (1998) results emphasize that the failure rate of truly new products
is only 25% which might therefore explain to some degree the negative impact of R&D.
Weiss and Wittkopp (2005) analyzing the impact of retailer concentration on product
innovation in German food manufacturing find that as a result of retailers’ upstream market
power food processors achieve lower profits, which reduces their incentive for cost-intensive
product innovation. Baumol (2010) shows how the overoptimism and prospects of psychic
compensations of R&D activity can lead to an underpayment of innovative entrepreneurs.
Even though the bigger part of equations is overall statistically significant, as shown
by the F-Tests, it has to be noted that the 𝑅 2 is in general relatively small. However, this
seems to be a general problem in studies based on the standard two step methodology (e.g.
Gschwandtner 2012). The main reason is that profit persistence can be seen as a very complex
matter where several other variables like import and export intensity, advertising or variables
related to merger activity have been found to have an impact. These variables however could
not be taken into consideration in the present analysis due to data limitation. The second
reason is the relative inefficient standard ‘two step methodology’. The dynamic panel
estimation however leads in general to stronger results and higher values of 𝑅 2 .19
Table 6 shows the results of the dynamic panel estimations. First, equation (1) was estimated
in order to determine the short run persistence parameter 𝜆̂ for each country. Short run profit
persistence turns out to be highest in the UK followed by Spain, France, Italy and Belgium.
Hence, the ranking order corresponds with the one for the mean 𝜆̂𝑖 ’s estimated with the
standard AR methodology.20 Finally equation (2) was estimated using the set of firm and
industry variables as explanatory variable of the persistence measures. Additionally, the panel
structure allows for the inclusion of retailer concentration (CR5). The coefficients of the
explanatory variables show their impact on the long run persistence and the coefficients of the
interaction terms of the explanatory variables with the lagged dependent variable (for ex.
R&D * πi,t-1) show the impact of the specific variables on the short run persistence.
19
Gschwandtner (2012) e.g. provides results for both methodologies based on the same dataset with very low R²
values for the standard methodology and rather high values for the dynamic panel estimation.
20
Due to the difference in methods the values cannot be directly compared to the mean 𝜆̂𝑖 ’s of the AR processes.
22
Table 6: Dynamic panel estimations of equation 1 and 2
Variable
πi,t-1
HHi * πi,t-1
CR5 * πi,t-1
NF * πi,t-1
Gr. NF * πi,t-1
R&D * πi,t-1
MS * πi,t-1
Age * πi,t-1
Ln TA * πi,t-1
Gr. TA * πi,t-1
Gear * πi,t-1
1/Curr * πi,t-1
HHi
CR5
NF
Gr. NF
R&D
MS
Age
Ln TA
Gr. TA
Gear
1/Curr
p
Belgium
France
Italy
Spain
UK
0.110 (7.12)***
3.270 (3.20)***
-35.372 (-10.24)***
0.000 (-1.93)**
-0.655 (-2.90)***
-1.808 (-3.42)***
-0.002 (-1.49)
-0.011 (-1.82)*
0.003 (0.07)
-0.120 (-1.24)
0.000 (0.13)
-0.057 (-2.41)**
0.639 (1.73)*
-0.041 (-0.14)
0.000 (1.36)
-0.022 (-1.82)**
0.038 (1.15)
0.151 (9.49)***
28.396 (1.63)*
-10.23 (-2.68)***
0.000 (0.29)
-0.864 (-0.24)
-0.112 (-1.17)
0.001 (0.07)
-0.003 (-0.17)
-0.245 (-1.55)
-1.387 (-2.15)**
0.000 (0.00)
0.910 (1.58)
0.615 (0.14)
0.115 (1.10)
0.000 (0.18)
0.033 (0.37)
0.016 (1.26)
0.001 (1.51)
0.002 (0.13)
-0.074 (-0.88)
0.006 (0.09)
0.000 (-0.03)
0.009 (0.45)
0.250 (15.95)***
-0.327 (-0.96)
-0.605 (-3.48)***
0.000 (-1.58)
0.081 (1.42)
-0.004 (-0.13)
-0.001 (-1.20)
0.001 (0.62)
0.038 (1.80)*
-0.147 (-2.80)***
0.000 (-3.49)***
-0.066 (-2.36)**
0.016 (0.97)
-0.005 (-1.12)
0.000 (2.35)**
0.004 (1.90)*
-0.002 (-1.27)
0.000 (2.14)**
0.000 (-0.43)
0.000 (0.61)
-0.011 (-5.07)***
0.000 (-2.23)**
-0.004 (-2.77)***
0.304 (10.27)***
0.478 (0.56)
-0.024 (-0.04)
0.000 (1.07)
0.386 (0.67)
0.059 (0.77)
-0.002 (-1.16)
-0.001 (-0.38)
0.127 (2.75)***
-0.382 (-2.52)**
0.000 (0.24)
0.125 (3.51)***
0.067 (1.56)
0.004 (0.19)
0.000 (0.71)
0.003 (0.09)
-0.004 (-1.25)
0.000 (-0.51)
-0.009 (-0.91)
0.025 (1.76)*
-0.007 (-1.02)
0.000 (-4.01)***
-0.004 (-2.16)**
0.205 (21.07)***
-1.785 (-1.76)*
-3.498 (-2.98)***
0.000 (-2.71)***
-0.787 (-3.68)***
-0.048 (-1.70)*
0.000 (0.46)
-0.005 (-2.47)**
0.049 (2.12)**
-0.055 (-1.55)
0.000 (1.76)*
-0.018 (-1.52)
0.662 (0.63)
2.885 (1.06)
0.001 (4.07)***
0.002 (0.07)
0.011 (1.60)
0.000 (0.46)
-0.026 (-2.98)***
0.009 (1.04)
-0.002 (-0.75)
0.000 (-5.85)***
-0.004 (-3.50)***
0.000
0.000
0.000
0.000
0.000
a
a
0.003 (1.20)
-0.018 (-1.82)*
0.000 (-0.51)
0.004 (1.18)
Dependent variable: πi,t
Industry variables: HHI = Herfindahl-Hirschman Index; NF = number of firms in industry; Gr.NF = Growth rate of the number of firms in
the industry; R&D = Share of R&D expenditure in industry value added; CR5 = Five-firm concentration ratio of the retail sector. Firm
variables: MS = firm sales/industry sales; Age = firm age; Ln TA = natural logarithm of total assets; Gr.TA= growth rate of total assets;
Gear = gearing ratio; 1/Curr = 1/current ratio.
Numbers in parentheses are z-values.
a dropped due to multicollinearity
***, **, * significant at the 1%, 5%, 10% level respectively. p refers to the p-value of the Wald Chi² - test.
Regarding the main findings, the results are similar to the ones of the ‘best lag model’. Firm
size is an important driver especially for short run persistence while age tends to have a
negative influence. The majority of the risk coefficients are negative while R&D has a
negative influence on short run persistence in Belgium and France (the coefficient of R&D *
πi,t-1 ).21 As expected, retailer concentration has a negative influence on short run persistence
21
The negative influence of R&D might be reinforced by the fact that R&D during period t is used to explain
persistence in t. Even though the time span until economic returns of R&D occur is expected to be rather short in
the food industry it is likely that the benefits of R&D do not occur in the same period. Therefore ideally lagged
R&D should have been used. However due to the rather bad data availability of R&D and the short period
analyzed this approach seemed to be disadvantageous.
23
in all countries except UK underlining the assumption that pressure on the part of retailers
reduces persistence. 22
However, there are also some differences in the results as industry size and growth have a
negative impact on short run persistence in Belgium and France. Additionally firm growth has
a negative influence in Italy, Belgium and Spain indicating that growth leads to stronger profit
fluctuations.
6. Conclusion
The preceding analysis of profit persistence in the European food industry indicates
that profits in general converge towards a competitive norm. Nevertheless, a considerable
degree of persistence could be found since in each of the five countries analyzed a significant
fraction of firms tends to earn profits above or below the competitive norm in the long run.
This shows that the process of convergence is far from completion.
As both methods show short run profit persistence is highest in the UK followed by
Spain and France and lowest in Italy and Belgium.
It was shown that especially young, large firms that are also characterized by fast
growth are the ones earning high profits that persist. Additionally, a firm’s risk and the level
of industry R&D expenditure have a negative impact on the degree of profit persistence in
some countries. As expected retailer concentration has a negative impact on long run profits.
The most obvious difference to other manufacturing sectors is that profit persistence
within the food industry is considerably lower as indicated by the lower average 𝜆̂𝑖 values.
This result could mainly be related to a high degree of market saturation, strong price
22
Concerned about the issue of endogeneity caused by reversed causality we have performed Granger
causality tests. Moreover, the Arrelano Bond estimation allows for explicit specification of endogenous
variables. In general the results confirm the causality implied by the model. Results can be obtained from the
authors upon request.
24
competition and the highly concentrated retailing sector. Another striking difference is the
importance of firm size. While many previous studies find evidence for the inefficiency of
large firms, being of sufficient scale is a very important matter in the food industry. Finally
the special characteristic of R&D and its negative influence on profit persistence in Italy and
the UK has to be pointed out. Nevertheless, the negative impact of R&D on profit persistence
should not lead to the wrong conclusion that R&D in the food sector is bad and should not be
pursued or subsidized. Rather on the contrary, it should lead to the conclusion that it is
important to encourage and subsidize the 'right' innovations that lead to success within the
food sector, namely truly new product innovations. Any measures taken to reduce
concentration among retailers and to shift the market power from retailers towards producers
as well as measures to increase collaboration between producers and retailers would also seem
beneficial.
25
Appendix
Table 7: Percentages of firms with |𝝀̂𝒊 | >1 per country
Country
Number of firms
Percentage
Belgium
134
15.93
France
298
10.70
Italy
31
5.20
Spain
131
12.56
UK
30
13.16
Table 8: Percentages of stationary
series per countrya
a
Country
Percentage
Belgium
94.99
France
87.93
Italy
96.35
Spain
87.31
UK
86.17
Based on a KPSS test.
Table 9: Choosing between AR(1)-AR(4)
based on SBCa
Country
AR(1)
AR(2)
AR(3)
AR(4)
Belgium
58.76
24.30
7.51
9.43
France
67.29
14.37
6.52
11.82
Italy
84.85
4.93
7.30
2.92
Spain
68.28
13.26
6.81
11.65
UK
64.36
15.96
6.38
13.30
a
Percentages of firms for which the AR(1) to AR(4) is
chosen based on the SBC.
26
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