Food Processing Firms And Foreign Production Incentives

As the practice of a firm in one country owning production facilities in another has increased, several theories have developed to explain why production facilities do not always have local owners who would presumably be more familiar with local business conditions. A transaction cost explanation is that a firm may have intangible assets that are sought in another country but that cannot be economically sold on account of market failure. In such a case the firm's expansion into the foreign country may be the most economical way for the foreign country to gain access to those assets. A few studies have identified firm characteristics and firm-specific assets associated with the international growth of food firms. The present paper expands on this work by interviewing executives in two product areas (processed meats and preserved fruit/vegetable products) to discover which assets the executives perceive as important and nontransferable through market channels (and thus applicable to the transaction cost approach). The assets of product development expertise, process management knowledge, and reputation appear to be key intangible assets associated with foreign production. A regression analysis tests determinants of foreign production of the two product categories by 17 US firms in 9 global regions, yielding results consistent with the interviews. That is, the probability of having foreign production plants is significantly enhanced by higher total firm sales, being in the processed fruits and vegetables business as opposed to processed meats and locating in higher income, Western Hemisphere and European Countries.