FDS Preliminary Report
Total Page:16
File Type:pdf, Size:1020Kb
The Development of the Food and Drink Processing Sector in Northern Ireland Literature review and preliminary recommendations Ziping Wu, Erin Minihan and Graham Finney Agricultural and Food Economics Branch Agri-food and Biosciences Institute (AFBI) September 2012 Agricultural & Food Economics Contents Executive Summary ....................................................................................................................... iii Chapter 1: Background ................................................................................................................... 1 Northern Ireland’s national competitiveness .............................................................................. 6 Industry competitiveness .......................................................................................................... 17 Firm competitiveness ................................................................................................................ 23 Chapter 2: Economies of Scale ..................................................................................................... 25 Scale in Northern Ireland’s food and drink sector .................................................................... 25 Current policy approaches and evidence .................................................................................. 31 Policy recommendations ........................................................................................................... 32 Chapter 3: Education, skills and training ...................................................................................... 34 Education, skills and training in Northern Ireland’s food and drink sector .............................. 35 Current policy approaches and evidence .................................................................................. 37 Policy recommendations ........................................................................................................... 40 Chapter 4: Market development.................................................................................................... 41 Market development in Northern Ireland’s food and drink sector ........................................... 41 Current policy approaches and evidence .................................................................................. 51 Policy recommendations ........................................................................................................... 58 Chapter 5: Innovation ................................................................................................................... 60 Current state of R&D in Northern Ireland’s food and drink sector .......................................... 61 Policy recommendations ........................................................................................................... 65 ii Agricultural & Food Economics Executive Summary This review aims to support the development of agri-food strategy in Northern Ireland (NI) by reviewing the available literature and benchmarking. The review focuses on discussing different strategic options for the Northern Ireland food and drink processing sector (NIFDS) by (1) identifying main problems and issues associated with its development, (2) reviewing the mechanisms driving competitiveness at country, industry and firm levels, and (3) discussing possible policy options for NI specifically. Based on the evidence available in the economic literature and data relevant to NI specifically, the underlying recommendation is that public support should focus on enabling firms to pursue differentiation and cost leadership strategies. The differentiation approach involves claiming a price premium or market share based on providing a unique product or service. Cost leadership strategy centres around decreasing costs, so that market share is secured via price competition. Both strategies depend on natural resources, infrastructure and human capital to secure or sustain a comparative advantage, although the emphasis on what resource the advantage is derived from changes with the strategic approach. Strategy Cost leadership The NIFDS has exhibited price and production cost competitiveness in recent times with wholesale prices of major exports below the sustained increase of international prices. The comparative advantage in terms of cost leadership potential for NI is likely derived from the relatively inexpensive raw inputs from agriculture and relatively low labour costs. Average production costs of major agricultural products in NI are lower than many competitors in Europe though not globally. The literature suggests that efficiency gains in agriculture may be transferred to the FDS in the form of cheaper inputs so the success of a cost leadership strategy in the NIFDS will depend on some degree of compatibility with the future direction of NI agriculture. Relatively low labour costs (about 10% below neighbouring regions) are also beneficial for a labour intensive sector such as the NIFDS. In terms of market demand, quantities required for food security are increasing at an unprecedented pace and demand for livestock products such as dairy and meat will continue to increase because of income improvements in emerging markets. However, penetration of emerging markets by the NIFDS is far below competing regions and nations. In 2009, only 3% of NIFDS exports were sold outside of the European Union (EU), compared to 35% of FDS exports from the Republic of Ireland (ROI). Sustaining a competitive advantage based on low costs alone has associated risks. It is subject to numerous external factors such as exchange rates, energy price, regulations and climate change. These challenges will have a fundamental impact on the long-run viability of pursuing a cost iii Agricultural & Food Economics leadership strategy in the NIFDS. For example, if sterling appreciated by 30% against the US dollar (and other currencies at the same rate), NI’s price competitiveness since later 2009 for butter, a major exporting commodity, would disappear. Differentiation Consumer preferences have moved towards safe, healthy, nutritious and sustainable ‘green’ food, particularly in relatively sophisticated mature markets such as the European Union (EU). The EU, particularly Great Britain (GB) and the Republic of Ireland (ROI), composes the primary market for the NIFDS, and so there is potential to pursue a differentiation strategy that caters to changing demand. Food manufacturing in NI generates a smaller proportion of gross value added (GVA) relative to sales than other regions in the United Kingdom (UK). Relatively low GVA can be explained by low capital inputs (including knowledge capital such as R&D) associated with producing differentiated products and services that command a price premium. A case study comparing the NI and Scotland dairy supply chain indicates that the GVA gap can be as large as 20% and is largely due to Scotland’s more differentiated product mix. The NIFDS has relatively higher output, employment and income multiplier impacts on the regional economy than other economic sectors, suggesting that growth in the NIFDS sector will have a relatively large impact on economic development. Following a differentiation strategy in the NIFDS could increase these multiplier effects even further if the resources and inputs required to engage in product development are sourced locally. While the upstream links with agriculture remain important under both cost leadership and differentiation strategies, there is considerable potential in strengthening downstream links to R&D and services such as marketing if there is an emphasis on differentiating products based on adding additional value such as convenience, quality, nutritional content or sustainable sourcing. Pathways to success Innovation Innovation is a process of creation that results in better or more effective products, processes, services, technologies, or ideas that are readily available to markets, governments, and society. It is proven to be the main driver of economic development and firm competitiveness. Innovation is essential to the pursuit of both cost leadership and differentiation strategies by creating new markets, adding new value, and reducing the cost of production and services. Many studies in developed countries indicate that the contribution of innovation, including Research and Development (R&D), to economic development can be as high as 70-80%. Linking the different components of the innovation process (such as R&D uptake by industry) is essential, so can be thought of as an innovation system. The main challenge facing innovation systems is a framework appropriate for the structure and competitive strengths of the local economy. In the NIFDS, there are also several sector specific problems. First, innovation investment by iv Agricultural & Food Economics businesses is lower than other manufacturing sectors in output terms. Second, there is no clear vision of industry needs regarding innovation and no effective and practical mechanism to bridge demand and supply. Third, the region is a net importer of technology, and is dominated by small and medium size enterprises (SMEs). Therefore, the system aspect, linking different components of the innovation chain is an important issue. There is anecdotal evidence that the NIFDS is involved in firm innovation but so far no systematic research is available. Literature in this area tends to suggest that successful FDS innovation depends on firm absorptive