Perspectives Foreign Investment In U.S. Food Manufacturing

John M. Connor (202) 447-6363

.S. food-manufacturing affiliates of affects FDI. For British and Canadian food Uforeign corporations accounted for firms, home markets dominated by a few about $20 billion in food and beverage sales, firms encourage FDI, while high U.S. or 5 percent of the total in 1979. By mid­ concentration discourages FDI. i 981, 30 foreign investors had U.S. food­ Finally, similar social and cultural charac­ manufacturing operations with sales exceed­ teristics and levels of economic development ing $100 million each. Of the 119 world's between home and host countries stimulate largest non-U.S. food firms, over one-fourth FDI. Once foreign food firms have invested have food-manufacturing investments of in the United States, their success largely this size in the United States. depends on having a large market share, Large, diversified, publicly owned foreign large size, and access to sophisticated firms are the most likely to engage in foreign manufacturing techniques, all factors that direct investment (FDI), especially those make it difficultfor other firms to enter the with experience marketing highly advertised industry. food products in a home country where advertising is intense. The competitiveness The Largest Non-U.S. Food Firms of the home and host country markets also Determining the amount of foreign

Table 1:The Largest Foreign Investments in the U.S. Food and Tobacco Manufacturing Firms, 19781

Propor- U.S. u.s Foreign Investor Country Investment tion sales assets owned

Percent Million dollars

B.A.T. lndustries3 U.K Brown and Williamson Tobacco Kohls Stores (Other retailing and paper) 100 3,500 2,250

Unilever UK/Nether- Lever Brothers 100 861 365 lands Thomas J. Lipton 100 671 365 National Starch and Chemical (pending) 100 419 299 Lawry's Foods, Inc. (pending) 100 100 70

Seagram Canada Jos. E. Seagram 100 1,887

Nestle Alimentana Switzerland Nestle, Inc. 100 1,300 Libby, McNeil! & Libby 100 250 Stouffer 100 200

George Weston Canada/U.K. National Tea 74 900 150 Peter J. Schmitt 87 350 lnterbake 100 60 Ruperts Certi-Fresh Foods 82 50

C.I.P. Luxembourg A. E. Staley' 9 1,214 583

Henkel W. Germany Clorox 19 1 100 350

Hanson Trust U.K. Hygrade Foods 100 1.016 Am. Farm Products Interstate United

20 National Food Review Perspectives

Table 1 :The Largest Foreign Investments In the U.S. Food and Tobacco Manufacturing Firms, 19781 continued

Propor­ U.S. U.S Foreign Investor Country Investment tion sales assets owned Percent Million dollars

Akzo Akzona 66 869 704

Beecham Group U.K. Beecham, Inc. 100 415 395 Calgon

Rhone-Poulenc Morton-Norwich 19 657 434

Northern Foods U.K. Bluebird 100 606

Allied Breweries• U.K. TFI Cos. 48 200 67 DCA Food Ind. 80 Baskin-Robbins 100 381

Sandoz Switzerland Sandoz US 100 538

United U.K. Keebler Crackers 100 437 176

lmasco5 Canada Hardee's Food Systems 39 259 110 Progresso Foods 100 50 Pop Shoppes 49 7

COPERSUCAR Coop Brazil Hills Bros. Coffee 100 275

Reckitt & Colman U.K. Reckitt & Colman 100 220 R. T. French

Cadbury Schweppes U.K. Schweppes 100 200 Peter Paul Candy (pending)

Hiram Walker­ Gooderham & Worts Canada Hiram Walker 100 200 100

Dalgety U.K. Dalgety 100 180

Distillers Co. U.K. Distillers Inc. 100 150 38

6 Douwe Egberts Netherlands Superior Tea and Coffee 100' 150

Brooke Bond Liebig U.K. Brooke Bond Foods 100 130 25

Triad Holding Saudi Arabia AZL Resources 15 110 137

Total sales 19,142'

1 lncludes all known investments of 5 percent ownership of more and with at !east $100 million �1masco is minority-owned but possibly controlled by B.A T Industries. in sales in 1978. Food retailers are excluded even though many are vertically integrated into food 'Douwe Egberts is 65 percent-owned by Consolidated Foods of the U.S., but CF may not have manufacturing. See Seigel and Handy article in NFR-13. management control. 2Other information indicates owner is J. G. Lambert Leon of the Lambert famtly of 1Some sales estimated. Tota! sales is slightly overestimated because of nonfood sales of some Equity owned may be much higher now. U.S. affiliates. 'In 1978, B.A.T. paid $141 million for the non-U.S. production and distribution rights to all of Lorrillard"s tobacco products. - = Not available. 'Allied recently purchased these U.S. assets as part of its 1978 acquisition of J. Lyons, a U.K. firm with $1.438 million in worldwide sales. Sources. Jaffe (1979) and recent data compiled by the author.

Fall 1981 21 Perspectives

Table 2-Large U.S. Acquisitions by Foreign-Owned Food and Tobacco Manufacturing Companies, Publlcally Announced 1979-81

Acquiring Company Country Acquired Company Products Amount Pd.

Million dol.

Grand Metropolitan U.K Ligget Group tobacco, 1,070 Intercontinental Hotels hotels, liquor, pet foods

Hiram Walker Canada Davis Oil Co. (part) petroleum 600

Unilever U.K. National Starch wet corn 485 milling

Hanson Trust U.K. McDonough Co. shoes, tools 180

Hanson Trust U.K. Barber Oil oil tankers 148

Suntory Japan PepCom Industries soft drinks 100

Pernod Ricard France Austin Nichols div. wine 98 Liggett Group

Beecham Group U.K. Jovan perfume 85

BSN-Gervais France Dannon, sub. of Beatrice yogurt 85

Northern Foods U.K. Bluebird canned hams 72

Unilever U.K. Lawry's Foods snacks 66

Cadbury Schwepps U.K. Peter Paul candy 58

Rhone-Poulenc France Morton-Norwich salt 52

United Biscuits U.K. Specialty Brands misc. foods 50

Hiram Walker Canada Bacardi rum 45

Nestle Switzerland Beech-Nut div. baby food 35-40 Warner Lambert

George Weston Canada Strockmann Bros. baking 32

Imperial Group U.K. Bayshore Foods fishing 25

Nichiro Gyogyo Japan Peter Pan seafood 25

Source: Compiled by the author from business publications and data furnished by the Office of Foreign Investment in the United States, International Trade Administration, U.S. Department of Commerce.

22 Natlonal Food Review Perspectives

ownership in U.S. manufacturing companies least 25 had subsidiaries in the U.S. food investors are the most prominent members is usually difficult. When foreign ownership manufacturing sector with sales of $l00 of the list, but there is one Brazilian reaches 5 percent or more in any U.S. million or more. The total U.S. revenues of cooperative and one Saudi firm. Recently, company, owners are required to file their affiliates approached $20 billion in two Japanese firms have purchased U.S. statements to the Securities and Exchange 1978. Seven foreign firms-B.A.T. Indus­ food firms. Commission (SEC). Once ownership reaches tries, Unilever, Seagram, Nestle, C.I.P., Table 2 brings the 1978 data in table I up IO percent, the Commerce Department Henkel, and Hanson Trust-each had to date. The 2½ years since the beginning of classifies a U.S. company as foreign-owned. manufacturing affiliates with sales of $ I 1979 were very active ones for foreign However, once a U.S. company becomes a billion or more. investment by large foreign firms, which wholly owned subsidiary of a foreign While most of the affiliateswere majority spent over $3.3 billion on new U.S. investor, it is no longer required to release owned, A.E. Staley, Clorox, and a few investments. Some of their investments were financial information to the public. others were minority owned. Table I in the nonfood area, but a major portion Table I presents the results of a thorough excludes firms whose U.S. affiliates were were food-manufacturing investments. Ex­ search of trade publications and other primarily food retailers, even though some cept for purchases by two Japanese sources by USDA economists. Out of the of these also owned food-manufacturing companies, the investors were companies or 125 largest foreign investors in the United plants (see article by Seigle and Handy, countries that had invested in U.S. firms in States in 1978 (measured by U.S. sales), at NFR-13). West European and Canadian the past. Another approach that can reveal much about the causes of FDI in particular markets is to collect detailed data on the globa operations of the major foreign food firms, their investment histories, and their Table 3-Measures of U.S. Participation by the 122 Largest Non-U.S. Food and home-market environments. Collecting glo­ Tobacco Processing Firms, 1974 bal data is even more difficult than looking Companies only at U.S. operations because of interna­ Estimated 1975 Total Market tional differences in languages, accounting Country Sales in the Shares, 4-digit practices, and industrial classifications. For With Some With None U.S. SIC basis2 the fallowing analysis, we identified virtually all non-U.S. food and tobacco processing Number Million dollars Percentage points firms with global sales exceeding $350 million in 1974 or 1975. Also, large ' 14 19 2,818 45.7 diversified firms with food or tobacco as a major line of business are included if that Switzerland 2 2 1,346 11.3 segment totaled at least $100 million. Canada 6 930 22.3 Foreign subsidiaries of U .S.-based corpora­ tions were excluded, as were a few foreign­ Netherlands' 2 7 685 24.6 government-owned food or tobacco monop­ olies. Japan 5 24 55 4.2 In 1975, 122 foreign food firms (FFFs) met these criteria. By comparison, there were France 2 9 15 0.2 slightly over JOO U.S.-based companies that met this size standard in 1975. The 3 Other developed 2 31 101 5.9 distribution of these FFFs according to their headquarter country is shown in table 3. Of Less developed• 5 259 4.4 those 122 FFFs, 34 own at least 10 percent of Total 34 88 6,209 118.6 a U.S. subsidiary in the food or tobacco processing sector. 1Unilever is categorized as a U.K. firm. 2The sum ot all 4-digit SIC industry market shares in all industries in which the firms have Characteristics of Foreign Food Firms sales. 3Norway, Sweden, Finland, Belgium, Denmark, West Germany, Italy, Spain, and Australia. The 122 FFFs display all the usual 4 lsrael, South Africa, and Brazil. characteristics of multinational corpora­ Source Compiled by the author. tions and are potentially powerful firms.

Fall 1981 23 Perspectives

Their size, diversity, product portfolio, and that foreign food-processing firms generally ratios (an indicator of product differentia­ the structures of their home markets all marketed branded, heavily advertised, and tion) are on average over double that of all suggest relatively profitable market posi­ highly processed foods, such as , other domestic food firms. tions. They are on average quite large ($1.2 candy, sauces, tea, coffee, and alcoholic billion in sales) and fairly profitable (9.3 beverages. FFFs have relatively low levels of Why Do Foreign Investments Occur? percent return on equity). They tend to be penetration into U.S. markets for more Two statistical analyses of the 120 largest highly diversified and have complex corpo­ commodity-type, slightly advertised foods, non-U.S. food firms were performed to find rate structures to handle their dispersed such as fruits, vegetables, flour, bread, and which economic factors might influence operations. (The FFFs that are not con­ dairy products. their foreign investment in the United States. glomerates include a few specialized beer Further support for the idea that FFFs The analyses attempted to explain: (I) the and sugar firms, some dairy cooperatives, market highly differentiated consumer pro­ level of FDI by these firms (ratios of their and State-owned cigarette or alcohol ducts comes from an analysis of their 1975 U.S. sales to their total world sales) and (2) monopolies.) media advertising expenditures. These data the U.S. market penetration by these FFFs Foreign food firms typically operate in reveal that their food and tobacco advertis­ (using their U.S. market shares). highly concentrated industries in their home ing accounted for at least 11 percent of all There are several alternate economic countries. Market sales concentration (the U.S. media advertising. Because FFF theories of the motives for FDI. This model sum of the market shares of the leading affiliates account for only 4 percent of net focused on three groups of factorsthought to firms) is especially high in industries U.S. sales of processed foods and tobacco, affect foreign investment in the long run: producing more differentiated or nonstan­ that implies that their advertising-to-sales • The "closeness" of the home-country dardized products (biscuits, candy, alcoholic society or economy to that of the United beverages, and tobacco). On average, for the 68 FFFs for which data were available, the four largest firms in each country had 73 percent of the industry's sales (see table 4 for method of computation). This average is 35 Table 4-Weighted Average Home-Country Concentration and Market Share Ratios percent higher than the comparable average for the Largest Non-U.S. Food and Tobacco Manufacturing Firms, Early 1970s concentration for U.S. food and tobacco Weighted four-firm sales indus tries in 1972 (adjusted for geographic Weighted market share2 concentration ratio' size of markets). Home country Observations Average Observations The average home market share of these of company Average FFFs was 35 percent. Such high market shares are known from other studies to Number Percent Number Percent generate market power-the ability of firms to set prices or control the supply of Canada 7 80.6 2 34.0 products. High market shares coupled with highly concentrated home industries also United Kingdom 23 67.0 18 23.0 imply that growth-oriented companies will have a difficulttime expanding their sales in Japan 11 94.0 9 36.7 their domestic markets because of the Netherlands 6 67.4 5 31.2 opposition of other large firms. Therefore, these foreign food firms are more likely to France 9 67.3 8 43.3 seek large markets like the United States in order to grow. West Germany 5 39.6 4 14.6

Products Sold by Foreign Food Firms Other Europe 7 84.8 10 48.7 in the U.S. A special study commissioned by the Total 68 72.7 56 34.6 Department of Commerce in 1974 found 1Concentration ratios for food and tobacco manufacturing from the latest censuses; firm weights are product-line sales of firms; country average is simple average of firms. 2Market shares for food and tobacco manufacturing are at varying levels of market definitions, but us ually 4- or 5-

Source: Compiled by the author.

24 National Food Review Perspectives

Table 5-Estlmated U.S. Market Shares of Foreign-Owned Food and Tobacco Manufacturing Companies, 1974

Estimated Product Companies/Subsidiaries Market Sh are

Percent

Poultry Imperial Group/Pillsbury Farms, J & M 3

Ice cream by the cone Unilever/Good Humor; J. Lyons/Baskin-Robbins 5-10

Canned vegetables Nestle/Libby 4-8

Dehydrated fruits and Unilever/Lipton; Reckitt & Colman/ R.T. French; 80-90 veg., esp. soups Nestle/Maggi

Mustard Reckitt & Colman/RT. French about 50

Sauces Rickitt & Colman/A. T. French; Imperial Group/ several Lea & Perrins; Kikkoman Shoyu leading brands

Dressings Unilever/Wishbone over 20

Frozen entrees Nestle/Stouffer & Findus 3-5

Wet corn products Unilevel/National Starch 5-10

Crackers & cookies United /Keebler; Weston 18-21

Chocolate candy Nestle; Cadbury Schweppes 16-23

Beer Rupert Group/Carling; Tuborg; Kirin/ Molson/Ranier; 3-5 Oetker Group/ Prinz Brau

Liquor Seagrams/Hiram Walker; Distillers; Scotish & 25-35 Newcastle

Coffee Nestle; J. Lyons/Beech Nut; Brooke Bond 16-10

Tea Unilever/Lipton; Nestle; J. Lyons/Tetley; Brooke 75-85 Bond/Salada Foods

Margarine Unilever/Imperial, Promise, Autumn 9

Sweetening Syrups Unilever/Mrs. Butterworths; Tate & Lyle 14-16

Gelatine Unilever/Knox leading brand

Wine Cadbury Schweppes; Seagrams/Masson; Reckitt & 3-5 Colman/Widmirs; Hiram Walker/Wildman

Fish BAT Ind.Nita Foods; Canadian National; Icelandic "significant regional shares"

Cigarettes BAT lnd./Brown & Williamson 17-20

Sources: Department of Commerce (1976: Vol. 3) and trade sources.

Fall 1981 25 Perspectives

States. Proximity was measured by per firms in the U.S. food and tobacco References capita income and per capita advertising manufacturing sector seems like a safe Barnett, Richard J. and Ronald E. Muller, expenditures, both of which are very high in prediction. The amount of their investments Global Reach: The Power of the Multina­ the United States. is likely to continue to outweigh foreign tional Corporations. New York: Simon • The type of market structure in the investments by U.S. food firms for several and Schuster, 1974. home country and in the United States. We more years. Given the characteristics of their Bergsten, C. Fred, Thomas Horst, and were particularly interested in whether home markets, Japanese, West German, Theodore H. Moran. American features like sales concentration or advertis­ French, and Scandinavian food firmsappear Multinationals and American Interests. ing intensity push or pull foreign firms to the to be underrepresented in the present mix of Washington: Brookings, 1978. U.S. market. investors. Moreover, if the trend in the Caves, Richard E. International Corpora­ • The internal organizationof the FFF­ United States toward higher levels of tions: The Industrial Economics of its firm size, product diversity, profitability, concentration, advertising, and profitability Foreign Investment. Economica 38: 1-27, and legal form. continues, it will attract more foreign firms 1971. The results of the statistical test indicated anxious to increase their sales and profits in Dunning, John H. Explaining Changing that no single factor can be identified as the U.S. markets, which are viewed as safer and Patterns of International Production: In cause of foreign investment in the United less regulated than markets in their home Defense of the Eclectic Theory. Ox.ford States. Rather, there are many forces or countries. Bull. Econ. Stat. 41: 269-95, 1979. motives impelling foreign food firms to Is investment by foreign firms in U.S. food Frank, Robert H. and Richard T. Freeman. become multinational. and tobacco industries desirable? The Distributional Consequences qf Direct A major finding of the study was that both United States has traditionally espoused a Foreign Investment. New York: Academic firm organization and market structures are "neutral" attitude toward FDI (see NFR- Press, 1978. key determinants of FDI in the U.S. food 15). In part, this policy stance has evolved Galbraith, John Kenneth. The Defense of and tobacco manufacturing industries. because of the presumed analogy between the Multinational Company. Harvard Large diversified foreign firms, publicly the mutual benefits to countries of free Business Review March-April 1978: 83- owned, marketing highly advertised pro­ international trade and the movement of 93. ducts, originating from countries with high materials, technologies, and skills among Horst, Thomas. At Home Abroad: A Study per capita advertising are the most prone to nations within firms. Furthermore, the entry of the Domestic and Foreign Operations invest in the United States. Some degree of of additional sellers into a market has ofthe American Food-ProcessingIndustry. international socioeconomic closeness ap­ generally been held to improve industry Cambridge: Ballinger, 1974. pears to strengthen the influence of home­ price or profit performance by making firms Hufbauer, G.C. and F.M. Adler. Overseas country market structures on FDI. Because more competitive. While that is probably Manufacturing Investment and the f it contradicts some widely held beliefs, it is correct in the short run, the longer run result Balanceo Payments, Tax Policy Research also interesting to note the factors found to of entry by multinational corporations may Study No. I. Washington: U.S. Treasury be unimportant: the size of the U.S. market, reduce competitive performance. Dept., 1968. U.S. tariff barriers, firm profitability, and Studies by Caves, Bergsten,an d Pagoulatos Lall, Sanjaya. Monopolistic Advantages firm growth. and Sorenson have examined how foreign and Foreign Involvement by U.S. Manu­ Most of the same factors that influence economic factors may influence industrial facturingIndustry. Oxford Econ. Pap. 32: FDI also influence the relative success of performance. Both imports and exports 102-22, 1979. FFFs in establishing and maintaining U.S. have been found to encourage competitive Pagoulatos Emilio and Robert Sorenson. market shares. Firm salesdiversification was pricing. Foreign investment, on the other Foreign Trade, Protection, and Multina­ not important,but high home-market shares, hand, has been shown to induce excessive tional Activity in U.S. Food Processing experience with multiplant operations, high profitability in the home-countryindustry of Industries. So. J. Ag. &on. July 1979: host-country barriers due to the large-scale foreign investors, while its influence on host­ 119-25. production required for profitability, and a country competitiveness is at best netural. Wolf, Bernard M. Industrial Diversification history of acquisitions in the United States Frank and Freeman found that FDI tilts the and Internationalization: Some Empirical all have a positive impact on market balance of incomes in the home country Evidence. J. Ind. Econ. 26: 177-91, 1977. penetration. from labor to the owners of capital. The benefits of assuring a competitive environ­ Conclusions ment are greater in the case of foreign Further large-scale entry by foreign food investors, since any cost of lessened competition would flow out of the United States as corporate dividends. Therefore, closer scrutiny of foreign investments than of domestic ones may be warranted. ■

26 National Food Review