The impact of FDI in the downstream sector on agricultural finance, investment and production: evidence from the CEEC

Hold-up problems(1) have become pervasive across the agricultural sector of transition economics as financially distressed, first stage processors hav e attempted to appropriate a greater share of the quasi-rents accruing to f armers' relationship-specific investments. This has resulted in large decli nes in output, reduced investment and sub-optimal resource allocations. How ever, in sectors characterised by the presence of foreign direct investment , the opposite has often been observed. This paper explains how foreign dir ect investment in the processing sector has been able to stimulate substant ial productivity, investment and output responses at the farm level, by red ucing the likelihood of delayed payments through the provision of credible contractual arrangements and the reallocation of private enforcement capita l. Additionally, by increasing the level of competition both within and acr oss factor and product markets, foreign direct investment provides an impor tant catalyst for facilitating and stimulating contractual convergence and institutional innovation within the agri-food chain. Case evidence from the Central and Eastern European countries and Former Soviet Union is provided as empirical support.