Transnational corporations and agriculture

Agriculture is central to the provision of food and the eradication of poverty and hunger. Not only does it provide significant mass and rural employment, it is also a major contributor to national economic growth and a considerable foreign exchange earner for many developing countries. Given the fundamental importance of agriculture to most developing economies, its chronic neglect by many of them has been of utmost concern for some time. However, several factors, which are not mutually exclusive, have resulted in a recent upswing in domestic private and foreign participation in agricultural industries in a significant number of developing countries. Most of these factors are of a structural nature, and are expected to drive agricultural investment in the foreseeable future. In this context foreign participation, as well as domestic investment, can play a critical part in agricultural production in developing countries, boosting productivity and supporting economic development.

A precisely quantified evaluation of the impact of TNC involvement in agriculture on important development aspects, such as contribution to capital formation, technology transfer and foreign market access, is impeded by the limited availability of relevant hard data collected by national authorities or available from international sources. The actual impacts and implications vary enormously across countries and by types of agricultural produce. In addition, they are influenced by a range of factors, including the type of TNC involvement, the institutional environment and the level of development of the host country. A number of salient observations of TNCs’ involvement in agriculture for developing countries nevertheless emerge.

Overall, TNC involvement in developing countries has promoted the commercialization and modernization of agriculture. TNCs are by no means the only – and seldom the main – agent driving this process, but they have played an important role in a significant number of countries. They have done so not only by investing directly in agricultural production, but also through non-equity forms of involvement in agriculture, mostly contract farming. Indeed, non-equity forms of participation have been on the rise in recent years. In many cases, they have led to significant transfers of skills, know-how and methods of production, facilitated access to credit and various inputs, and given access to markets to a very large number of small farmers previously involved mostly in subsistence farming.

Although TNC involvement in agriculture has contributed to enhanced productivity and increased output in a number of developing countries, there is lack of evidence on the extent to which their involvement has allowed the developing world to increase its production of staple foods and improve food security. Available evidence points to TNCs being mostly involved in cash crops (except for the recent rise of South-South FDI in this area). Such a finding reveals the development challenges for developing countries in promoting TNC participation in their agricultural industry to improve food security. However, food security is not just about food supply. TNCs can also have an impact on food access, stability of supply and food utilization and, in the longer run, their impacts on these aspects of food security are likely to prove more important for host economies.

Positive impacts of TNC involvement in agriculture are not gained automatically by developing countries. While TNCs have at times generated employment and improved earnings in rural communities, no clear trend is discernible. To the extent that TNCs promote modernization of agriculture and a shift from subsistence to commercial farming, their long-term impact is likely accelerate the long-term reduction in farm employment while raising earnings. Only a limited number of developing countries have also been able to benefit from transfers of technologies.

Recent experiences also underscore that developing-country governments need to be aware of the environmental and social consequences of TNCs involvement in agriculture, even though there is no clear and definite pattern of impact. Case studies show that TNCs have the potential to bring environmentally sound production technologies, but their implication in extensive farming has also raised concerns, together with their impact on biodiversity and water usage. Similarly, TNCs’ involvement raises significant social and political issues whenever they own or control large tracts of agricultural land.

Agriculture is of fundamental importance to all countries in the world, both for meeting their growing requirements for food and for providing a basis for industrial development, diversification and growth. In some countries, increased investment and technological advances have transformed agriculture, raising productivity and output to meet food requirements as well as laying the foundations for rapid economic growth. In other countries, however, especially in Africa and parts of Asia, agricultural potential is not being fully exploited, with resultant shortfalls in food supply and constraints on economic development. Greater investment in agriculture is thus a priority for development, and one that has received growing attention during the recent food crisis.

Insufficient investment and declining official development assistance (ODA) in agriculture has prompted governments to look increasingly to the private sector – domestic and foreign – for significant new investment. This is reflected in the liberalization of policies related to agriculture and land ownership by host and home countries. In fact, in the past foreign direct investment (FDI) has played an important role in agriculture, with TNC activity in agricultural production particularly strong in some export-oriented commodities. However, after the Second World War, there was a long-running decline in FDI flows to agriculture in developing host countries. This trend has been reversed in recent years for a variety of reasons, but some forms of foreign participation – not least the so-called “land grabs” by investors – are causing concern by some quarters in the development community.

In the recent past, allowing for data limitations, the direct involvement of TNCs in agriculture has been limited. World inward FDI stock in agriculture comprised only $32 billion - only 0.2% of total inward FDI stock in 2008 - despite significant growth in FDI since 2000, particularly in developing countries. Between 1989 and 1991, world FDI flows in agriculture remained below $ 1 billion per annum, as compared to more than $7 billion in food and beverages. By 2006-2008, world FDI inflows in agriculture exceeded $3 billion per annum. This still constituted less than 1% of total world FDI inflows. The low levels of FDI in agriculture may be partly explained by the regulated nature of the industry, restrictions on ownership of agricultural land by foreigners, and corporate strategies which favor control over the supply chain through upstream and downstream activities. FDI outflows in agriculture in 2006–2008 were even smaller than inflows: they remained on average around $1 billion per year. This difference between inflows and outflows suggests that an important part of agricultural FDI is undertaken by TNCs coming from related industries (and therefore the capital outflows are registered under those industries in the outward data).