Up- and Downstream Restructuring, Foreign Direct Investment, and Hold-Up Problems in Agricultural Transition.

Reform in the transitional economies has been marked by falls in agricultural output and by decapitalisation of the agricultural production system. A key factor is the disruption caused by the break-up of the pre-reform, vertically integrated, centrally planned, contracting system within the agri-food supply chain. This paper analyses how restructuring up- and downstream from production is affecting output levels, particularly the impacts of hold-up problems characterised by excessively long payment delays for delivered products. Standard institutional solutions to the hold-up problem, including supply contracting, cooperatives and vertical integration, have disadvantages in the short-to-medium term. FDI at the processing level is shown to be capable of solving hold-up problems, whilst producing important positive spillover effects within the sector and across adjacent sectors. Empirical evidence indicates strong output, yield, and investment responses when hold-up problems are solved. Copyright 1998 by Oxford University Press.