Competitiveness of value adding in developing countries

by

Aurora Zugarramurdi
Southern Regional Center (INTI-CIC)
Marcelo T. de Alvear 1168. (7600) Mar del Plata
Argentina. E-mail: [email protected]

1. Introduction

The lesson that comes from modern competitiveness theory is that countries that create value through labour productivity, product differentiation and by adding local value will be able to create wealth and compete more successfully than those that do not. To successfully compete with other sectors for labour and capital, the fishery sector must be relatively profitable. In turn, to be relatively profitable, the sector's labour and capital productivity needs to be comparable.

Each price of a fish product comprises cost and profits that can be analysed to estimate value added for the purpose of comparing economic contributions and productivities between sectors of each fishery and among fisheries. Gross National Product (GNP) is the money measure of the overall annual flow of goods and services in an economy. Each level from extracting or harvesting through retailing has added some value to the product.

2. Input-output analysis

The estimate of value added at each functional level provides a yardstick to compare the economic contributions of any industry with those of another and those among different levels within the same industry on a nonduplicative basis.

For a fishery product, the price spread is the difference between the price paid for the final product by the consumer and the dockside value of an equivalent weight of the product. If the final product is in fillet form, for example, the exvessel-price should be converted to a comparable value on a fillet-weight basis. This difference includes payments received by all agents performing services in landing and moving fishery products from dockside to consumers. These agents are distinguishing to form the four functional levels, namely, harvesting, processing, wholesaling and retailing. Each fishery product handled at any of these levels has a selling price and a purchase price (or the cost of merchandise). Their difference is the price margin or gross earnings of the product at the particular level.

The above discussion can be applied to analyse price margins of fishery products. To find the margins of a price spread, prices must be colleted for the major fishery products at the four functional levels: harvesting, processing, wholesalers and retail marketplace. Cost data for the selected fisheries at the four functional levels are also needed. Value-added items must be separated from material and service costs.

3. Contribution to GNP of the different activities in the fishery sector

The sales value of a fish product at each of the seven levels times the value-added rate of the product at that level is the contribution to the national economy by the fishery expressed as the GNP. Updated information for the fisheries of the United States are shown in Table 1 (NOAA, 2001).

Table 1. Value added, margins and consumer expenditures for commercial marine fishery products in the United States (2001)

4. Value added in value-added products and commodities

Value adding is often narrowly construed as the further processing of primary commodities. From time to time there are calls for the further processing of these commodities in order to 'add value' to their exports and thus boost the nation's trade performance. In a similar vein, the further processing of local primary commodities is often seen as a way of expanding the regional economy.

At the national level, the further processing of primary commodities has actually increased quite significantly recently in many developing countries.

One of the clearest trends in fish marketing over recent decades is the addition of consumer value through the incorporation of various attributes which add convenience or other perceived desirable characteristics, such as nutritional qualities (low fat), fish safety ("clean and fresh"), or other attributes. If adding these attributes is not particularly scale-sensitive, and if the necessary inputs are available in harvesting regions, then there may be significant opportunities for adding value through the reliable supply of premium differentiated products to high-end niche markets. Adding value also adds costs, however, and the test, as always, is whether the added value is sufficient to cover the added costs. The added costs in these cases are likely to be those of rewarding the relatively high levels of human capital necessary for product design and market development of high-end products. Sometimes the attribute, which adds value for customers, is the absence of further processing: fish in unprocessed form.

4.1 Case study: Argentina

The value-added rate approach previously presented is applied in order to analyse the Case Studies developed under the Project "Rehabilitation and Development of the Seafood Processing industry in Rio Grande and Mar del Plata" (INFOPESCA/FAO/CFC) for the fish industry in Mar del Plata, Argentina (Zugarramurdi et al., 2001).

The first step in order to calculate value added is the evaluation of cost rates as percentages of gross earnings. An example for hake portions with sauce is shown in Table 2.

Table 2. Production costs and cost rates as percentages of gross earnings of hake loins with sauce

Then, the value-added rate as percentage of sales can be calculated, as shown in Table 3.

Table 3. Value added as percentage of gross earnings at processing level

The results for all the products developed for the project are presented in Tables 4 and 5.

Table 4. Calculation of value-added rate for VAPs and commodities in the fishery industry in Argentina

Table 5. Value added rate for selected products of INFOPESCA project

4.2 Further processing and value-adding. Case study: shrimp products

Value adding in shrimp is viewed as among the alternatives to continuously obtain more benefits from an expensive raw material. Even more, some developing countries without aquaculture usually see it as a declining resource and seek value adding to stay in business. Value adding involves processing of shrimp to increase the quantities of attributes with positive implicit prices. This generates additional value or 'willingness to pay' among consumers.

Processing to reduce or eliminate negatively valued attributes is also deemed as value adding because it reduces the 'reluctance to pay' and therefore raises the willingness to pay. An example of value adding is the processing of headless shrimp to breaded form, which improves eating quality and the ease of preparation, and raises the willingness to pay per unit.

Because value adding increases the quantities of desirable product attributes and generates additional willingness to pay among consumers, an upward shift in the ordinary demand curve results from value adding. Previous studies on returns to quality improvement have also postulated that investments in quality-improving research in agricultural commodities may be depicted as an upward parallel shift in the demand curve for the commodity (Voon and Edwards, 1992; Unnevehr, 1986).

There are other value adding processes such as improved packaging and other customer-oriented services. For the purpose of the present analysis, value added was calculated using the same methodology described before.

It should be noted that only those shrimp of good quality are processed into breaded form, otherwise contamination, spoilage and losses are inevitable. Valde addition, therefore, further increases the attractiveness of a good product which enhances consumers' willingness to pay. But this is not always the story that can be told.

Positive gains for both the producers and consumers are possible from nearly all the processes, except for the processes that involve headless shell-on end-product forms, as can be seen in Table 6.

Table 6. Value added of different shrimp products

Even when the price of the headless peeled shrimp is usually lower than the breaded product, the value added of the former is higher than the value added of the latter. In some markets, like Philippines, prices of the headless peeled form can be higher, what consequently gives a much more high value added for this product when compared with the headed product. Again, further processing like in breaded products does not give a higher value added.

Processes where head-on shell-on forms are beheaded to produce either headless chilled raw or frozen are more intensive value-adding procedures and recorded negative total gains. Negative shift in demand suggests that the final product form is less preferred than the initial form and there is negative willingness to pay for the added attribute. Furthermore, the increase in cost is higher than the other processes due to additional cost of beheading the product, although the price of the final product is higher than the initial form.

The headless end products of these processes are called a downgrade of the other first processes. Nevertheless, these headless forms were often resorted to because greater losses due to spoilage may occur if beheading is not done. The head is the first to show signs of deterioration either by drooping or having discolorations once harvested, and not handled properly and kept in appropriate temperature. Smaller total gains was recorded for processing frozen head-on shell-on form since consumers do not highly value this product, perceived as not as fresh as live and chilled forms.

5. Special concerns on value added products in developing countries

If developing countries are to fully develop the potential of their fishery sector by producing value-added products, they must also receive better access for their products in the major import markets. These are not only the developed countries of Europe, Japan and North America, but also other developing countries. However, the road from commodities to VAPs is paved with many different challenges that are going to be discussed very briefly.

5.1 Productivity

The concept of competitiveness encompasses many factors that impact on a country's macroeconomic performance. They include productivity and technological innovation, which in turn depend on investment in human and physical capital, and on the institutional and structural policy environment.

As mentioned before, buyers are willing to pay more only if the product is better quality, it has better features, is offered together with better services, or carries a better brand name. Productivity growth is as much a function of raising product value as it is of improving the efficiency with which traditional products are produced.

Data from fish canneries in Argentina during 1994-1999 period were analysed in order to explore the technology impact over productivity (Anovelli, 2000). Total production costs were analysed using the methodology developed by Zugarramurdi et al. (1995). It was also measured the technical change effect on output by Solow residuals method. The variable A(t) measures the cumulated effect of any technical change over time. The A(t) time series for the period under consideration for fish canneries in Argentina is shown in Figure 1. Technological change includes internal capital investment (for both high-tech and other capital equipment), changes in labour composition that may be driven by skill/educational differentials and R&D.

Figure 1. Technology change and time for fish canneries, Argentina

It can be seen that there was an increase of 16 percent in the Aggregate technological change in the period 1994-1999. On the other hand, the Average Product of Labour is shown in Figure 2, showing a high correlation (R² = 0.853) with technological changes. Fish processing plants are labour-intensive, so that technology changes are more related with labour productivity than other manufacturing industries.

Figure 2. Labour productivity and time for fish canneries, Argentina

In industrialized countries, the pattern of the labour productivity index was moving upward continuously over years. Many studies showed that labour productivity in the manufacturing industry is related to technological innovations, measured with the described parameters of investment in equipment, training and R&D (Basu, Fernald and Kimball, 1998; Morrison and Siegel, 1996). An average value of 27 percent has been recorded for the relative productivity in Latin America and USA in the period 1975-97. These results are highly correlated with a lack of investment in technology in Latin America during the same period.

Following with the case study of canneries in Argentina, Average Variable Costs are shown in Figure 3, where it can be appreciated the decrease during the analyzed period. As mentioned before, this behaviour can be explained by the increase in output and in labour productivity, due to technical investment.

Figure 3. Average variable costs for fish canneries, Argentina

The technological progress and the capital intensity per unit of labour determine the rates of change in the labour productivity. The labour productivity index obtained from the net-output approach is considered as representative productivity measure and it is considered a useful indicator to show directly how the food-manufacturing sector can contribute to the GDP. The results for USA imply that the contribution of the food-manufacturing sector to the growth of GDP increased during 1975-97 (Huang, 2002).

5.2 Other challenges for value added products manufacturers

• Change of the origin of the added value: marketing

• Development of domestic market

• Technological innovation

• Investment in technical training

• Financing

• Economies of scale

• Need to develop clusters and value chains

• Increase of working capital

• Higher tariffs

• Government support

• Implementation of HACCP, traceability and SPS Agreement

• Special characteristics of the fishery sector

6. Recommendations and conclusions

Due to declines in stocks and the need of staying in business, in many developing countries fish processors are reshaping their production, moving to value-added products. Value is added by careful selection and handling of raw materials, assurance of reliable supply, meticulous packaging and presentation, careful transportation, and prompt delivery. These usually require large investments in market research and in building relationships throughout the marketing chain. There is also a need of additional financing for working capital and new investment in human and physical capital. However, these actions result in different benefits depending on the country characteristics and product type.

The fishery sector profitability, and consequently country's GNP, can be increased if an effective evaluation of which type of value added products are more convenient for each country. Variables such as available technology, labour productivity, availability of resources, quality assurance level, financing, level of development of clusters and association through the value chain, should be analysed, since altogether they define the advantages and weaknesses of each case. Developing these skills will require those involved in commodity production and marketing to change their way of thinking and to link up with companies already active with value added products. Countries should be aware that even when value addition is usually the more profitable alternative, it is also more complex requiring action in a fast evolving market.

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