Determinants of International Competitiveness: A

Comparative Study of the Sugar Industry in Australia, Brazil, and the European Union

By

Shantanu Banerjee

M. Business (International) Queensland University of Technology, Australia, 2002.

Post-Graduate Diploma in International Trade

Indian Institute of Foreign Trade, 1986.

B.Tech (Mechanical) Banaras Hindu University, India, 1984.

A dissertation submitted towards partial fulfilment for the Degree of Masters in

Business (Research), School of International Business, Queensland University of

Technology, Brisbane, Australia.

August 2004

Abstract

The dissertation involves an investigation into the circumstances of international

competitiveness and how it is pursued by firms from different sugar producing and

marketing nations. Understanding of competitiveness has primarily been pursued in

terms of economic variables and market conditions. The roles of the government, the

socio-cultural-political context in international business, and their effects on

competitiveness have largely been ignored. This study integrates perspectives from

strategic management, the resource-based view of the firm, and international business

to propose a conceptual framework of international competitiveness. The work

advances understanding of competitiveness in international business in two ways.

First, it develops a conceptual framework that captures the socio-political element of a

nation’s industry and the crucial role it plays in achieving international

competitiveness. Second, it combines firm, industry, strategy, and socio-political

influences. Those are involved in a multi-level hierarchical process between firms,

industry and the nation that effectively generates competitiveness. The dissertation

employs a qualitative method of comparative analysis between Australia, Brazil and

the European Union, which are the three dominant sugar producing and exporting

economies in the world. A series of propositions are presented on the four identified

influences on international competitiveness. How firms from different nations pursue

these is highlighted. After considering the varied approaches for attaining

international competitiveness, implications for further research and for theory, policy

and practice are outlined.

Key Words

1. Competitiveness

2. Sugar

3. Production and Marketing Regimes

4. Australia

5. Brazil

6. European Union

7. Conceptual Framework

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Table of Contents An Overview 1 Chapter 1 Introduction 2 1.1 The Research Area 3

1.1.1 Concept of Competitiveness 3 1.1.2 Background to Research 4 1.1.3 Research Problem 5

1.1.4 Research Question 6 1.1.5 The Practical Context: Application to Australian 6 Sugar Industry

1.2 The Study as Presented 7 1.2.1 Practical Scope and Focus of the Study 7 1.2.2 Methodology 8 1.2.3 Conceptual Scope and Focus of the Study 9 1.2.4 Organisation of the Research 9 1.3 This Study in Context 12 1.3.1 Justification of the Research in the IB Context 12 1.3.2 Expected Contributions of the Research 12 1.3.3 Limitations of the Study 13 1.4 Summary 14 Chapter 2 Theoretical Basis For A Conceptual Framework 15 2.1 Literature Review 16 2.1.1 Strategic Management Theory Related Literature 16

2.1.2 Resource-Based Theory Related Literature 18 2.1.3 Firm-Industry Relation Specific Literature 21 2.1.4 Socio-Political Effects and IB Related Literature 22

2.2 Theoretical Foundation 27 2.2.1 Resource-Based Theory of Firm 27 2.2.2 Strategic Management Theory 28 2.2.3 Towards an Integrated Theory of Competitiveness 29 2.2.4 Theory of National Competitive Advantage 32 2.2.5 Towards a Conceptual Framework of Competitiveness 38 2.3 Summary 40

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Chapter 3 Methodology of Approach to the Research 42

3.1 Research Approach 42 3.2 Qualitative Methodology 43 3.3 Scope of Qualitative Research 44

3.4 Comparative Study 47 3.5 Methods Used 48 3.5 Summary 49 Chapter 4 World Sugar Production and Marketing Regimes 50

4.1 Introduction 50 4.2 Current State 53 4.2.1 Australia 53 4.2.2 Brazil 54 4.2.3 European Union 56 4.3 Production and Marketing Regimes 60 4.3.1 Australia 60 4.3.2 Brazil 62 4.3.3 The European Union 64 4.4 Summary 67 Chapter 5 Analysing Firm, Industry and Environment 69 5.1 Rationale 70 5.2 SWOT Analysis Application and Inferences 70 5.3 PESTLE Analysis Application and Inferences 78 5.4 Porter’s ‘Diamond’ Model Analysis Application and 81 Inferences 5.5 Summary 89

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Chapter 6 A Conceptual Framework of Competitiveness and 91 its Application

6.1 Context 91 6.2 Conceptual Framework for Competitiveness 92 6.3 Application of the Conceptual Framework 97 6.3.1 Firm Effects 97 6.3.2 Industry Effects 99 6.3.3 Strategy Effects 101 6.3.4 Socio-Political Effects 103 6.4 Summary 107 Chapter 7 Conclusions and Future Research Directions 111 7.1 Summary 112 7.2 Conclusions about Research Issues 113 7.3 Conclusions about the Research Question 114 7.4 Implications for Theory, Policy and Practice 115 7.5 Strengths and Weaknesses of the Study 117

7.6 Implications for Further Research 119 7.6.1 Multidisciplinary Study 119 7.6.2 Conceptualisation, Operationalisation, and Measurement 119 7.5.3 Methodological Rigor 120 7.7 Conclusion 120

References 121

Appendices 136 Appendix A A 1 Appendix B B 1 Appendix C C 1 Table B.1: Variables affecting revenue and costs of sugar B 2

production in Australia

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List of Tables

Table 2.1 Firm, Industry & other effects on performance identified 22 by researchers Table 2.2 Different levels of International Business 41 Table 3.1 Comparative analysis of qualitative and quantitative research 45 Table 4.1 Sugar policies and practices in different sugar producing 53 nations Table 4.2 Comparison of Current Sugar Industry Situations in 59

Australia, Brazil, and the EU Table 4.3 Framework under the Sugar Industry Act 1999 61 Table 4.4 Characteristics of EU Sugar Regime 65 Table 4.5 Summary of Production and Marketing Regimes 68 Table 5.1 Snapshot of SWOT Analysis 73 Table 5.2 Strategy Options for Australia 74 Table 5.3 Strategy Options for Brazil 75 Table 5.4 Strategy Options for the European Union 76 Table 5.5 Illustrations of Strategy Option Positions 77 Table 5.6 Snapshot of PESTLE Analysis 80 Table 5.7 Porter’s Home-Country Diamond Analysis – Australia 84 Table 5.8 Porter’s Home-Country Diamond Analysis – Brazil 85 Table 5.9 Porter’s Home-Country Diamond Analysis – European Union 86 Table 5.10 Comparison of Porter’s Home-Country Diamond Analysis 87 Table 5.11 National-Industry-Firm Level Analysis and Comparison 88 Table 6.1 Attributes of Firms, Industry and Nations towards 95 Competitiveness Table 6.2 Comparisons of Propositions 110

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List of Figures Figure 1.1 Organisational Framework of Research 11 Figure 2.1 The Learned, Christenen, Andrews and Guth (LCAG) 31 Framework (1969) Figure 2.2 Porter’s Diamond Model 33 Figure 6.1 Schematic concept of International Competitiveness as 94 derived from the theories Figure 6.2 Conceptual Framework of International Competitiveness 97

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List of Abbreviations ABARE Australian Bureau of Agricultural and Resource Economics

APSRU Agricultural Production System Research Unit

BSES Bureau of Sugar Experiment Stations

CAP Common Agricultural Policy

C&EECs Central and East European Countries

CIUS Committee of Industrial Users of Sugar

CMO Common Market Organization

CPA Cane Production Area

CSR Country-Specific Resources

FDI Foreign Direct Investment

FSR Firm-Specific Resources

IB International Business

EU European Union

FTA Free Trade Agreement

IO Industrial Organisation

LCAG Learned, Christensen, Andrews, and Guth

MERCUSOR Created by Argentina, Brazil, Paraguay and Uruguay in 1991

MNC Multinational Corporation

MNE Multinational Enterprise

MTBE Methyl Tertiary Butyl Ether

OECD Organisation for Economic Cooperation and Development

PESTLE Political,Economic,Social,Technological,Legal,Environmental

QDPI Queensland Department of Primary Industries

QSL Queensland Sugar Limited

RBV Resource-Based View

R&D Research and Development

SRI Sugar Research Institute

SRDC Sugar Research and Development Corporation

SWOT Strength, Weakness, Opportunities, Strength

UK United Kingdom

WTO World Trade Organization

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Statement of Original Authorship

The work contained in this dissertation has not been previously submitted for a degree

or diploma at any other higher education institution. To the best of my knowledge and

belief, the dissertation contains no material previously published or written by another

person except where due reference is made.

Signature: ………………………..

Date: ……………………………..

ix

Acknowledgements

This dissertation would not have been possible without the continued support and

encouragement of my supervisor Dr Mark McGovern. I have learned a lot from him.

During the time I have been working on my dissertation, many thoughts and concepts

have greatly influenced and enriched my understanding of the subject matter. In that

context I would like to express my gratitude to Dr McGovern, who not only advised

me, but also challenged and inspired me and witnessed my growth during these

months of composition of this study.

I would like to express my sincere thanks to Dr Gordon Boyce, my associate

supervisor and Head of the School of International Business, for his support and

critical advice on my work that helped me to sharpen points that I failed to notice.

I would most especially like to thank my wife, Mita, for her unconditional love,

support, and encouragement during our difficult times. To my children, Sanchito and

Bornika, my great thanks go, particularly for their understanding and endurance

during these months. Their support in so many ways was invaluable and has been the

central source of my inspiration.

I have endeavoured to make the best utilisation of all the help and guidance that I

received during the course of my work. However, any gaps and shortcomings in this

dissertation are as a result of my limitations in understanding and knowledge.

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AN OVERVIEW

This dissertation is about:

Understanding the meaning of competitiveness and how it is interpreted (Sections

1.1.1, 2.1.4 and 6.2).

Understanding the effects government has on the functioning of the firms,

industry, and the environment (Sections 5.3, 5.4, and 6.2).

Recognising the roles of national governments in creating production and

marketing regimes and their effects on the international market (Section 4.3).

Recognising the fact that (in pursuit of competitiveness) different nations have

fashioned different regimes with various implications for firm, industry, nation

and the global market (Section 4.2).

Understanding how firms interact in such an environment to gain advantage

(Section 5.4).

Understanding how firms (in such an environment) can gain competitiveness by

strategically using resources (Sections 2.1.2, 5.4 and 6.2).

Understanding the determinants of international competitiveness and how this can

be achieved (Sections 2.2.5, 6.2 and 6.4).

Understanding how the various determinants of competitiveness are applied by

different nation-bound firms to gain advantage (Section 6.3).

Recognising the effects non-market forces have on the firms in the pursuit of

international competitiveness (Sections 2.1.4, 2.2.5 and 6.3.4).

How competitiveness is to be understood by considering international business as

an exchange process involving output within different environments (Sections

2.2.5, 5.3 and 6.3.4).

From such things emerges the international competitiveness of firms and nations.

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Chapter 1

Introduction

This chapter lays the foundation of this research which examines the attributes of

international competitiveness in the world sugar industry. The pressing need to find a

more suitable framework for assessing international competitiveness is discussed

within indicated research and problem areas.

The notion is explored that national governments play a significant role in shaping the

international competitiveness of firms. The approach in the study is to explore and

evaluate international competitiveness through a comparative study of the production

and marketing regimes of the three dominant sugar producing and marketing

economies of the world.

The goals of this chapter are:

• To know how the concept of competitiveness is presently being understood

(Section 1.1.1).

• To discuss the direction of research in international business and to record the

apparent lack of interest in incorporating the role of the government in achieving

competitiveness in international markets (Sections 1.1.2 and 1.3.1).

• To highlight that government actions create “unnatural” market imperfections

in the world market (Section 1.1.3).

• To emphasise the need to have improved understanding of the determinants of

competitiveness (Section 1.1.4).

• To briefly consider the problems and the issues affecting the Australian sugar

industry (Section 1.1.5).

• To discuss the scope and focus of this research (Sections 1.2.1 and 1.3.1).

• To provide an initial overview of the methodology employed in the study

(Section 1.2.2).

• To position this work (Sections 1.3.2 to 1.3.3).

The materials positioned in this chapter:

• Provide a context for the research undertaken.

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• Highlight why it is important to understand more fully the concept and

practices of competitiveness.

• Recognise the role of the national governments in creating production and

marketing regimes that have effects on the competitiveness of firms in

international markets.

1.1 The Research Area

1.1.1 Concept of Competitiveness

The international business literature is replete with conceptual and empirical works

pertaining to competitiveness. A systematic search of the academic literature

demonstrates that while competitiveness is a major issue (Dunning, 1995; Porter,

1990), it has still not been well defined (Martin, Westgren and Duren, 1991; Connor,

2003). Yet competitiveness remains an important measure of ‘benchmarking

economic performance’ (Dunning, 1995).

Competitiveness has been delineated by many researchers as a multidimensional and

relative concept (Spence and Hazard, 1988). The purport of this is that different

attributes of competitiveness changes with time and context (Ambastha and Momaya,

2004). Cook and Bredahl (1991) state that competitiveness can be viewed from a

choice of geographic area (space), product (form), or time. The extant literature

examines competitiveness with the analytic unit variously being the country, the

industry and the firm.

Longman’s Advanced American Dictionary (2000) provides a useful initial focus in

defining competitiveness as:

1. the ability of a company or a product to compete with others.

2. the desire to be more successful than other people (p. 278).

Learning to understand how firms, industries and nations acquire the ability and the

desire to compete is an area of major interest and concern by businesses, industries

and national governments. In the process of understanding and investigating

competitiveness, challenges lie in the identification, measurement, and analysis of the

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attributes of competitiveness. Moreover, under conditions of uncertainty and rapid

changes in the world economy, an understanding of environments to assess and

pursue strategies not only becomes crucial but also a major challenge. When the issue

of competitiveness gets related to agricultural products, notably sugar, the meaning is

sensitive to the context and the factors affecting competitiveness become intriguing.

These themes and challenges are explored in the research presented in this

dissertation.

1.1.2 Background to the Research

Previous research on international business (IB) has been done primarily on three key

topics (Buckley, 2002): (a) comprehending flows of foreign direct investment (FDI);

(b) understanding multinational enterprises (MNEs), their strategy and organisation;

and (c) to identify and explain the development of internationalisation of firms

towards globalisation. The activities of the MNEs epitomised international business.

The establishment of the theory of multinational enterprise, which relies on the

synthesis based on internalisation theory, the theory of location and competitive

dynamics (Buckley, 1990), have been a major achievement. The blend of these

theories has its foundation in the fundamental concepts derived from Coase [1937]

(Buckley, 1990; Dunning, 2002), modern industrial organisation theory, international

trade theory and the theories of monopoly and monopolistic competition (Buckley,

1990). Added to this, Dunning (2002) presented the eclectic paradigm of international

production (notably production financed by FDI) that ‘attempts to explain the totality

of foreign owned activities of firms from a particular group of countries or industries’.

The theories of IB consider the various advantages that accrue from international

expansion. These advantages result in access to (i) foreign and bigger markets with

the possibility of greater global market share, (ii) cheaper and idiosyncratic resources

in foreign markets, including cheaper labour, better and ‘home-grown’ technology

and/or any country-specific resource (Porter, 1990), (iii) greater learning and/or

international experience (Kobrin, 1991), (iv) efficiency in production through

economies of scale, and/or geographic scope (Kogut, 1985). This leads us to the

notion that the foundation of international business studies is based on increased

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multi-nationality that is beneficial for a firm’s performance (Contractor, Kundu, &

Hsu, 2003).

In today’s world economy, many industries are being seriously challenged by foreign

competitors. These are variously influenced by the economic and political actions of

their governments. However, Boddewyn (1988) acknowledges that in the present

modern societies, economics and politics constantly interact and it is hard to

determine or influence the nature of the activities. Boddewyn and Brewer (1994)

write that ‘alternative assumptions are advanced regarding the political nature of

international business and the role of government as a factor of production, which

firms must manage in their international value-added chains’. They further highlight

the fact that various IB studies have emphasised government as a variable, rather than

a constant or given. International firms operate under a great variety of evolving

political regimes that have impacts on firms’ entry, operation and exit.

Nevertheless, IB and business activities are heavily influenced by ‘unnatural market

imperfections’ that are created, aided and abetted by governmental interventions

(Boddewyn and Brewer, 1994). This results in the creation of intense and ‘imperfect

competition’ (Christoffersen, 2002) in the global market, reflecting the complexity of

the problems confronting industries in some of the countries and leading to their

deterioration in competitiveness. This becomes profoundly evident in, and with

important implications for, international agricultural markets in general and sugar in

particular. Policy changes in a few major countries can promote rapid changes in the

competitiveness of other nations.

1.1.3 Research Problem

International business activities are a consequence of the fact that markets are

imperfect in the ‘politically constructed environment’ (Boddewyn and Brewer, 1994,

p. 121). Such imperfections enable firms to gain economic advantages in the

international market. National governments are instrumental in stimulating the supply

and demand of both resources and capabilities of firms affecting competitiveness.

This leads to market imperfections in the world market which are unnatural from a

purely economic viewpoint.

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This problem of where and how governments create regimes that affect a firm’s

performance and influence the industry needs to be investigated. In particular,

relevant attributes need to be identified and analysed as part of a consistent and more

comprehensive conceptualisation of international competitiveness.

1.1.4 Research Question

In the context of this research problem, there is an opportunity and need to further

understand the meaning of the concept of competitiveness and its application.

The purpose of this study is to develop a more adequate conceptual framework of

international competitiveness. How competitiveness is sought and practiced in a

number of different nations is examined. Considerable market effects and externalities

arising from regimes and their ‘imperfections’ are examined.

The specific research question is:

What are the determinants of competitiveness as pursued in practice by firms in the

sugar producing nations?

In the quest to answer this question, this study will develop a conceptual framework

based on relevant theories and literature.

1.1.5 The Practical Context: Application to Australian Sugar Industry

Sugar is an important industry and a major contributor to the Australian economy in

terms of being the second largest export crop of Australia and the state of

Queensland’s largest rural commodity (SRI, 2002). Its contribution to the national

economy can be gauged from the fact that ‘the growing and milling sectors of the

industry produce sugar valued at between $1.2 to $2.0 billion, depending on world

prices’ (APSRU, 2004). Sugar generates ‘an additional $ 1.5 billion in other sectors of

the economy’ (Sugar Industry Submission, 1999).

The Australian sugar industry produces raw and refined sugar from sugarcane. While

Australia produces only 4% of world sugar supply, it exports approximately 12% of

the sugar traded worldwide (SRDC, 2002). Australia exports the bulk of its sugar

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production (around 80%). Therefore the viability and condition of the industry depend

largely on the conditions prevailing in the world market for sugar. Despite earning a

reputation for sustainable growth and being very efficient with an overall recovery

(extraction of sugar from sugarcane) of approximately 90%, many Australian sugar

manufacturers today are facing threats to their competitiveness and survival.

In recent years, as observed by the Sugar Research and Development Corporation

(SRDC, 2003), the Australian sugar industry has faced an increasingly difficult

situation with reduced sugar yields and low industry profitability arising out of a

combination of adverse internal factors including supply problems caused by natural

hazards, particularly high climatic variability and disease, and external factors like

changed relativities in world currency exchange rates. There have been disappointing

returns on capital and low profitability throughout the industry value chain. The

economic health of the industry has been further eroded by a sharp decline in the

world sugar prices.

To improve their performance in increasingly global markets, Australian sugar

manufacturers must have a clear understanding of how to assess their competitive

position and how to affect its strategic determinants.

1.2 The Study as Presented

1.2.1 Practical Scope and Focus of the Study

The study specifically seeks to identify and analyse in an applied sense:

(a) The strategies that Australian sugar firms and industry are adopting in

relation to foreign competitors and the role of their government in pursuit

of their goals.

(b) The strategies adopted by competitors.

(c) The relative strengths and weaknesses of the Australian sugar industry in

respect to its ability to increase its future international competitiveness.

(d) The strategic choices that Australian firms must consider if they are to

enhance their international competitiveness.

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The particular economies that have been examined and compared are Australia,

Brazil, and the European Union (EU). These economies are chosen as their industries

and the intervention policies adopted by their governments have significantly shaped

the competitive environment of the global industry for several decades. A difficult

strategy scenario for the Australian sugar industry has followed due to the political

options contemplated and the strategic adjustments made and implemented by other

competitors. The resultant effects of various strategic scenarios need to be understood

in respect to the influences brought about by local cultural, social, and political

factors. Such understanding can provide valuable information on how policies and

strategies have or have not been successful.

1.2.2 Methodology

Qualitative research design is adopted to investigate the phenomenon of international

competitiveness. The central approach is the qualitative method of comparative

analysis which will explore the complexities associated with competitiveness in

international business.

In the investigation of a complex subject, qualitative methodology has been

considered more appropriate (Amarantunga, Baldry, Sarshar and Newton, 2002).

Qualitative techniques are useful in explaining and reinterpreting the intricate issues.

Further, the phenomenon of international competitiveness involves different cross-

cultural-socio-political environments. In such situations, comparative research

methods provide better explanations by highlighting the similarities and differences of

the central factors (Hantris, 1996).

The methods used are SWOT analysis (strengths, weaknesses, opportunities, threats),

PESTLE analysis (political, economic, social, technological, legal, and

environmental/ethical) and Porter’s home-country diamond model analysis. Chapter 3

explains the methodology used to investigate the production and marketing regimes of

the three dominant and major exporters in the world sugar market – namely Australia,

Brazil and the EU. The framework described has been progressively developed in

chapters 4 and 5.

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1.2.3 Conceptual Scope and Focus of the Study

Such investigations combined with various theoretical considerations allow features

of a more adequate conceptualisation of competitiveness to be proposed including:

The intensity and dynamics of international competition by examining the

different circumstances in the national markets – like market sizes and socio-

political-cultural factors;

The different roles of the national governments play namely degree of

protection, incentives and subsidies;

Factor cost differences among the countries/regions in respect to natural

resources and productivity;

Differences at the speed at which new technologies and mechanisation are

incorporated;

Resource differentials – natural and created;

Differences in objectives and strategies employed; and

The ability and capability to react to changes in the environment.

1.2.4 Organisation of the Research

The overall organisation of the research is depicted in Figure 1.1. The work proceeds

by way of outlining the broad field of study that leads into the focus of the research

problem (Chapter 1). Thereafter, a conceptual review of literature is undertaken that

provides the theoretical foundations (Chapter 2) for the development of the

conceptual framework of competitiveness. Chapter 3 provides the description and

justification of the methodology of approach to the research. Chapter 4 illustrates the

state of current world sugar industry and the production and marketing regimes of

three major exporters. Analyses of firms, industry and environment in the three

exporting economies (Chapter 5) are carried forward to develop and apply the

conceptual framework of international competitiveness (Chapter 6). Chapter 7

describes the conclusions and the contributions of the work in advancing knowledge

for a better understanding of international competitiveness.

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The dissertation is divided into seven chapters. A brief description of the content of

each chapter is given below:

Chapter 1: Introduction has described the contextual background for the research, research issues and problems, research question, scope and focus of the study and the methodological approach to the research.

Chapter 2: Theoretical Basis for A Conceptual Framework focuses on the literature review and the theoretical concepts related to competitiveness for a theoretical foundation to this study. This chapter also identifies a research gap and seeks to explore the relationships between the various attributes of competitiveness with a goal of a more adequate conceptual framework of competitiveness.

Chapter 3: Methodology of Approach to the Applied Research covers in detail the justification for choosing a qualitative method of comparative study in case of the present research.

Chapter 4: World Sugar Production and Marketing Regimes highlights the current state of the world sugar industry and the existing production and marketing regimes of Australia, Brazil, and the European Union.

Chapter 5: Analysing Firm, Industry, and Environment reflects and analyses the various internal and external environments in the three economies considered. This chapter also provides insights on the various attributes of competitiveness and their interactions.

Chapter 6: A Conceptual Framework and Its Application draws on the literature reviews and theories from Chapter 2 to develop a conceptual framework of international competitiveness. This chapter also looks at the application of a conceptual framework in three sugar producing and marketing economies to study the variations in the approach to the international business of sugar.

Chapter 7: Conclusions and Future Research Directions presents the contribution and conclusions to the research with implications for theory and for practical purposes. Further research is recommended.

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Figure 1.1: Organisational Framework of Research

Chapter 1 Introduction

Chapter 2 Theoretical Basis for A Conceptual Framework

Chapter 3 Methodology of Approach

to the Research

Chapter 4 World Sugar Production & Marketing Regimes

Chapter 5 Analysing Firm,

Industry, and Environment

Chapter 6 A Conceptual Framework

and Its Application

Chapter 7 Conclusions and Future

Research Directions

SWOT Analysis

PESTLE Analysis

Porter’s Home Country Diamond

Analysis

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1.3 This Study in Context

1.3.1 Justification of the Research in the IB Context

Buckley (1990) states that international business does not exist in a vacuum and is

profoundly affected not only by economic changes but also by social and political

change. Grief (1992) opines that international trade theory views trade as ‘determined

by endowments, technology, preferences, and the nature of competition in

international markets’ while distancing from examination of the determinants of

institutions that govern trade. Rodrik (1997) examines ‘the ‘paradoxes’ of the

successful state’ highlighting:

the important role that government policy play in stimulating private

investment; how regimes supported by subsidies make good policy (based on uniformity,

transparency, non-selectivity, etc) ‘quite useless in predicting which policy

regimes perform better in practice’ (p. 411); and ‘that government’s social insurance role creates a complementarity between

states and markets.’ (p. 411)

To date, and despite the efforts of various scholars, the understanding of the way

competitiveness is pursued has been chiefly in terms of economic variables and

market conditions. The role of the government, its political effects, and the profound

consequences that result in the changes of competitiveness of other nations need more

attention. Boddewyn and Brewer (1994) highlight that the low importance accorded to

political factors in IB operations deserves scrutiny.

1.3.2 Expected Contributions of the Research

This research is expected to make contributions to the following important areas:

1. Competitiveness is consistently examined and understood in a variety of ways.

Implications for international business and trade, policy and strategy are

apparent.

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2. Knowledge and understanding about the applicability of theory to the sugar

sector and its international trade and business are demonstrated.

3. Conceptual schema developed from the existing theory which can advance

industry, trade and international understanding are proposed.

4. Such things are seen as potentially useful in business and policy decision-

making.

1.3.3 Limitations of the Study

In undertaking the research, it is hoped that the attributes of competitiveness studied

and their influence will provide a better understanding of this key concept. The

challenge is, however, an established one and a study such as this can only make a

modest contribution. There are also a number of specific limitations.

A study based on a phenomenological approach on as broad a subject as

competitiveness runs the risk of being challenged from various disciplines.

The study is confined to a single industry and needs application in other global

contexts.

Further, the research presented in this dissertation considers the production

and marketing systems of only three major exporters – Australia, Brazil, and

the EU, and does not consider Thailand – another major exporter and also a

representative of the developing economies.

In today’s world, the triad economies of the USA, Europe, and Japan have

considerable direct and indirect impacts on international business. This study

does not take into consideration the sugar production and marketing regimes

of other members of the triad namely the USA and Japan and their effects on

the world market.

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1.4 Summary

This chapter has provided the contextual background for the study conducted and

presented in this dissertation. The study is primarily concerned with explaining the

phenomenon of the attributes of competitiveness outlining the production and

marketing system of the three dominant and major sugar exporters in the world.

The subject of competitiveness has attracted wide attention even considering the fact

that the concept is not well defined. This has often led to a poor understanding of the

attributes of competitiveness, including of the economic aspects of the industry and

the market conditions.

The next chapter of this research focuses on the literature pertinent to the concept of

competitiveness and outlines the theoretical foundation of the study. This will help in

exploring and identifying the research gap and the relationships between the various

attributes of competitiveness considered.

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Chapter 2

Theoretical Basis For A Conceptual Framework

This chapter explores approaches to a conceptual framework of international

competitiveness. It draws on the strategic management and resource-based theories as

well as competitive advantage theory, to illustrate the antecedents and aspects of

international competitiveness. The identified attributes highlight a view of

competitiveness as strategically using resources to gain advantage. Further, a

perspective is drawn on how non-commercial factors influence international

competitiveness.

In arriving at sets of determinants of competitiveness, there are various attributes of

non-market forces that combine within and across firms, industries, and nations that

are important in shaping the international business environment and mechanism.

Understanding these attributes of competitiveness provides valuable information for

decision-makers.

This chapter aims:

• To build a theoretical foundation for this research (Section 2.2.1, 2.2.2, and

2.2.4).

• To review the relevant literature to identify research issues not answered by

previous researchers (Sections 2.1.4 and 2.2.5).

• To recognise the importance of non-market forces in the pursuit of

competitiveness (Section 2.1.4).

• To identify measures of competitiveness (Section 2.1.1).

• To understand how firms can gain competitiveness by strategically using

resources (Section 2.1.2).

• To understand the interacting effect of the firm-industry relationship on

competitiveness (Section 2.1.3).

• To understand the various considerations involved in building a conceptual

framework of competitiveness (Section 2.2.5).

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The materials positioned in this chapter:

• Identify four complementary determinants of competitiveness which can

contribute to the development of a theoretical framework.

• Highlight the significance of non-market forces on competitiveness.

• Emphasise that international business needs to be viewed as a ‘multi-level,

hierarchical process’ involving the nation, the industry, and the firm.

2.1 Literature Review

The major focus of this review is to consolidate the empirical studies and literature

that have assessed competitiveness, competitive advantage and/or sustained

competitive advantage. What such theme mean and how they might be achieved are

focal. Prior researchers have identified a number of antecedents of competitiveness in

different contexts. In particular, strategic management literature and research, based

on industrial organisation (IO) economics (Porter, 1980; 1985) and the resource-based

view of the firm (Barney, 1991; Conner, 1991) provide the context and the

background for the present review.

2.1.1 Strategic Management Theory Related Literature

A preliminary survey of the literature exhibits the development of strategy

classifications – either conceptual or empirical (Venkatraman, 1989). Further,

Venkatraman (1989) notes that the prominent conceptual classifications inductively

derived and termed ‘typologies’ are from the works of Porter (1980), Wissema, Van

der Pol and Messer (1980), Rumelt (1974), Hofer and Schendel (1978), and Miles and

Snow (1978). Also the eminent works on empirical classifications termed

‘taxonomies’ are that of Miller and Friesen (1978) and Galbraith and Schendel (1983)

(as cited by Venkatraman, 1989). Galbraith and Schendel (1983) state that further

strategic management archetypes haves been proposed by Buzzell, Gale and Sultan

(1975), Utterback and Abernathy (1975), and Vesper (1979).

16

The various strategy typologies provide firms with the option of identifying an

appropriate generic strategy to implement in competitive conditions to attain certain

competitive objectives. In summarising the competitive objectives as proposed in the

strategy typologies, it is observed that the firms strive to gain ‘market share’ (Buzzell

et. al. 1975; Buzzell, 1981; Hofer and Schendel, 1978; Vesper, 1979; Wissema et. al.

1980), ‘efficiency and uniqueness’ (Porter, 1980), ‘profitability’ (Porter, 1980; Hofer

and Schendel, 1978) and ‘performance through R&D and innovation’ (Utterback

and Abernathy, 1975 and Miles, 1982).

Venkatraman (1989) referring to the works of Ginsberg (1984), Hambrick (1980),

Pitts and Hopkins (1982) and Snow and Hambrick (1980) states that in

operationalising strategy, the measures representing theoretical definitions are

‘generally weak’. However, some empirical supports for positive correlation have

been found between strategy and market share (Hamrick, MacMillan and Day 1982;

Woo and Cooper, 1981), strategy and performance and/or profitability (White, 1986;

Dess and Davis, 1984; Geringer, Beamish and daCosta, 1989; Miller, 1988; Powell,

2003; Helms, Dibrell and Wright, 1997; Parker and Helms, 1992; Reitsperger, Daniel,

Tallman and Chismar, 1993), strategy and efficiency (Phillips, Davies and Moutinho,

2002).

Fahy (2002) in a review of the global strategy literature highlights the following

features:

The conflict between the need to react to local conditions in different markets and

the potential for firms to integrate their activities across national boundaries.

The recognition of this conflict faced by firms has been conceptualised as:

Integration versus responsiveness (Prahalad, 1976),

Economic versus political imperative (Doz, 1980),

Global versus local (Levitt, 1983).

Relatively little agreement among the researchers on the importance of the driving

force of the global strategy.

17

Levitt (1983) and Ohmae (1985) are proponents of the ‘global’ approach

suggesting standardisation of strategy and integration of activities as the

source of attaining advantages by firms.

Doz (1980) emphasises differences, rather than similarities among countries,

drawing attention to asymmetries to create opportunities for firms.

Bartlet and Ghoshal (1989) propose a transnational solution that ‘optimizes

integration, responsiveness, and effective transfer of learning’.

‘Think global, act local’ is the principle advocated in practitioner literature

(Oliver, 2000).

Global strategy literature has a ‘strongly deterministic orientation’.

Further, this literature is characterised by perceptions of environmental conditions

that dictate strategic choices and consequent competitive advantage.

2.1.2 Resource-Based Theory Related Literature

A survey of literature on the resource-based theory of the firm and the properties of

advantage-creating resources shows typologies proposed by Grant (1991), Barney

(1991), Collis and Montegomery (1995), and Amit and Schoemaker (1993). Two key

features that can be inferred from the typologies are – (i) that the firms develop and

deploy scarce resource capabilities for value creation and (ii) that firms’ capabilities

cannot be easily imitated while also engaging to resist duplicative efforts of

competitors (Barney, 1991; Peteraf, 1993; Wenerfelt, 1984). The classification

schema that have been proposed based on the properties of resources that generate

asymmetries and resist duplication (Fahy, 2002) include asset stock accumulation

(Dierickx and Cool, 1989), capability differentials – cultural, functional, positional

and regulatory (Hall, 1992, 1993), capability gaps – business, managerial, position

and regulatory (Coyne, 1986), causal ambiguity created by complexity, tacitness and

specificity (Reed and DeFillippi, 1990), scale (Collis and Montgomery, 1995),

uncertain imitability (Lippman and Rumelt, 1982), isolating mechanism (Rumelt,

1987). Fahy (2002) citing the work of Bharadwaj, Vardarajan and Fahy (1993) further

states that resources, with the above characteristics, can be deployed to gain

18

sustainable competitive advantage resulting in superior performance measured in

traditional terms of market share and profitability.

Some empirical studies with a resource-based view of the firm such as Yeoh and Roth

(1999), Collis (1991), and Capron and Hulland (1999), have examined the

relationships between resource configurations and improved performance in terms of

market share and profitability. Moreover, empirical research by Maijoor and van

Witeloostuijn, (1996) has stressed the importance of specific assets or stocks as

critical within a particular industry context. However, it is observed from the work of

Godfrey and Hill (1995) and reconfirmed by Peng (2001) and Fahy (2002), that there

are difficulties associated with empirical work.

Black and Boal (1994) in a review of the resource-based view (RBV) provide several

resource level categorisations. In particular they note:

(i) Barney (1991) arranges all firm resources into three categories: physical

capital resources (Williamson, 1975), human capital resources (Becker,

1964), and organisational capital resources (Tomer, 1987).

(ii) Grant (1991) classified six categories of firm resources: financial,

physical, human, technological, reputation, and organisational.

Collis (1991) notes that firms are idiosyncratic because of the accumulation of

different physical assets during the course of their development and commitment to

irreversible investments in various interrelated assets. This creates the distinctive

value of the firm (Ghemawat, 1991). Teece, Pisano and Shuen (1997) highlight that

enhanced firm-efficiency can be achieved ‘through combinations of competencies and

resources’ that can be ‘developed, deployed, and protected’ and in the process focus

on the degree of integration – vertical, lateral, and horizontal. Vasconcellos and

Hambrick (1989) broadly classify various attributes of success of the firm particularly

mandated by the task environment and arising because of the fundamental factors of

the market.

Literature review further reveals that the firm’s unique resource capabilities as laid

out in the resource-based theory are fundamental in analysing and developing strategy

concepts as demonstrated through the works of Grant (1991) and Barney (1991) for

19

example. This synthesis of RBV and strategy was extended through the concepts of

‘dynamic capabilities’ and strategic management (Teece, Pisano and Shuen, 1997).

Fahy (2002) attempts an empirical study that integrates perspectives from

international business, strategic management and a resource-based model for global

sustainable competitive advantage. When the RBV is applied for an analysis of

sustainable advantage in the global environment, the following salient features

emerge:

A diverse and complex resource pool is available to firms operating in different

countries.

Availability of greater resources to the firm leads to challenging activities in the

global context should be acknowledged.

The greater difficulty of protecting key resources in the absence of a global

regulatory framework is desirable.

Resource accumulation is a dynamic activity.

Better understanding of the properties of resources that are available and enable

the attainment of sustainable advantages.

Development of resources that results in gaining advantages should become an

important priority.

International business particularly FDI, should be driven by the desire to gain

access to country-specific resources to develop firm-specific resources and also to

avail market opportunities.

The key feature that emerges is that firms in a global context should strive to create

‘valuable, unique, and hard-to-imitate resource’ and gain ‘idiosyncratic

expertise…through in-country learning despite the liability of foreignness’ (Peng,

2001; p. 820).

The review of literature thus far has concentrated primarily on the firm-specific

characteristics as the source of competitiveness. The various facets of a firm and its

activities have been well documented and recognised by a large volume of literature

with interests in a firm’s performance and its relation with the structure of the

organisation (Peters, 1988), assets and skills (Aaker, 1989), human resources (Duffey,

1988), organisational culture (Peters and Waterman, 1982; Barney, 1986), value-

20

addition by firm (Kogut, 1985), ‘core competence’ (Prahalad and Hamel, 1990),

intelligence system (Ghoshal and Kim, 1986), environment and strategy (Porter,

1991), global strategy (Yip, 1989), system balance (Mintzerg, 1991), market share

(Buckley, 1991; Schwalbach, 1989), market power (Teece, 1981), cost/price

differentiation, efficiency, value-creation and productivity (Porter, 1990), corporate

restructuring of multinationals (Enderwick, 1989), firm efficiency and market share

(Hay and Liu, 1997), knowledge and skills (Nonaka, Toyama and Nagata, 2000).

2.1.3 Firm-Industry Relation Specific Literature

It is also imperative to review the industry-specific influences that affect the firm

performance. In that respect, drawing from RBV, Peteraf (1993) refers to

‘heterogeneity within an industry’. Moreover, Barney (1986) reflecting on the

concepts of competition, notes that ‘the unit of analysis traditionally has included the

industry’ and further states that in strategic management literature the importance of

combining the analyses of ‘firm individuality’ with industry structure for choosing

strategies is manifested in the widely applied concept of SWOT (strengths,

weaknesses, opportunities, and threats). Porter (1980, pp 6-7) argues:

Firms will each have unique strengths and weaknesses in dealing with industry

structure, and industry structure can and does shift gradually over time. Yet

understanding industry structure must be the starting point for strategy analysis.

The arguments about whether strategy, industry-specific factors (within the IO

perspective) or firms’ internal environments (within RBV) can be identified as

primary determinants of competitiveness and profitability or superior performance

can be studied through the empirical works of Hansen and Wenerfelt (1989), Powell

(1995, 1996, 2002), Schmalensee (1985), Jacobsen (1988), Warring (1996), Roqueert,

Phillips and Westfall (1996), Rumelt (1991), Montgomery and Wernerfelt (1991),

McGahan and Porter (1997), Mauri and Michaels (1998), Brush, Bromiley and

Hendrickx (1999), and Hawawini, Subramanian and Verdin (2003). Moreover,

empirical study by Powell (1992) integrates the industry factors, market share, generic

strategy, and strategic group membership to test the financial performance wherein it

is observed that the role of organisational factors in producing sustainable competitive

advantage is understated.

21

A comparison of the results (Table 2.1) in percentage of total variance do show some

‘direct and indirect influence on profitability’ (measured as Return on Assets)

(McGahan and Porter, 1997) and that ‘both industry and firm effects are important in

shaping profitability’ (Henderson and Mitchell, 1997). Added to this, industries strive

for capital and resources (Powell, 1996) to gain substantial relative advantages from

their home economy (Gray, 1991). However, the high percentage of error in each case

signifies that the influence of various other factors on profitability remains

unexplained.

Variance Schmalensee Rumelt McGahan & Hawawini, component (1985) (1991) Porter (1997) Subramanium & Verdin (2003) Firm effect 0.6% 45.8% 36.0% 35.8% Industry effect 19.6% 4.0% 18.7% 8.1% Error 80.4% 44.8% 48.4% 52.0% Source: Adapted from Hawawini, Subramanian and Verdin (2003). Table 2.1: Firm, industry and other effects on performance identified by researchers.

2.1.4 Socio-Political Effects and IB Related Literature

Peng (2001) in mapping the contributions of RBV to IB and the convergence of

strategy, arising from the attributes of RBV, with IB, highlights how the diffusion of

these streams have enriched each other in the understanding of competitiveness.

However, in addition to industry and firm-level conditions, an account of broader and

wider influences from the states and society is needed when crafting and

implementing strategies (DiMaggio and Powell, 1991; Oliver, 1997; Peng, 2002) for

competitiveness. Doryan (1993) states that competitive advantage can be created in

contrast to the theory of comparative advantage which views a country as ‘anchored

to what it has, not to what it can create’ and that ‘there is a role for innovative policies

by the state’. Fahy (2002) acknowledges the ‘resource asymmetries at a national

level’ as a core element of trade theory that underpins recent contributions on country

competitiveness and the role of firms. Further, drawing on the work of Dunning

(1988), Fahy suggests that the advantages of firms are not independent of their

industrial structure, economic systems and institutional and cultural environments or

their national diamond of advantage (Porter, 1990). In reviewing the works of

22

Dunning (1977) and Ghoshal (1987) and as confirmed by Fahy (2002), international

business literature assigns significance to country-specific resources as well as to

firm-specific resources. Moreover, Dietz (1992) stresses the importance of the state

getting policies right and the importance of ‘strategy switch-points’ taking into

consideration the changing national and international realities.

In the strategic management literature, strategy has been examined in a ‘task

environment view’ wherein focus is on economic variables such as market demand

and technological change and has rarely examined the strategic choices of firms

affected by the formal or informal constraints of an institutional framework (Peng,

2002; North, 1990; Oliver, 1997). In recognition of the above, studies on management

of political imperatives by Ring, Lenway and Govekar (1990) have focussed on the

impact of political environments on firms and strategy choices. Miller (1993) has

focussed on the political and government policy creating macroeconomic

uncertainties that differ across countries. Cohen (1990, p. 261) viewing the political

economy of international trade in the real world states that the ‘forces of mercantilism

and protection always seem rampant if not wholly dominant’. Brewer (1993) talks of

‘numerous dimensions of variability in government policies that need to be identified

in order to understand fully the effects of government policies on market

imperfections’. Murtha and Lenway’s (1994) study shows how national institutional

arrangements can systematically contribute to state strategic capabilities that form the

basis of competitive advantage. Doryan (1993) states that both market and the state

have a role to fulfil, and emphasis only on the market without the institutional

framework (that only the state can provide) is meaningless. Murtha and Lenway

(1994) also mention that states’ strategic economic capabilities vary.

Keillor, Hult and Owens (2002) draw attention to the increased recognition that

government and political influences impact on firms involved in the international

market. Further, these authors state that ‘government trade policies and market

imperfections are frequently the staring point involving the political environment and

its relationship to international business’ (p. 90). Boddewyn (1988) and Brewer

(1993) define government policies as the controls that are exerted by the political

structure on the market economy considered. Market imperfections are considered as

23

a reflection of deviations from an environment of pure competition and frequently

result from government policy (Keillor et. al., 2002). Chakravarthy and Perlmutter

(1985) regard market imperfections as political imperatives created by host

government trade policy which are to be taken into account by firms in devising

strategies for international operations.

The interest in IB research and linkages to political behaviour and imperatives can be

viewed from the studies of Murtha and Lenway (1994), Ring, Lenway and Govekar

(1990), Miller (1993), Brewer (1993), Gomes-Casseres (1990) and Fagre and Wells

(1982). However, Boddewyn and Brewer (1994), drawing from the comments of

Carroll, Delacroix and Goldstein (1990), emphasise that this interest in external

political behaviour is less discernible in mainstream organisation theory and strategy

analysis. Further, Boddewyn and Brewer (1994) highlight that while theories of

resource dependence (Pfeffer and Salancik, 1978), institutionalisation (DiMaggio and

Powell, 1983) and interorganisation (Bension, 1975) have considered the business-

government relations they have not been accorded a central place. Moreover,

Boddewyn and Brewer (1994) observe that organisational economics, though it

considers efficiency as the main concern, is essentially silent about the ‘non-market’

phenomenon – a factor that also affects efficiency.

The resource-based theory of strategic advantages (Barney, 1986; Collis, 1991;

Conner, 1991; Grant, 1991; Peteraf, 1993; Teece, Pisano and Shuen, 1990; Mahoney

and Pandian, 1992) highlights the heterogeneity, uniqueness, and competence of firms

gained through resource selection and deployment through capabilities. These

characteristics ‘are essentially economic and organizational in nature but not political

ones’ (Boddewyn and Brewer, 1994; p. 120). In essence, Boddewyn and Brewer

(1994) highlight the deficiency in IB literature of the importance assigned to political

factors stating that if they are considered at all they are regarded as constraints

(Conner, 1991) and ‘when the tradeability of resources is discussed, only economic

markets are mentioned but not political ones.’ (p. 120)

Further, Kobrin, Basek, Blank and Palombara (1980) referring to political risk and

stability in particular, and the foreign political environment in general, state that ‘the

24

process of assessment and evaluation of non-market environments appears to be

relatively unsophisticated and unstructured.’ (p. 33)

The political motivations for national governments to shape trade policies have been

highlighted by the works of Grossman and Helpman (1994; 1995). Eaton and

Grossman (1986) argue that ‘international competition among firms in many

industries is in fact imperfectly competitive’ and further state that:

Government policies that affect the competitiveness of their firms in international

markets, as well as the welfare of their consumers, involve not only traditional trade

policy (trade taxes and subsidies) but policies that affect other aspects of firms’ costs,

such as output taxes and subsidies. We refer to intervention of this sort as industrial

policy. (p. 384)

Hart and Prakash (1997) assign to the fact that ‘state intervention to directly guide

activity is called industrial policy and to guide foreign trade is called trade policy’.

Trandel and Skeath (1996) ascribe to the routine use of international trade policies by

respective governments to assist domestic industries. These authors allude to a

relatively large body of political-economic trade literature to state how competing

interest groups can wield political influence in the design of trade and industrial

policies. Christoffersen (2002) specifies how government is motivated by welfare

thinking and implications to intervene in international trade through the use of

subsidies and creating asymmetric international rivalries.

Buchholz and Rosenthal (1995) draw attention to the policy environment in a

particular nation in which firms and industry function and express that the process of

public policy formation is instrumental to articulation of society’s goals and

objectives. The market is viewed as a place that affords the opportunity to value a

particular product or service, whereas ‘people express concerns about broader social

issues, such as the environment, largely through the public policy process’ (Buchholz

and Rosenthal, 1995). The role of the government and the political strategies of firms

and industries in the context of public policy have been sought to be explained by

stakeholder theory and social contract theory.

25

Toyne (1989) highlights that international business may be influenced by non-

commercial (social and political) considerations. To this effect Toyne and Nigh

(1998) stress that international business can be distinguished by ‘socio-cultural’

factors at the national level and emphasise the need for examination of the business

process of different contexts.

It can therefore be said that in the pursuit of competitiveness, the determinants of

strategic choices are not only driven by industry conditions and firm-specific

resources that traditional strategy research and resource-based theory maintain (Grant,

1991; Barney, 1991; Porter, 1980) but are also designed by related actors located in

the non-market environment of the firm – especially the nature of governments,

interest groups, socio-cultural settings, and the public opinion and the relative role of

political behaviour in strategy management (Boddewyn and Brewer, 1994). Political

behaviour is affected by firm and industry characteristics that interact in the non-

market environment (Yoffie, 1993).

Summarising the literature review, the distinct but complementary classes of effects

on competitiveness identified are:

1. Firm-assets/capabilities effects

2. Strategy effects

3. Industry effects

4. Socio-Political effects

Moreover, it can be inferred that the competitive advantage is sought through strategic

advantages that are created and developed through an industry economics perspective

and resource-based perspective – that concentrates on identifying and developing core

competencies and capabilities. However, the gaps identified include:

1. The measures defining theoretical definitions are weak in empirical works on

strategy (Venkatraman, 1989) and even in empirical works on resource-based

theory there are difficulties (Godfrey and Hill, 1995; Peng, 2001; Fahy, 2002).

2. Further, there is high percentage of error associated in the empirical studies on

industry effects on firms’ performance.

26

3. It can be inferred that the relationships examined through RBV and the

strategic management perspective in the search for the determinants of

competitiveness need to be strengthened by considering the influence of other

factors – notably socio-political effects.

4. No identified empirical study has highlighted the political nature or the role of

the government in international business.

5. The low importance accorded to political factors in IB operations deserves

scrutiny (Boddewyn and Brewer, 1994).

6. The process of assessment and evaluation of non-market environments, like

the foreign political environment in IB, appears relatively unsophisticated and

unstructured (Kobrin et. al., 1980).

2.2 Theoretical Foundation

2.2.1 Resource-Based Theory of Firm

The conceptual importance of firm-specific resources is credited to the works of early

economists such as Chamberlin [1933] and Robinson [1933] (Fahy and Smithee,

1999). The resource-based view has its origin in the central theme that the system of

production and its efficiency play a crucial role in competition rather than the

products in the marketplace. Penrose (1959) subsequently developed the idea of how

advantages can be firm-specific and that uniqueness may be at the root of strategic

advantage. This approach lead to resource-based theory highlighting firms’

heterogeneity in relation to their unique assets/resources and capabilities – important

factors that greatly influence the competitiveness of the firms.

In the resource-based perspective, competitive advantage of firms is determined

around the internal competencies of firms (Wernerfelt, 1984; Dierickx and Cool,

1989; Prahalad and Hamel, 1990) rather than by its external environment as viewed

from the industrial organisation perspective. Moreover, firm and/or organisational

capabilities are rooted in the ability of the firms or organisations to configure and

synthesise organisational resources. In effect, it is the continuous interaction between

resources and capabilities that becomes critical in providing competitive advantages

to the firms/organisations.

27

In summary, the resource-based view has provided deep understanding in that the

resources and capabilities of a firm serve as sources of sustained competitive

advantage (Barney, 1991; Peteraf, 1993; Mahoney and Pandian, 1992). The

differences in firms’ performance are based on the disparities of firms’ resources,

knowledge, capabilities and endowments accumulated in a firm-specific or path-

dependent manner. It is therefore the importance of tangible and intangible resources

that are unique to firms and are acknowledged as the source of competitiveness.

2.2.2 Strategic Management Theory

Strategic management theory integrates diverse management practices and

perspectives in pursuit of goals in the context of rapid environmental changes in the

world economy. Strategic management theory is directed towards the need for change

to gain competitiveness in response to changing environmental circumstances and

institutional arrangements. Strategic management is about what is being done now to

bring about a future result and is an iterative process geared to deal with

discontinuous futures (Gray and Karp, 1994 referring to Goodstein, Pfeiffer & Nolan,

1986).

The orientation of strategic management perspective has been towards private-sector

organisations – the main source of strategic conceptualisation (e.g. Porter, 1980) and

the market-driven competition (Gray and Karp, 1994). The field of strategic

management is concerned primarily with identifying long-term opportunities and

threats and how in the process firms or organisations mobilise their assets and develop

their capabilities in their desire to address these threats and implement a successful

strategy to gain advantage of the opportunities.

In understanding the effectiveness of strategic management policies and choices, it is

imperative to consider the influence of institutional control which can incoprporate

political, economic, technological, competitive, and social forces. In contrast to

private-sector organisations, public organisations and institutions operate in an

environment governed by an authority system rather than a market system. This

results in the strategic mission, strategic choices and actions in the public sector

domain originating from sources other than market competition (Gray and Karp,

1994). In private-sector organisations, implementation of alternative strategies and

28

strategic choices are accomplished through an organisation’s structure, its leadership,

its distribution of power and its culture. In respect to public organisations and

institutions, the forces at display are not market manoeuvrings, but a relatively

complex arrangement of multilateral power, influencing bargaining, voting, exchange

relationships and treaties.

Therefore, strategic management theories need to consider the opportunities and

threats that are largely created by environmental forces including those that are

created by both market-oriented and institutionally controlled powers.

2.2.3 Towards an Integrated Theory of Competitiveness

In the preface to the Competitive Advantage of Nations, Porter (1990) states:

There is no accepted definition of competitiveness. Whichever definition of

competitiveness is adopted, an even more serious problem has been there is no

generally accepted theory to explain it (p. xii).

In the search for an integrated theory of competitiveness there are divergent premises

that have been compared and contrasted. In the RBV perspective, a firm is viewed as

a source of unique resources – tangible and intangible, and capabilities which create

idiosyncratic firm attributes for enhanced performance (Porter, 1990). Moreover,

drawing from Porter’s (1980, 1985, 1990, 1991) framework here termed “IO based”

since it is influenced from the traditional industrial organisation economics, the firm’s

behaviour (or strategy) is directed at enhanced performance by adapting to the

industry environment and in the process gaining a competitive position in the market.

Henderson and Mitchell (1997) focus on the debate around the ‘interactions between

organizational capabilities and industry competition’ that affect business strategy and

performance. Traditional economic research focuses on ‘industry structure as the

primary cause of strategy and performance’ while the RBV of the firm tends to

emphasise the importance of firm-specific capabilities (e.g. Lippman and Rumelt,

1982; Wernerfelt, 1984; Barney, 1991; Conner, 1991; Amit and Schoemaker, 1993;

Peteraf, 1993).

29

Drawing from the literature review (Section 2.1) on RBV and strategic management

literature, the three distinct and complementary ‘classes’ of effects identified (Spanos

and Lioukas, 2001) which may contribute towards an integrated framework of

competitiveness are (i) strategy, (ii) industry and (iii) firm-assets/capabilities effect.

Williamson (1991), studying the sources of sustainable competitive advantage, also

refers to the integrated effects of strategising – a market power imperative and

economising – a concept fundamentally concerned with efficiency. Moreover,

Porter’s IO-based framework on strategy seeks to advance the crucial role of the firm

rather than industry performance. For Porter, industry structure is neither constant nor

exogenous. He recognises a market environment as partly exogenous and partly

subject to influences by firms’ actions. Spanos and Lioukas (2001), reinforcing

Porter’s view, state that is because the ‘industry structure is also, at least partly,

susceptible to firm activities’. So, in Porter’s framework on competitive strategy

perspective, firm performance is a function of industry and firm effects (i.e. market

positioning) (Grant, 1991; Porter, 1991) and ‘these two determinants of firm

performance are ultimately interrelated’ (Spanos and Lioukas, 2001).

It follows then that the RBV and Porter’s IO-based framework on strategic

management focus on the individual firm as their unit of consideration. However, the

fundamental differences in their perspectives lie in the perceived source of

competitive advantage of firms: namely, a monopoly situation in Porter’s framework

and increased efficiency in RBV. Whatever be the source of competitive advantage

for firms, firm strategy is about ‘how to position and manage firms so that (efficiency)

rents may be created, protected and possibly increased’ (Foss, 1996 referring to Kay,

1993). In an endeavour to seek complementarity between the two perspectives, Foss

(1996) states that the industry orientation in Porter’s framework of strategy seems to

provide the ‘Opportunity-Threat’ part of the SWOT-framework, while resource-based

insights supply the ‘Strength-Weakness’ part of the analysis. Penrose (1959) however

emphasises within the resource-based approach, that environmental changes ‘may

change the significance of resources to the firm’, while in Porter’s framework

industry effects are the environmental changes that may be crucial in developing and

combining resources to achieve competitive advantage.

30

Porter (1983) acknowledges that the evolution of concepts for modern business

strategy planning began with the work of Learned, Christensen, Andrews and Guth

(LCAG) in 1969 in the LCAG strategy framework. In the LCAG framework, strategy

is a concept of how firms are attempting to compete in their environment keeping in

view of the objectives to be achieved. In the process of achieving the objectives, the

firms considered both the economic and non-economic factors like social obligations,

organisational climate and others. Fahy and Smithee (1999) state that over time,

different sectors of the LCAG framework have been emphasised, with Porter (1980)

working on the industry quadrant (quadrant 2) of Figure 2.1 and Burgelman (1988)

emphasising the social learning process as being part of the strategy making process.

In the pursuance of a comprehensive and integrated structure towards

competitiveness, international competition highlights the importance of country-

specific resources (CSRs) and firm-specific resources (FSRs) (Fahy and Smithee,

1999). Country-specific resources, once viewed as the basis of resource heterogeneity

among nations that then facilitated international trade, are now being perceived as

influencing foreign direct investment decisions (Davidson, 1980), facilitating the

research environment (Porter, 1980), providing communications and marketing

infrastructures (Dunning, 1988; Porter, 1990), and creating ambience for

technological and organisational capabilities (Kogut, 1991). In this context, Fahy and

Smithee (1999) and Fahy (2002), drawing from the works of Dunning (1981; 1988)

highlight that though firm-specific advantages (resources) are endogenous to a

(particular) firm, they are not independent of their industrial structures, economic

31

systems, institutional and cultural environments. In support of these circumstances,

Fahy and Smithee (1999) referring to Pascale and Anthos (1982) and van Wolferen

(1989), cite the contribution of the Japanese government in the success of Japanese

firms. Gray (1982) (as quoted by Fahy and Smithee, 1999) draws attention to

‘“physical” national characteristics (land, natural resources, labour supply and

capital) that influence the stock of country-specific resources and “social”

national characteristics (social structure, tax structure, treatment of R&D and

government policy) which influence a country’s stock of firm-specific

resources.’

Further, Fahy and Smithee (1999) comment:

Perhaps, the most comprehensive treatment of the links between the physical,

economic and institutional environment of a country and its stock of CSRs and FSRs

is provided by Porter’s “diamond” of national advantage (Porter 1990; 1991). The

four central elements of the diamond are factor conditions (which describe a

country’s stock of CSRs), demand conditions, firm strategy, structure and rivalry and

related and supporting industries all of which combine to influence the FSRs

possessed by firms in a particular country. Both CSRs and FSRs in turn are

influenced by government policy and chance (Porter 1990).

2.2.4 Theory of National Competitive Advantage

The Theory of Competitive Advantage of Nations (Porter, 1990) analyses national

competitiveness on the grounds that (i) a conducive national environment helps in the

development of particular profiles of resources and capabilities, (ii) firms provide the

dynamic aspects of national competitiveness through innovation and resource

upgrading, and (iii) the dynamic conditions of nations (so developed by firms through

their innovation activities) creates a national environment that influences national

competitiveness (and not only natural endowments of resources). While proposing his

‘diamond model’ (Figure 2.2) Porter argues that the competitive advantage of nations

is determined by four main determinants – the strength of their factor endowments,

the demand conditions – particularly in their home market, the firm’s strategies,

structure and rivalry in the major industry as influenced by national institutions, and

the strength and diversity of related and supporting industry. However, he further

32

states that national competitiveness is shaped by the type and quality of interactions

among the four determinants (Choi, 1999). Porter acknowledges the role of

government as an additional factor or external variable that can influence national

competitiveness in providing the environment through industrial policies, trade, and

education. However, it should further be noted that Porter’s paradigm importantly

examined the so-called ‘non-price determinants’ of competitiveness.

Porter (1990) argues that his ‘diamond’ contains elements that shape the competitive

attributes of strategy in a firm and industry as well as the ability and capability (both

inherited and created) of firms and industry to gain positions of competitive

advantage:

These determinants individually, and as a system, create the context in which a

nation’s firms are born and compete: the availability of resources and skills necessary

for competitive advantage in an industry; the formation that shapes where

opportunities are perceived and the directions in which resources and skills are

deployed; the goals of the owners, managers and employees that are involved in and

carry out competition; and most importantly the pressures on firms to invest and

innovate.

33

…The determinants in the ‘diamond’ and interaction amongst them create the forces

that shape the likelihood, direction and speed of improvement and innovation by a

nation’s firms in an industry. (pp. 71 and 173)

The elements of Porter’s ‘diamond’ contain:

1. Factor Conditions

In understanding international competition, the magnitude of the country-specific resources (CSRs) highlights and influences the competitive position of a nation and its industry. Further, this dimension not only stresses its inheritances but also pronounces on how effectively they have been used and upgraded by the nations and the firms within that country. In addition, this attribute is directed at a nation’s most basic factor – raw and undeveloped, and/or advanced (developed and refined) factors of production in that country. This recognises hierarchies among factor conditions (Porter, 1990) as well as the resource heterogeneity among nations.

The array of factors – natural resources, labour, education, telecommunications, transportation infrastructure, capital markets and legal frameworks, provide the basic conditions for firm-specific resources (FSRs) to attain comparative and competitive advantage to equip for firm competition.

A nation’s legal system, tax systems and other policy instruments fashion the control mechanism in the manner in which natural resources are to be used. The basic objective for factor conditions is oriented toward increased factor specialisation and continuously increasing levels of value-addition through differentiation, economies of scale, and shifting uses of these inputs toward higher values uses. Porter (1990) stressed that specialised and advanced factors are significant for sustaining a nation’s competitive advantage.

2. Demand Conditions

The characteristics of national demand can greatly influence how firms perceive,

interpret and respond to customers’ need and behaviour and this consequently can

greatly effect the development of the competitive position of an industry. The

intensity of domestic demand in terms of quality, service, durability, function, and

environmental attributes is crucial as demanding local customers have been identified

as motivation for innovation, continuous improvement and increased specialisation by

domestic firms. The role of the domestic market is to create the demand for products

34

and services with stringent standards and drive specific performance characteristics

that will be valued by international markets. This will increase the value of products

for domestic consumption, and push local firm competition not only toward more

efficient production but also toward the desires and expectations of demanding

international markets. Additionally, understanding the nature of domestic demand

conditions is important as it shapes the strategies firms can employ in international

markets.

3. Related and Supported Industries

This feature signifies the presence or absence, at a country and industry level, of

industrial suppliers and other support industries. The effect on the domestic firms and

industry in interaction with internationally competitive related and supporting

industries can enhance competitive advantage in international competition – thereby

developing competitive capability when companies interact with sophisticated

suppliers working to develop innovative inputs and supporting services. Successful

industrial clusters shows a critical role of this element in generating new and

improved inputs, services and practices capable of re-enforcing innovation-driven

resources and capabilities in leading firms.

4. Industry Structure, Firm Strategy and Rivalry

This characteristic ascribes to the national-level circumstances that differentiate the

creation, organisation and the management of firms and the nature of national level

competition. Intense and positive rivalry between firms in a country shape firms for

global competition and assists to construct and establish a business climate attractive

for foreign and domestic investment. Added to the above, a competitive and

transparent policy environment can provide the industry with clear “rules of the

game” which promotes higher levels of competitiveness through innovation.

A1. Role of Chance

Chance events are happenings that have little or no bearing with circumstances in a

nation and are generally beyond the power of firms and the national governments to

influence such occurrences. Such events can alter the conditions of a nation’s industry

and also have ‘asymmetric impacts on different nations.’

35

A2. Role of Government

Porter (1990) acknowledges the importance of the role of government to such an

extent that he admits that ‘it is tempting to make government the fifth determinant’ (p.

126) in his “diamond”. Dunning (2002) opines that ‘Porter prefers to consider

government not as an attribute of the diamond, but as a fashioner of its structure and

efficiency.’ (p. 293)

However, Harling (1989) states that ‘government policies can have a major impact on

the competitiveness and profitability of industries’. Further, based on the theory of

Effective Protection (EP), Harling (1989) uses the proposed analytical approach to

study how government policies:

(i) help to direct business interests and government policy-makers to those

policies which have the most serious effect on the performance of an

industry;

(ii) can result in intervention that recognises both the positive and negative

effects of policy measures on an industry;

(iii) impact either or both the upstream and downstream industries when

measures affect markets that link industries vertically.

This approach takes into consideration government policies affecting both product

price and input prices facing an industry.

Nixon and Perry (1993) write that ‘in an increasingly competitive international

market, widely diverse governmental policies directly affect allocation of scarce

resources’ and this can have effect on international trade competitiveness which can

become an important factor in trade negotiations.

Arburn, Rosson and Nyankori (1991) discuss and analyse, in respect to soyabean,

how government policy changes can have impact on domestic welfare, world market

welfare, competitive position, and future international policy formulation. Larson and

Rask (1992) evaluate changing competitiveness in the world soyabean markets

relative to government policy and natural resources.

36

Dunning (2002) considering Porter’s ‘diamond’ of competitive advantage, states that

by competitive advantage, ‘Porter means the ability of a country – or more

specifically indigenous firms of a country – to use its location-bound resources in a

way which will enable it (them) to be competitive in international markets.’ (p. 291)

Moreover, Dunning (2002) opines that the interactions among the ‘diamond’

determinants will vary in the type and quality not only among themselves but also

between countries. In this context, Dunning (2002) highlights Porter’s model in

respect to the ‘efficiency at which the facets of the diamond are coordinated with each

other’ and that leads to ‘important competitive advantage’. In the process, Dunning

(2002) brings a brilliant reflection on Porter’s ‘diamond’ model by stating that Porter

draws ‘a parallel between the efficiency of the governance of resources and

competencies by firms, and that by the governments of countries.’ (p.292)

Further, in relation to national competitiveness, one definition that stands out as being

most useful and widely used is defined by the Organisation for Economic Cooperation

and Development (OECD) as:

the degree to which a country can, under free and fair market conditions,

produce goods and services which meet the rest of international markets,

while simultaneously maintaining and expanding the real incomes of its

people over the long term. (Oughton, 1997)

Clearly, there is much in the literature on competitiveness. Its multi-level focus on

country, industry and firm, has given rise to different views and debates (Krugman,

1994; Cohen, 1994; Thurow, 1994; Prestowitz, 1994). However and importantly for

the present work, Dunning (1995) opines, that competitiveness for ‘benchmarking

economic performance’ of firms and countries, is an appropriate and desirable

application of the concept ‘whenever it is expected that the knowledge so gained may

help improve that performance’ (emphasis added).

The growth of international trade and more recent increase in trade conflicts in the

agriculture sector have generated interest in issues of competitiveness. Firms

operating under widely different market conditions are experiencing different levels

of competitiveness. The entanglement created and caused between elements of public

37

policy and private management strategy is having a profound effect on international

competitiveness. This underlines increasing government interest in the performance of

firms in the international markets.

2.2.5 Towards a Conceptual Framework of Competitiveness

In drawing from the theories and literature thus far, it is observed that to capture the

essence of competitiveness in international business, the challenge lies in garnering

internal resources, capabilities, and strengths of the firms in relation to the external

environment. This is best depicted in the seminal framework of Learned, Christensen,

Andrews, and Guth (1969), as shown in Figure 2.1.

Porter (1980; 1981) concentrated on the second quadrant of the LCAG framework (as

noted in Section 2.2.3,). His framework (influenced by traditional industrial

organisation economics) focuses and advances the role of the firm, against the

traditional concept of industry as the unit of analysis. Porter postulated that a firm’s

performance is largely a function of the structure of the industry and the firm’s

position in the industry (Fahy, 1996). However, empirical studies (Wernerfelt and

Montgomery, 1988; Hansen and Wernerfelt, 1989; Rumelt, 1991; Cool and Schendel,

1987) have shown performance differences among firms in the same industry.

Fahy (1996) alludes to a ‘conceptual swing’ towards the first quadrant of the LCAG

framework through the work of Penrose (1959) that has become known as the

resource-based view. Subsequent works by Peteraf (1993), Mahoney and Pandian

(1992), Barney (1986, 1991), Grant (1991), and Conner (1991) have further enriched

this domain. Resource-based theory explains the unique characteristics of the firm for

enhanced performance attained through its invaluable assets and capabilities that

increases a firm’s efficiency. However, resource-based theory also focuses on the

heterogeneity among firms in the same industry.

Porter (1990) through his theory of competitive advantage highlights that firm-

specific resources are rooted in the firm’s country of origin. Porter’s theory blends the

traditional country-based theories of comparative advantages that emphasise factor

38

endowments with the firm-based theories that focus on the behaviours of individual

firms (Mahoney, Trigg, Griffin and Pustay, 1998).

The concepts as shown in the third and fourth quadrant of the LCAG framework have

been considered scantily, typically by incorporating the ideas just in terms of a firm

management’s response to environmental threats/opportunities and broader societal

expectations. Toyne (1989) highlights this deficiency in international business by

stating that this is because of the firm’s observed pattern of behaviour is sought to be

explained only in economic terms. He further stresses that to define the conceptual

domain of international business and the phenomenon to be explained, it is necessary

to recognise at least three characteristics of international business:

1. International business involves the exchange of goods and /or services across or

within national boundaries between two or more social actors in different

countries for commercial reasons.

2. International business is an exchange process involving relationships, inputs and

outputs, between social actors located in different countries.

3. International business may be influenced by non-commercial (social and

political) considerations (p. 3)

Toyne and Nigh (1998) underline that international business is ‘socio-culturally

distinguishable at the national level’ and it is imperative to develop ‘an understanding

of their interaction with one another and with the business processes of different

locales including those processes that explain their emergence, continuance, and

individuality’.

Toyne and Nigh (1998) present international business as a ‘multi-level, hierarchical

process that evolves (or emerges) over time as a consequence of the interaction of two

or more socially embedded, multi-level business processes’ (p. 866). The authors

further propose that as the process evolves and unfolds, its organisational outputs, like

the firm, also change. In this context, the authors call for a study of the international

business phenomena not just involving organisations from different socio-cultural

contexts (as representing the product of different processes), but to explain differences

(not similarities) by studying the processes that created them and transforming them at

the national level initially and subsequently at the international level. Toyne and Nigh

39

(1998) further acknowledge that there are various levels of organisation that are

instrumental in shaping international business processes and their ‘interactions

between phenomena at contiguous level must establish the initiating or boundary

conditions’ (p. 867). Table 2.2 presents a hierarchy of levels involved in international

business and those that create and influence the environment.

2.3 Summary

This chapter has provided the theory as well as some of the relevant literature and

conceptual thinking needed for the development of an analytical framework of

competitiveness which can be used to conduct further study in respect of the three key

economies in world sugar.

The chapter identifies and separates elements of competitiveness into four

complementary effects – firm, industry, strategy, and socio-political. These elements

will be progressively carried forward in the development of the conceptual framework

and in analysing the current situation and the strategy employed by the three major

producing and exporting economies of sugar. Further understanding will be drawn as

to how in reality these economies create an institutional framework that leads to

variations in the approaches of firms for attaining competitive advantage. In the

understanding of international business attention is drawn on how various non-

commercial aspects and relationships at various levels – individuals, groups, firms,

industry, and nations, need to be studied for a holistic view of international

competitiveness.

The next chapter will focus on the methodology of approach taken for this research

and its appropriateness.

40

41

Chapter 3

Methodology of Approach to the Applied Research

This brief chapter explains the methodology of the approach that is used to investigate

international competitiveness in the world sugar industry. The central approach of this

applied study is the qualitative method of comparative analysis. This relative simple

method will help in exploring and analysing the determinants of competitiveness, as

discussed in chapters 4 and 5. The theoretical basis of this approach, its application,

and its justification in the present research is described. Methods used to understand,

explain, and analyse various attributes of the firms, industry, and the nations are also

described.

The goals of this chapter are:

• To provide a preliminary orientation to the research approach (Section 3.1).

• To explain the purpose of conducting qualitative research for the topic

(Section 3.2) and the scope of such research (Section 3.3).

• To justify the choice of a comparative study for the research question (Section

3.4).

• To describe the major methods used to understand and analyse various factors

of competitiveness (Section 3.5).

Developments in this chapter:

• Highlight the need for and usefulness of qualitative methods in respect of the

research problem.

• Provide a rationale for the use of a comparative study to develop insights into

the research issues.

3.1 Research Approach

This research is essentially an attempt to increase a body of knowledge through the

recognition, interpretation, and understanding of a concept that is intricately linked to

conditions-specific settings and that draws influences from human experiences and

42

actions. In an effort to understand such a complex subject, a research investigation

must be one that is logical, systematic, and pertains to seeking solutions to problems

and answering research questions (Ahmad and Ali, 2003; referring to Allison, 1994).

As a result, a research strategy should be one that is a function of the research

situation (Yin, 1994).

This dissertation uses a phenomenology approach to investigate determinants of

international competitiveness that will provide a better understanding to Australian

and other sugar producers of how to affect strategic attributes. A comparative study is

provided that compares and contrasts the varying institutional settings as well as

cultural and social contexts in which are embedded the production and marketing

regimes of the three dominant sugar producing and marketing economies of the world,

Australia, Brazil, and the European Union. This more detailed understanding of the

complex phenomenon of sugar production and marketing form a wide and

differentiated basis can advance understanding of competitiveness.

3.2 Qualitative Methodology

Amaratunga, Baldry, Sarshar and Newton (2002) assert that phenomenological

inquiry (interpretive science) uses qualitative methods to understand and explain a

phenomenon. Munck (1998) states that one of the relevant criteria for defining the

research problem in qualitative research is to ‘pose a question that is ‘important’ in

the real world’ (p. 20). Ahmad and Ali (2003, p. 2) opine that ‘qualitative research is

used when there is a concern for understanding how things happen and how they are

related, rather than only measuring the relationship between variables’. Ezzy (2001)

highlights that qualitative methods focus on interpretation with an improved

understanding as central.

Amaratunga et. al. (2002) draw attention to the flexible nature and the lack of

structure of qualitative methods which allow theory and concepts to proceed in

tandem. Another feature of the qualitative approach that has been stressed by

Amaratunga et. al. (2002, pp. 21-22) is the ‘“rich descriptions” that are vivid, nested

in a real life context, and have a ring of truth’ for revealing complexity. Further,

Amaratunga et. al. (2002, p. 22) assert that qualitative methodology has generally

been ‘advocated as the best strategy for discovery, exploring new areas, developing

43

hypotheses’ and are useful when one needs to ‘supplement, validate, explain,

illuminate, or reinterpret’.

In a comparative analysis of qualitative and quantitative research (Table 3.1), it is observed that a significant level of assistance to thinking is provided by qualitative research as it:

Allows a fuller, longer use of highly contextualised research for ongoing discovery and identification of emergent phenomena,

Is interested in the content as the expression of deeper phenomenon, Uses less formal categorisation than quantitative analysis.

Further, Helppner, Kivlighan, and Wampold (1992) refer to qualitative research as naturalistic, ethnographic or phenomenological, indicating its appropriateness in regard to events affecting human lives and the influences from the culture of a particular society.

Given such advantages and strengths as well as the research problem and research

situation, qualitative methodology has been chosen for this research so as to delve

more deeply in examining the intangible aspects of complex issues of the process

(Mintzberg, 1983; Van Maanen, 1983) of international competitiveness.

3.3 Scope of Qualitative Research

Qualitative research while using unreconstructed logic to get at what is ‘real’, has a primary focus on ‘quality’, a term largely referring to the essence or ambience of something (Berg, 1989). In the context of the stated expression, Cooper and Schindler (2001, p. 140) present the scope of qualitative research in terms of:

Participant observation – to perceive firsthand what participants in the setting experience,

Ethnography – the process of discovering how a cultural subgroup describes and structures its world,

Films, photographs, and videotape – capturing the life of the group under study,

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Table 3.1: Comparative analysis of qualitative and quantitative research Qualitative Research Quantitative Research

Primary goal – Describing the variety of human social experience and activity through social and historical information and the roles they play in human life – i.e. to understand the lived experience by seeking to develop shared meanings within a specific context.

Methodological consideration – The researcher’s understanding of reality is shaped by broad social and historical factors. The methods can yield a richer and deeper understanding of reality based on encountering the diverse accounts used by people in making sense of their lives – i.e. dealing more with the presence and un-presence of some content than with its frequency.

Methods are primarily based on unobtrusive observations that can be analysed without using numbers and measurements.

Underlying philosophy – Humanistic, phenomenological and existential paradigms.

Strengths Uses direct observation and semi-

structured approach in real-world settings Researchers look for social transactions

and interactions between people and events

Data collection is less structured than quantitative research

Researcher can make a number of adjustments during the observations

Researchers may even develop new hypotheses during the research process

Very flexible – resting on the view that multiple realities exist, can only be studied holistically and require an open system approach.

Naturalistic, participative and interpretive Sample size determination isn’t as

important Weaknesses Subject to experimenter bias Results may attract low credibility

Primary goal – Describing the reality of human social interactions and functions – i.e. to understand the strength of relationships in order to establish causal associations among objectively specified variables (through testing hypotheses derived from predictive theories).

Methodological consideration – Methods created and used to control or eliminate factors that would weaken the researcher’s ability to discover the true shape of reality.

Methods involve the precise measurement of variables and the collection of data under standardised conditions from a randomly selected sample.

Underlying philosophy – Logical

positivism and radical behaviourism. Strengths Can provide wide coverage of the range

of situations. Can be fast and economical.

Weaknesses Seldom deviates from the research plan. Methods used tend to be inflexible and

artificial. Quantification is not the appropriate

method for all research situations – primarily pertaining to answering certain questions dealing with culture or certain ways of life.

In effect, is incapable of dealing with ‘reality’ in all its complexity.

Note: This table synthesises notions from Kerlinger and Lee (2000), Amaratunga et. al.

(2002), Pernice (1996), Sampson (1991), Heppner, Kivlighan, and Wampold (1992), Davies

(2003).

45

In-depth interviewing – usually conversational rather than structured but with

a purpose,

Case studies – occurs for an in-depth contextual analysis of a few events or

conditions and to generalise on that basis,

Document analysis – to evaluate historical or contemporary confidential or

public records, reports, government documents, and opinions,

Projective techniques and psychological testing – includes projective

measures, games, or role-playing.

Cooper and Schindler (2001) further state that in combining these approaches, four

main techniques emerge with wide applicability. These are:

Secondary data analysis – pertains to re-analysis of data and reports of prior

research studies. Advantages lie in (i) identifying methodologies that proved

successful or unsuccessful, (ii) being a rich source of hypotheses, (iii) refocussing

on solutions that belied recognition due to different environmental circumstances.

This approach is limited by the creative thinking of the researcher and by the

temptation of duplication in instances when prior collected data can provide

sufficient information for solution to the present research problem. Also various

work or data may be proprietary to a given organisation and thereby not available.

Experience surveys – seek to unearth new ideas on important issues or aspects of

the subject and discover what is important across the subject’s range of

knowledge. Strength of this method lie in profiting from information provided by

‘persons experienced in the area of study, tapping into their collective memories

and experiences’ (op. cit., p. 141).

Focus groups – Primary advantage of this research tool is its ability to quickly and

inexpensively grasp the core issues of a topic. Focus groups are brief and

extremely flexible with a chance to observe reactions among participants to the

research questions in an open-ended group setting. Participants often respond in

their own words, rather than force-fit into a formalised structure and this enables

the ‘exploration of surprise information and new ideas’ (op. cit., p. 145).

However, the method’s disadvantage lies in its weak effectiveness with limited

sampling accuracy.

Two-stage designs – This approach aims at exploring limited objectives in the first

stage that helps in (i) clearly defining the research question and is subsequently

46

followed by (ii) developing the research design. Such an approach is helpful in

circumstances where the research budget is inflexible, operating in an unknown

area, problem not identified before effort and resources are committed. It is aimed

at specific issues with modest cost consideration and with efforts directed at

uncovering relevant information.

In an effort to distinguish the similarities and differences across the three sugar

producing economies, in regard to the research problem of this study, it is imperative

to understand and differentiate between characteristics that are socially, culturally and

politically specific and that are universal in nature. In such an exploration,

comparative study is identified to be most appropriate for this research.

3.4 Comparative Study

Winter and Prohaska (1983, pp. 418-419) state that where there is a study of a

complex subject described as ‘“a multiplicity of operating conditions, a confounding

of their influences on the dependent variable, and an indeterminacy regarding the

effect of any one condition or several conditions in combination” (quote attributed to

Smelser, 1967 by the authors)’, the prescription for examining these complex

problems often includes ‘some form of comparative analysis’. Winter and Prohaska

see the comparative method as ‘essentially a search for similarities and differences

that will explain relationships between objects, issues and the like’. They highlight the

significance of this research method by remarking that ‘it is more than an approach

describing the focus of the research interest, but amounts to a form of measurement in

itself’. The authors further add that this method helps to draw systematic comparative

illustrations which can lead on to explanatory relationships.

Hantrais (1996) dwells on the fact that research that transgresses national boundaries

progressively takes account of socio-cultural settings and comparative research

methods have long been used ‘in an attempt to identify and illuminate similarities and

differences’ across societies and nations. Hantrais (1996) further asserts that

‘comparisons can lead to fresh, exciting insights and a deeper understanding of issues

that are of central concern in different countries’ and in the process ‘may also help to

sharpen the focus of analysis of the subject under study by suggesting new

perspectives’.

47

The perplexing nature of the research problem and the search for insights into the

phenomenon of competitiveness in international business has resulted in choosing

comparative analysis for this research. This methodological approach will aid in the

complex process of making inferences about the meaning and usefulness of observed

national differences. It is important to know to what extent the institutional context at

various levels, shaped by cultural, social, and political issues, influences the behaviour

of firms and to what extent characteristics of firms themselves or their immediate

environmental conditions are responsible for their behaviour in international business.

This comparative study will help to understand the macro level by comparing

differences in the institutional context and this result in explanatory observations at

the micro level, the behaviour of the nation-bound firms.

3.5 Methods Used

Linkages between the country-specific resources, firm-specific resources, competitive

strategy, and the external environment can be understood by examining the concerns

and needs at the national, industry and firm-level for the sugar industry in Australia,

Brazil, and the European Union (EU).

In this context, the techniques used for comprehensive investigation are SWOT

analysis (strengths, weaknesses, opportunities, and threats), PESTLE analysis

(political, economic, social, technological, legal, environmental/ethical), and Porter’s

home-country diamond model analysis.

The SWOT analysis will focus on the comparative advantages and disadvantages in

resources. These are synonymous to strengths and weakness respectively and generate

cost and differentiation advantages and disadvantages in competitive product markets

(Valentin, 2001). Also, the unique bundle of resources, that a firm possesses (in the

RBV perspective), identifies internal factors and ascertains the manner in which the

firm can respond to external circumstances offering opportunities and/or threats.

However, the external environment of the firm encompasses the whole range of

external factors, as cast by the PESTLE classification for instance, that impact on a

firm’s manner and decision making strategy, and its performance (Grant, 2002).

Supplementary to this, Grant (2002) states that ‘for most strategy decisions, the core

48

of the firm’s external environment is its industry’ alluding to strategy as a link

between the firm and the industry.

While affirming that the core of the firm’s business environment is formed by its

industry environment, Grant (2002) also draws attention to the macro-level factors

that may be critical determinants of threats and opportunities that a firm can face. So

in order to have a better understanding of the environment outside the industry (that

influences the industry and the corresponding firms) a macro-environmental analysis

through PESTLE is also undertaken.

Issues of linkages are also important. Further analysis and more comprehensive

treatment of the various links that influence competition is sought through Porter’s

‘diamond’. Application of Porter’s ‘diamond’ model to sugar is appropriate owing to

its inclusion and examination of ‘non-price determinants’ of competitiveness. Such

considerations are needed when the world sugar price has little bearing on the

performance of the firms, reflecting the identity and the embedded advantages found

in their respective nations.

3.6 Summary

This chapter demonstrates the relevance of the methodological approach that is taken

in this research. The complexity of the research problem and the research situation in

the ‘real’ world needs to be understood not in economic terms alone, but also through

the social, political, and cultural constructions for a holistic picture. The qualitative

method will explain, illuminate, and interpret the various interacting effects that lead

to international competitiveness. To augment this methodological approach, the

comparative analysis will seek to concentrate on the contrasts and similarities between

nations and economies in a comparative context of varying socio-political points of

view.

The next chapter deals with the current state of the sugar industry in Australia, Brazil,

and the European Union and the regulatory framework of the production and

marketing regimes as existing in the three economies.

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Chapter 4

World Sugar Production and Marketing Regimes

This chapter investigates how, in pursuit of international competitiveness, different

nations have fashioned different regimes with various implications for firms, industry,

and the global market. The first section of the chapter provides some background

information on the world sugar industry as context for a detailed insight into the

characteristics of each regime that currently exists.

The goals of this chapter are:

• To understand the current state of world sugar trade (Section 4.1).

• To understand that the extent to which the domestic industry is exposed to the

global market with various implications for the firms, industry, and nations

(Section 4.2).

• To recognise that national governments create production and marketing

regimes to pursue various objectives (Section 4.3).

The materials positioned in this chapter:

• Provide a knowledge of the different policy approaches that are pursued in the

three dominant sugar exporters in the world.

• Help to understand the extent and the form of government policies that

influence the respective economies of the sugar producing nations.

• Provide knowledge of the various objectives towards which each nation aims.

4.1 Introduction

The Food and Agricultural Organisation (FAO) reports that 133 countries produce

sugar. Rabobank International (1999) reports that ‘the worldwide sugar and

sweeteners market is valued at more than US$ 67 billion. Sugar dominates this market

with a share of 83%’ and consequently the world sugar industry is important to the

world economy.

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Sugar is the conventional name for sucrose, which is extracted commercially from

two plant sources, sugar beet and sugarcane. ‘Sugarcane accounts for 70% and sugar

beet for 30% of sugar production throughout the world’ (Vidal, 2000). Chemically,

both types of sugars are identical and consist of 99.9% sucrose. The largest sugarcane

producers are Australia, Brazil, Cuba, India, Indonesia, Mexico, South Africa, and

Thailand. The largest sugar beet producing countries are the EU, Canada, Algeria,

Turkey and Poland. Other countries such as China, the USA, Japan and Egypt

produce both beet and cane sugar.

Most sugar produced in the world is consumed domestically, and the residual is sold

on the world market. The worldwide average sugar consumption – as per statistics

released by Rabobank International (1999) is 21 kilos per capita, but this varies

considerably by region and continent. Sugar consumption in Brazil has grown to 55

kilos per capita in comparison to 6.5 kilos per capita in China. On the basis of the

current trends, world sugar consumption is expected to increase to more than 135

million tonnes by 2003/2004.

The Australian Bureau of Agricultural and Resource Economics (ABARE, 1999)

reports that an important feature of the bulk trade in sugar is that it is internationally

traded in both raw and white (refined) forms. Furthermore, though the majority of

sugar imports in recent years have been in raw form, nearly all consumption is in the

form of white sugar. Imports of raw sugar constitute an important feedstock for

refineries in a number of countries. Sugar can be divided into three product

categories: white granulated sugar, liquid sugars and specialty sugars. Industrial users

of sugar are the food processing industry, and the chemical and the pharmaceutical

industry.

The export of sugar is dominated by Brazil, the European Union, Australia, Thailand

and Cuba, which together account for 65% of sugar exports. The majority of the

world’s raw sugar imports are dominated by – the European Union, Russia, the

United States, South Korea, Canada and Malaysia and the major importers of white

sugar are Indonesia, Russia, and some African and Middle East countries. The export

of raw sugar takes place from the cane producing countries while that of white sugar

51

(refined) from the beet producing region. Less than 30% of world sugar production is

traded internationally. A proportion of this trade takes place under bilateral long-term

agreements or preferential terms. Around 20% of world sugar is traded freely. The

world sugar market is characterised by long-term growth in production and

consumption of almost 2% per annum. However, production, which is often

controlled or influenced by government policy decisions, is more volatile than

consumption. World sugar prices are very unstable.

Sugar is one of the most regulated food commodities of the world. The world sugar

market is heavily influenced by domestic government policies of many countries

leading to distortions in the world sugar trade. The main directions of the sugar

policies in the developed economies are towards maintenance of farm incomes,

industry expansion, and safeguards from unstable price cycle. Additionally, sugar

industries, especially in the developed economies, have historically been isolated from

volatilities in the world sugar market through the use of import restrictions. The

extremely volatile prices on free markets of world sugar reflect the recurring

supply/demand imbalances (Borrell and Pearce, 1999). Besides these considerations,

in the developing economies domestic government policies are directed at earning

and/or conserving foreign exchange. The impact of all these policies on the world

sugar market is to increase the volatility of the price and also the variability in

production and supply.

The sugar trade is characterised by protected markets, special trade arrangements and

volatile prices. At the same time however, the market for freely traded sugar is large

and deep compared with other agricultural commodities. However, liberalisation has

not been a priority. Sugar is thus excluded from many regional free trade agreements

like the Australia-US FTA or it is given special treatment (Canada/US, South

Africa/Swaziland). Sugar has also been excluded from the US “Freedom to Farm

Act”, which introduces deregulation of American agriculture.

In summarising the policies and practices affecting world sugar trade, we have the

situation as shown in Table 4.1:

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4.2 Current State

In the world of sugar, where the policies followed by various countries have various

objectives, the current situation is studied through consideration of production and

exporting regimes of Australia, Brazil, and the European Union (EU).

4.2.1 Australia

The Australian sugar industry produced 5.35 million tonnes of raw and refined sugar

from sugarcane in the year 2002/03. Typically, it produces only 4% of world sugar

supply. It exports approximately 12% of the sugar traded worldwide (SRDC, 2002).

Australia is exceptional among sugar producing countries as it exports around three

quarters of its sugar production. So, in effect, the domestic prices get associated with

world prices and therefore the viability of the industry depends largely on the

conditions and prices prevailing in the world market for sugar.

Sugar is Australia’s second largest export crop and Queensland’s largest rural

commodity and is a major contributor to the Australian economy (SRI, 2002). It’s a

substantial foreign exchange earner (APSRU, 2004) and is also instrumental in

generating additional revenues for the allied sectors of the economy (Sugar Industry

Submission, 1999).

53

Sugarcane is produced on the coastal plains and river valleys along 2100 kilometres

of the eastern coastline between Mossman and the Atherton Tableland in Northern

Queensland to Grafton in Northern New South Wales and in the Ord River region of

Western Australia. Australia has over 545 000 hectares (ha) devoted to cane growing

of which the sugarcane area in Queensland now exceeds 508 000ha. Cane fields

represent 20% of Queensland’s total crop area (SRI, 2002).

Raw sugar is produced from sugarcane in three Australian states: almost 95% in

Queensland, around 5% in New South Wales (NSW) and 0.7% in Western Australia

(WA). There are 26 raw sugar mills in Queensland (including one mill that processes

sugarcane to syrup stage only), three in NSW and one in WA.

Australia is currently one of the world’s largest exporters of raw sugar, with

Queensland exporting about 80 to 85% of its total raw sugar production. Almost

100% of raw sugar exports originate in Queensland. Australia also exports refined

sugar. Currently there are four sugar refineries in Australia, two in Queensland

(Mackay and Bundaberg), one in New South Wales (Harwood), and one in Victoria

(Melbourne). The remaining 15%-20% of raw sugar production is refined for

domestic consumption and export. The establishment of additional refinery capacity

has increased competition in this segment of the market over recent years. Exports of

white sugar have also increased as a result of this increased capacity.

Accompanying the considerable expansion in the Australian sugar industry are the

government deregulation policies – especially the reduction of central controls on

areas planted and the removal of import tariffs on sugar. Australia advocated the

cause of world agricultural trade reform at the Uruguay Round and in the

circumstances introduced a number of reforms in its own economy. This has led to a

situation where Australian cane growers do not enjoy the protective subsidies and

price support as enjoyed by their European counterparts.

4.2.2 Brazil

Brazil is among the world leaders in the production of sugarcane, sugar, and ethanol

(fuel alcohol). In addition, its producers are among the most efficient of all major

sugar producers. Brazil’s production of sugarcane reached 321 million metric tonnes

54

and produced 23.7 million tonnes of sugar and 12.6 billion litres of ethanol

(anhydrous and hydrated) in the marketing year 2002/03. Its export of sugar alone is

in the range of 8-9 million metric tonnes. Its foreign exchange earnings through

exports are around US$ 2 billion. Sugar directly employs 1.5 million people. Brazil

produces 60% of the world ethanol production made from sugarcane and has

important challenges. It is used in the country as an alternative fuel (to gasoline),

being more environmental friendly and renewable.

For Brazil, sugarcane is important for job generation. It is a very powerful commodity

that can be exported, generating credits for the Brazilian trade balance. The oil crisis

of the 1970s created a need for self-sufficiency and import substitution of oil. Brazil

was innovative by turning to biomass of sugarcane as an alternative energy source and

began developing its ethanol industry, mostly through government support and

control. The country also produces and exports a diverse number of sugar products.

Brazil vies with India to be the world’s largest producer of raw sugar. Since Brazil

can produce either sugar or ethanol from sugarcane, it is one of the few countries that

can adjust sugar production rapidly to take advantage of potential world sugar (or oil)

shortfalls and high international prices.

With the fifth largest world population and a long tradition of high per capita sugar

consumption, Brazil is one of the world’s largest consumers of sugar. Brazil ranks

fifth as a sugar-consuming nation, with annual consumption measured at 9.45 million

tonnes. Per capita consumption is about 50 kilograms of sugar per year and has

increased nearly 10% in recent years as more sugar is used in processed products.

Consumption of sugar largely reflects Brazil’s population growth. Food

manufacturers, including those that produce carbonated drinks, chocolate, ice-cream,

crackers, and pasta (massas) account for approximately 35 to 45 percent of domestic

sugar consumption. The remaining 55 to 65 percent is direct consumption. Given the

economic importance of sugar in the national diet, the Brazilian Government has

regularly given priority to the industry to ensure that production is sufficient to cover

consumers’ needs. Sugar for export, while vital to the national economy, has been

secondary. (Bolling and Suarez, 2001)

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There are major factors that make Brazil a strong competitor in the world sugar

market including:

In 1999, freight rates fell in the wake of the Asian financial meltdown,

making shipping to distant Asian markets such as South Korea, Malaysia, and

Indonesia more attractive.

The continued devaluation of its floating currency increases the attractiveness

of Brazilian sugar.

Brazil is enhancing its export ability by improving transportation and loading

facilities. This has reduced costs and speeded up the flow of exports to the

world market.

Brazil is the second largest quota holder to the US market and ships that US

sugar quota from the northern ports of Maceio and Recife.

4.2.3 The European Union (EU)

The European sugar industry produces around 18 to 19 million tonnes of sugar

annually from sugar beet and imports over 1.3 million tonnes of white sugar

equivalent from third world countries in Asia, the Caribbean and Pacific. This level of

production puts the EU among the world’s leading sugar producers and at the same

time accounts for around 19% of the internationally traded sugar. About a million

people are involved in the European sugar industry, of whom there are 335,000 beet-

growers and 52,000 employees in the sugar manufacturing industry.

The sugar industry forms an integral part of the rural economy. Two million hectares

are given over to sugar-beet growing on generally medium-sized farms (CEFS, 2002).

France and Germany account for about 50% of the total EU sugar production. In the

EU, practically all sugar – 98% of total production – comes from sugar beet (Vidal,

2000).

In this world’s largest beet sugar producing area, the Common Agriculture Policy

(CAP) is protective in nature and provides high incomes for its farmers. Rabobank

International (2002) reports that the current EU sugar policy is founded on three key

principles:

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i) production quotas and guaranteed price to regulate the sale of

sugar;

ii) a system of intervention buying and export restitutions to maintain

a high internal price; and

iii) tariff-rate quotas and import tariffs to restrict imports in terms of

country of origin and volume.

The basic tools of the EU’s sugar policies are:

(1) Internal support prices that ensure returns to producers for fixed quantities of

production and permit the maintenance of refining capacity:

This is done through the mechanism of ‘target’ and ‘intervention’ prices for refined

sugar.

The target price is fixed only for white sugar of a standard quality, and is

applicable to bulk sugar, ex-factory and free-on-board purchaser’s transport

and is also, on average, the price the EU considers growers should obtain for

sugar.

The intervention price applies for the processed product (white sugar) and is

set at 95% of the target price and is also the price at which the national

intervention agencies will buy all Union-produced sugar that is required to be

purchased.

Intervention price differs among the EU members depending on the production

conditions and transport costs. Intervention prices have been substantially above the

world market prices.

(2) Production Quota System:

Each EU member state is allocated a quota under which the quantity produced is

supported by a three-tier pricing system.

Every EU member is allocated a base quantity of refined sugar.

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The A-quota, on which the full intervention price is paid. This A-sugar

(produced within the A-quota) is subjected to a maximum levy of 2% of the

basic beet price.

The B-sugar is subjected to higher levies.

Together, the ‘A’ and ‘B’ quotas make up what is termed the ‘maximum’

quota.

Any sugar which is produced outside the sum of total A and B quotas is

referred to as ‘C’-sugar.

According to the EU legislation, C-sugar must be sold on the world market

without export subsidies or carried over to the following marketing year. To

ensure that the ‘C’ production is exported, a time limit is applied. It has to be

sold on the world markets ‘before January 1 following the end of the

marketing year’ in which it was produced with the exception that processors

are allowed to carry over a quantity of sugar, up to a maximum equal to 20%

of their A quota into the following production year.

(3) Export Subsidies/Import Controls:

The EU’s production of A and B quota sugar exceeds domestic consumption,

and then this excess production is exported. When world prices are less than

the EU support prices, an export subsidy is granted to make EU sugar

competitive on the world market. When the price level in the EU is lower than

the world market, EU sugar is subjected to an export levy in order to ensure

adequate supply to the domestic market.

All of the EU’s imports form part of a ‘preferential system’ aimed at helping

the least developed countries in the African-Caribbean-Pacific zone by

bringing an essential market within their reach. However, protection against

imports is provided through system of import levies and ‘threshold’ prices.

Table 4.2 provides a comparison of the current situations of the sugar industry in

Australia, Brazil and the European Union. Details of production and marketing

regimes are then next discussed.

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Table 4.2: Comparison of Current Sugar Industry Situations in Australia, Brazil, and the EU Australia Brazil European Union

Supply Produces raw & refined sugar from sugarcane. Produces around 4% of world sugar supply and exports around 12% of world traded sugar. Exports around 75% of its production. Second largest export crop and Queensland’s largest rural commodity. Sugarcane is produced along 2100kms coastal line in Northern Queensland & in W.Australia. Over 545,000 ha devoted to cane growing of which over 508,000 ha is in Queensland – 20% of total crop area in Queensland.

Among the world leaders in production of

sugarcane, sugar, and ethanol (fuel alcohol).

Among the most efficient sugar producers in the world.

Industry produces around 18-19 mt of sugar from sugar beet – accounting for around 19% of internationally traded sugar – putting EU among the world’s leading sugar producers. About a million people are involved in the sugar industry of which 335,000 are beet-growers and 52, 000 employed in sugar manufacturing. Sugar Industry forms an integral part of the rural economy.

Position Raw sugar is produced in 3 states – Queensland (around 95%), NSW (around 5%), WA (0.7%). There are 26 mills in Queensland, 3 in NSW, and one in WA. Queensland exports 80-85% of its raw sugar production and 100% of Australia’s raw sugar export. 15-20% of remaining raw sugar is refined for domestic market and exports. Sugar refineries – 2 in Queensland, 1 in NSW, & 1 in Victoria.

Brazil enjoys: Flexibility due to its natural resources and

capability to adjust sugar production rapidly as per the world market demand.

Continued devaluation of its currency that increases the attractiveness of sugar exports.

Second largest quota holder to US market. Enhancing infrastructure facilities to further

reduce costs and speed up export flow to world market.

Fall in international freight rates as a result of Asian financial crisis has facilitated exports to far away destinations like Malaysia, South Korea, and Indonesia.

CAP that is protective in nature and provides high incomes for its farmers regulates the sugar industry, in the world’s largest beet sugar producing area. Sugar policy is founded on 3 key principles: Production quotas & guaranteed price to

regulate the sale of sugar; A system of intervention buying and export

restitutions to maintain a high internal price; Tariff-rate quotas & import tariffs to restrict

imports in terms of country of origin and volume.

Regime Sugar industry in Queensland is regulated by the Sugar Industry Act 1999 and amended by the Sugar Industry Reform Act 2004 (the various provisions of the Reform Act are to take effect in future years) The sugar industry is largely characterised by the government deregulation policies – especially in the reduction of central controls on areas planted and removal of import tariffs on sugar.

The regulatory framework is governed by: Control on ethanol-petrol mix, Control on ethanol imports.

The basic tools of the EU sugar policies are: Internal support prices ensure returns to

producers for fixed production quantities and permit maintenance of refining capacity done through the ‘target’ and ‘intervention’ prices.

Each EU member is allocated a ‘quota’- A, B, & C - under which the quantity produced is supported by a three-tier pricing system.

Production in excess of A & B quota is exported.

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4.3 Production and Marketing Regimes

In the world of sugar, a wide disparity of policy approaches characterises the major producing and exporting countries. Development of existing policies that have shaped the prevailing sugar industries of Australia, Brazil and the EU is studied.

4.3.1 Australia

About 95% of Australia’s sugar is produced in Queensland. Before Australia reformed its sugar policies, it maintained stringent production and marketing controls. Reforms began in 1989-90, when an import tariff replaced the import ban. The Australian and Queensland Governments reviewed the country’s sugar policy in 1996. As a result of this review, the federal government eliminated import tariffs in July 1997.

The regulatory framework for the Queensland sugar industry is established primarily by the Sugar Industry Act 1999. In 2000, the Act was amended to allow for the transfer of bulk sugar terminals to industry ownership and for the creation of an industry-owned marketing company to replace the previous statutory marketing authority. (Hildebrand Report, 2002, Appendix B)

The stated principal objective of The Sugar Industry Act 1999 is

To facilitate an internationally competitive, export oriented sugar industry based on sustainable production that benefits those involved in the industry and the wider community.

The Act seeks to achieve this objective through establishing a series of frameworks

relating to the operation of the industry. These frameworks are for:

Negotiation of contracts for cane supply and processing between farmers and

millers;

Sustainable resource management; and

Marketing of raw sugar.

Subsequent legislation, the Sugar Industry Reform Act 2004, which varies this

framework in ways which are as yet unclear. The various elements of the new

legislation are to take effect in subsequent future years (like in the year 2005 and

2006). The Sugar Industry Act 1999 will suffice for current purposes.

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Table 4.3: Framework under the Sugar Industry Act 1999 Negotiation of Contracts Sustainable Resource Management Marketing of Raw Sugar

Farmers and millers can negotiate the supply and processing of cane either collectively or individually. The Act establishes this process with the following stated objectives: The enhancement of profit for both farmers

and millers; To set out the minimum necessary subject

matters for inclusion in the agreement like matters on harvesting, delivery to the mill, transport and handling, acceptance and crushing by the mill and payment by mill owner for cane;

Farmers and millers can include any other terms in order to develop an agreement that suits their needs;

To ensure access to the mill on equitable basis, an individual farmer is able to bargain directly with the mill for cane supply (with no significant adverse effect on other farmers);

The setting of prices for cane; Deciding on how the proceeds from the sale of

raw sugar are divided between farmers and millers;

Quality program for each mill area is required to facilitate management of sugar quality to meet customers’ requirements;

Mechanisms for dispute resolution and for mediation allows for bargaining, in the context of interdependence between parties to the agreement and to examine issues of quality.

The Act establishes the use of land for cane growing be regulated to match the supply and demand for cane in a given mill area, with the intent of ensuring: Sustainable production; and Optimum efficient use of milling capacity.

To supply a mill, a farmer must have a cane production area (CPA), measured in a certain number of hectares of land under cane. The CPA is linked to a particular mill. Mill viability is a closely linked to a minimum throughput. It also aims to provide certainty for farmers by guaranteeing that their cane will be crushed. The framework for land use is intended to assist sustainability and contribute to mill viability and optimum use of crushing capacity. CPAs are a form of property, and can be sold, leased and otherwise dealt with. CPAs can be transferred between mills, subject to certain conditions, which operate to ensure the viability is not threatened. The Cane Production Board (a small, part-time statutory body of farmers and mill nominated members) handles the administration of CPAs. One key function of the Board is to make guidelines about land use, the environment and transport in relation to applications of grants of CPA or increase in size of CPA with the aim to manage the sustainable production of cane.

The Act vests all raw sugar in Queensland Sugar Limited (QSL). QSL markets this production on both the domestic and world market on behalf of industry. QSL acquires the raw sugar (“vesting”), which is commonly known as the ‘single desk’. The proceeds of the sale of raw sugar are returned by QSL to mills, less QSLK marketing costs, on the basis of payment schemes negotiated between QSL and the mills. There is in turn a agreed contractual split of the proceeds between each mill and its farmers. Under the Act, QSL has the power to direct mills to produce certain brands of sugar. It is noted that the kinds of sugar produced are generally subject to commercial negotiation between the parties. QSL is an industry-owned corporation, the privatised successor to the statutory Queensland Sugar Corporation (QSC). A government regulator, the Sugar Authority oversees the vesting operations of QSL. Currently the Sugar Industry Commissioner, a statutory appointee, functions as the Authority.

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4.3.2 Brazil

Brazil exports both raw and refined sugar, as well as ethanol produced by processing

sugarcane. While Brazil is the largest producer of raw and refined sugar in the world,

a large portion of sugarcane production in Brazil goes towards the production of

ethanol – the fuel (anhydrous and hydrous) alcohol. Anhydrous alcohol in Brazil is

used to blend with gasoline as mandated by the Brazilian government. Hydrous

alcohol in Brazil is used as fuel for vehicles that are powered by 100% alcohol though

the number of vehicles powered by hydrous alcohol gas has declined sharply over

recent years. Brazil exports between 0.5 and 1.0 billion litres of ethanol per year.

There has been three-fold increase in the efficiency of ethanol produced from

sugarcane from the year 1975.

Brazil’s history has been that of an agro-exporting nation. The oil crisis of the 1970s

worsened their terms of trade. This led Brazil to reorient their commodities producing

abilities towards exporting and earning foreign exchange. However, Brazil’s drive for

modernisation and growth in agriculture resulted in their borrowing from international

institutions. This caused further financial distress and the ever-increasing need to

export commodities. Such economic conditions resulted in the creation of the

government program PROALCOOL in 1975 to promote domestic production of fuel

alcohol from sugarcane production. This resulted in:

The creation of a ‘home-grown’ technology,

The efficient utilisation of sugarcane,

Import-substitution of oil, and

Conservation of scarce foreign exchange.

During the 1970s and 1980s, sugarcane production received considerable government

support under PROALCOOL. Government policies affecting sugarcane production

and use of ethanol were the main determinants of growth in sugar output and exports.

Since 1998, there have been some policy changes that have affected the Brazilian

sugar sector such as:

A common external tariff of 20% on sugar imports was established in 2001,

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Imports of ethanol are taxed at 30%.

Such policies ensure that sugar and ethanol producers receive a higher price for their

product, without facing competition from other low-cost exporters on the domestic

market. However, there is no tax on intra-zone trade of ethanol for MERCOSUR (the

regional trading block created by Argentina, Brazil, Paraguay, and Uruguay). Finally,

there still remains a support mechanism that compensates for sugarcane-cost

differentials across regions that is well under the “de minimis” clause of the WTO

agricultural agreement.

The production environment of sugarcane in Brazil and the beneficial utilisation of

sugarcane in the Fuel Ethanol Program stem from some of the crucial factors that are

developing and shaping the commercial viability of the fuel ethanol production.

The ethanol market today still profits and gains from a captive market of

anhydrous alcohol as mandated by a gasoline/ethanol blending ratio, and

The prices of this fuel alcohol is to a great extent determined by the market.

The commercial viability of ethanol from sugar crops depends on the

following key factors (Banerjee and McGovern, 2003):

o The price of sugar in relation to ethanol.

• The relative ex-mill prices of ethanol and sugar in Brazil are a key

determinant of the volume of sugar that Brazil produces for export

to the world market.

o The price of crude oil and the ethanol production costs.

• Despite technological advances in bio fuel/ethanol production

process that helped in lowering the production cost, the cost of bio

fuels production has typically been higher than the world market

price for gasoline.

Summarily, the production of sugarcane, sugar and ethanol in Brazil is intricately

intertwined with a direct and indirect role (through the fuel-alcohol ratio) of the

government that has bearing on the production of sugar.

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4.3.3 The European Union (EU)

The policies that govern the EU sugar regime have helped nurture the region to become a formidable force in the global sugar market. The Swedish Competition Authority Report (2002) on the present production and trade in sugar states:

The common organization of the markets in the sugar sector (CMO Sugar) is one of the components of the Common Agriculture policy (CAP) of the European Union. The CAP was put in place in 1962, and the CMO Sugar has been in place since 1967. While most of the regulations regarding other products covered by the CAP have been subject to reforms over the years, CMO Sugar has remained almost intact since it came into force.

The EC Treaty contains both rules or the safeguarding of competition on the different EU markets, and rules establishing and governing production and trade in the agricultural sector. When a market is covered by the Common Agricultural Policy, EC competition rules do not necessarily apply to anti-competitive agreements between undertakings. The intervention price and quota system under CMO Sugar has in principle such anti-competitive features which since they are incorporated into the CMO Sugar cannot be tackled by either national or competition law in EU.

The main objectives of the CAP are:

• to increase productivity, • to ensure a fair living standard for the agricultural society, • to stabilise markets, • to ensure the availability of supplies and • to ensure that supplies reach consumers at reasonable prices.

The complexity of the EU sugar regime in order to implement the CAP objectives is summarised below and its characteristics are encapsulated in six main components as shown in Table 4.4:

A. Production Quota System B. Price Guarantees C. Trade Regimes D. Storage Cost Equalisation Scheme – Reimbursement fixed at level necessary to

cover stock financing costs, insurance and rent. E. Self-Financing Regime – Production levies are charged as a means of recouping

for the EU budget the entire cost refunds on sugar exports to the world market. F. Refining Regime.

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The Swedish Competition Authority Report (2002) mentions that the CMO Sugar pursue the five objectives of the CAP through implementation of the following main supportive elements.

Institutional support prices, such as the intervention price, the basic beet price and the minimum beet price. These support prices guarantee a certain level of income for the sugar beet growers and for the sugar producing industry;

Intervention purchases, either by the member states’ intervention agencies, or by the EU Commission;

Production quotas and levies, regulating both the total EU quality of sugar production and the quantity of sugar production in each sugar producing member state;

Export refunds, safeguarding that sugar producers/exporters receive a guaranteed price for exported sugar if the world market sugar price is lower than the EU intervention price;

Import duties and preferential imports, safeguards on the one hand that the price for imported sugar is not lower than the EU sugar price, and on the other hand that sugar imported from certain countries receive a preferential status. It also provides for “special preferential” treatment in relation to some countries.

Production refunds for the chemical and pharmaceutical industries, compensating these industries for the high sugar prices in their competition with such industries outside the European Union.

The EU sugar regime, in respect to the above, however, has ensured that:

• the mechanism of target and intervention prices exists, intervention buying does not apply to the farm products (sugar beet or sugarcane), but to the products as processed (raw or white sugar) as sugar beet and cane sugar are not storeable.

• EU support is not open-ended, but is restricted to production within quota. • The principle of “co-responsibility” has been applied most fully to the sugar

regime. Sugar producers (growers and processors jointly) are responsible for paying (through their producer levies) the full costs to the EU budget of disposing of surplus quota sugar.

• There is guaranteed access to the EU market for a significant quantity of Third Country sugar, principally from ACP countries associated with the EU by the Lome Convention.

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4.4 Summary

This chapter has focused on the wide disparity of policy approaches in the three main

producing, consuming, and exporting economies of sugar with various objectives –

increasing technical efficiency (in Australia), increasing efficiency through harnessing

the natural resources (in Brazil), and increasing income and improving social welfare

for domestic producers (EU).

The critical features that characterises the production and marketing sugar regime in

the European Union are production quotas and export subsidies well supported by

import and tariff quotas. This differs from the policy of controls on ethanol-petrol mix

and ethanol imports as practised in Brazil. In Australia, a markedly different policy of

deregulation in the domestic market through ‘single desk’ selling is considered to be

the prime motivation towards increasing the ability and desire to compete and be

more successful.

In this context it is worthwhile to focus on the concept of competitiveness drawn in

Section 1.1.1 and how markedly it differs from the OECD definition of national

competitiveness (Section 2.2.4) that is further examined in Section 5.3 (and Appendix

B).

The extent and form of the government policies that stem from the varied notion of

competitiveness has a profound impact on the world sugar trade. Such policies have

created situations ranging from producers being insulated and sheltered from the

world market by high import quotas and duties while being paid well above the world

prices while in other countries, the producers and consumers are exposed directly to

the global market.

Table 4.5 summarises the salient features of the framework as exist in the three main

sugar production and marketing regimes of the world.

The next chapter of this dissertation reflects and analyses the various internal and

external environments in the regimes considered. This will help in developing the

elements of the framework related to competitiveness in sugar.

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Table 4.5: Summary of Production and Marketing Regimes Australia Brazil European Union

The regulatory framework for Queensland sugar industry (that account for 95% of Australia’s production) is established primarily by the Sugar Industry Act 1999. In 2000, the Act was amended for the creation of industry-owned marketing company and to allow for transfer of bulk sugar terminals to industry ownership. The Act established a series of frameworks relating to the operation of the industry: Negotiation of contracts for cane supply and

processing between farmers and millers. Farmers & millers can negotiate collectively or

individually for enhancement of profit; Set out minimum subject matters like delivery to mill,

harvesting, transport & handling, acceptance & crushing by mill, payment by mill owner for cane or terms to suit needs.

To ensure access to mill on equitable basis and setting of prices for cane.

Deciding how proceeds from raw sugar sale are divided between farmers & millers.

Quality – requiring each mill area to have quality program.

Dispute resolution mechanism and for mediation that allows for bargaining.

Sustainable resource management. Act regulates the use of land for cane growing to match

supply and demand for cane in a given mill area for (i) sustainable production and (ii) optimum efficient use of milling

capacity. Marketing of raw sugar. Act vests all raw sugar marketing in QSL - both

in domestic and world market.

Exports both raw & refined sugar as well as ethanol – fuel alcohol (anhydrous & hydrous) by processing a large portion of sugarcane production. Anhydrous alcohol is blended with gasoline as mandated by the government & hydrous alcohol used to run vehicles powered by 100% alcohol. Oil crisis of 1970s caused economic troubles and financial distress that resulted in creation of PROALCOOL program to promote domestic production of fuel alcohol to utilise the vast abundance of sugarcane production. This resulted: In creation of ‘home-grown’ technology, In efficient utilisation of sugarcane, In import-substitution of oil, and In conservation of scare foreign exchange.

A common external tariff of 20% on sugar imports established in 2001 and imports of ethanol taxed at 30%. Such policies lead to sugar & ethanol producers receiving higher prices for their products. The production environment of sugarcane that develop & shape the commercial viability of fuel ethanol production stems from crucial factors like: Ethanol market still profits & gains from a captive

market of anhydrous alcohol as mandated by gasoline/ethanol blending ratio,

Fuel alcohol prices, to a great extent, dominated by market,

Commercial viability of ethanol from sugar crops depends on:

Price of sugar in relation to ethanol; ♦ Relative ex-mill prices of ethanol & sugar are

a key determinant of the volume of sugar production for export market.

Price of crude oil and ethanol production costs.

CMO Sugar is one of the components of CAP that governs the sugar regime and nurtured the region to become a formidable force in global sugar market. The sugar regime is governed by CAP objectives:

To increase productivity, To ensure a fair living standard for the agricultural

society, To stabilise markets, To ensure the availability of supplies, and To ensure supplies reach consumers at reasonable

prices. The supportive elements are: Institutional support prices

Intervention price, Basic beet price, Minimum beet price

Intervention purchases Production quotas and levies Export refunds Import duties and preferential imports Production refunds.

Further details are in Table 4.4. However, The mechanisms of target & intervention prices do

not apply to the farm products – the sugar beet and cane.

EU support is not open-ended but is restricted to production within quota.

The principle of “co-responsibility” has been applied – where sugar producers (growers and processors jointly) are responsible for paying – through their producer levies – the full costs to EU budget of disposing surplus quota sugar.

There is guaranteed access to EU market for a significant sugar quantity from third country.

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Chapter 5

Analysing Firm, Industry and Environment

This chapter aims:

• To understand the effects government has on the functioning of the firms,

industry, and the environment (Sections 5.2, 5.3, and 5.4).

• To posit strategies that might be adopted (Section 5.2).

• To understand how firms and industry interact in their environment to gain

advantage (Sections 5.3 and 5.4).

The materials presented in this chapter:

• Identify the advantages and the disadvantages in terms of the resources and the

capabilities that each nation has inherited or created.

• State the characteristics of the environment in which the firms and the industry

function.

• Contribute to the understanding of the various factors of the competitive

framework in which a firm and an industry operates.

• Provide characteristics of the firm, the industry, and the nation in pursuit of

competitiveness.

Three analytical methods are applied to each of the three sugar nations:

SWOT (in Section 5.2) to focus on the different strategy options available,

PESTLE (in Section 5.3) to distinguish the institutional context and the regulatory

framework of each nation,

Porter’s home-country diamond analysis (in Section 5.4) to explore important

relationships between the competitive attributes at the firm, industry, and the

national level.

A preliminary rationale is provided in Section 5.1.

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5.1 RATIONALE

The segregation at the macro-level between the attributes of economic growth and those of ‘managed trade’ as created, aided, and abetted by governmental interventions, generate and activate forces acting in the opposite direction at the micro-level where competitive performance increasingly becomes a function of the ability and capability of firms to devise strategies to respond to the external environment. The framework used can portray a process in which competitiveness and other influences may converge to become interrelated forces driving firms and nations towards a competitive position, one of advantage in the international competition.

To articulate the objectives of each nation, this chapter focuses on the national, industry, and business characteristics. Three forms of analysis are used.

The SWOT analysis will determine the capabilities and deficiencies of the three nations regarding the proposed strategies. This also will position business in each nation and its potential market. How positions can change can be demonstrated.

The PESTLE analysis of the respective nations will provide understanding of the business environment that will relate to both the present and future.

Porter’s home-country diamond analysis will provide an understanding of the attributes that combine the effects of comparative advantage of nations to enhance the competitive advantages of the nation-bound firms.

These analyses will lead to a comprehensive understanding of the three main sugar producing and marketing regimes of the world.

5.2 SWOT Analysis Application and Inferences

In the light of the current state of sugar in Australia, Brazil, and the EU, a study of the existing internal resources and skills is undertaken. This will help to assess

the ability of these economies to establish priorities for the opportunities and threats that the present world sugar market represents, and

the ability of these economies to respond effectively to the evolving global economy.

Such an analysis will provide knowledge in the formulation of international strategies. Kogut (1985) opines that ‘the design of international strategies is based upon the interplay between the comparative advantages of countries and the competitive advantages of firms’ (p. 15).

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The detailed description of the various SWOT attributes is placed in Appendix A.

with a comparative snapshot of the analysis provided in Table 5.1. This analysis also

provides the various strategy options scenarios for Australia (in Table 5.2), Brazil

(Table 5.3), and the EU (Table 5.4). The tables used for this work have been adapted

from the TOWS matrix of Weihrich (1999) and the four strategies depicted are here

termed as aggressive, diversification, turn-around, and defensive.

The SWOT analysis exhibits the strengths and weaknesses that each sugar producing

economy has either inherited or created. As the nation-bound firms tend to acquire

the strengths and weaknesses of the environment they operate in, this analysis

provides valuable information on available strategy options.

In an economy dominated by market forces, the Australian sugar industry is the most

vulnerable of all other economies to the price variability of the world sugar prices.

Being exposed to the international market to the extent of around 80% of their

production, the strengths are relatively overshadowed by the constant threat of low

sugar prices in the world market. The SWOT reveals the industry comprising

primarily the millers and the refiners have acquired the strengths and the reputation of

being one of the most efficient, quality conscious, good knowledge of international

business, and highly mechanised. The industry strongly favours leveraging these

strong attributes into diversifying in related and unrelated activities to enhance its

economic well being.

The economic challenges that the Australian industry is facing is primarily two

pronged – firstly low return from the continual low sugar prices in the unstable world

market and secondly from the cane farmers depending solely for their survival on the

production of raw sugar and its realisation from the market. Consequently the

canegrowers seek turn-around and defensive strategy options. Government, though

tends to make amendments to appease canegrowers and the pressures of industry and

farmer representations, is vehemently on the path of free market policy. It has

aggressively taken the strategy option of making strong case against the EU sugar

subsidies at the WTO. A recent ruling of WTO (CNN, August 4, 2004) that EU sugar

subsidies have violated global trading rules has vindicated Australia’s stand.

However, the implication of this ruling on the world sugar trade is yet to be

understood. Within Australia, there is a contradiction in the strategy options that are

considered appropriate by the government, industry, and the canegrowers for a

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concerted approach to a viable solution of the present crisis. The top section of Table

5.5 provides an illustration of the strategy options considered in Australia.

The sugar industry of Brazil has the inherent weaknesses of a developing economy, but is protected to a certain extent from the world sugar market by its reliance on the domestic energy sector. Brazil’s natural resources in sugarcane production and its innovative and effective plans in the energy sector, remains a unique and long-term economic strength that overrides potential threats from the world sugar market. The SWOT directed strategy shows that Brazil has taken a path of diversification in the 1980s and 1990s from a defensive position of the 1970s that was owing to the economic distress of the world oil crisis.

The socio-economic-political imperatives to survive the crisis resulted in Brazil looking inward to harness its inherited abundant natural resources that are conducive to massive growing of sugarcane. This created the national bio-energy strategy that propelled Brazil to, not only tide over the oil-crisis of the 1970s, but also to become the biggest producer of ethanol and sugar. Today, Brazil is in such a position that it launched into an aggressive strategy of exporting it’s ‘home-grown’ technology of manufacturing fuel-alcohol from sugarcane, formulating policies that will attract foreign direct investments while simultaneously attacking the protective regime of EU sugar for a more fair competition in the world market of sugar. Table 5.5 indicates the movement of strategy options that Brazil has exercised to arrive at its current strategy option.

The EU sugar industry is comfortably placed in respect to an assured return on its production irrespective of the world market price. On one hand, the strength of the EU sugar industry lies in its consolidation, concentration, differentiation, diversification, and expansion within the EU. On the other hand its weakness lies in the subsidies and protection that it now enjoys within the EU sugar regime. Recognising this, EU sugar firms are designing strategies to counter the threat of liberalisation of the EU sugar regime. The EU sugar industry has grown to be formidable force in the world sugar market with strong support from the growers who are encouraged and protected by the EU sugar regime. Today, EU firms are pursuing a diversification strategy with signs of adopting aggressive posture in their behaviour in the light of their weaknesses and the imminent external threat with the recent ruling of WTO against EU sugar subsidies. This has been illustrated in the bottom part of Table 5.5.

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Table 5.1: Snapshot of SWOT Analysis Australia Brazil European UnionStrengths Good infrastructure.

Cost efficient – low production costs. Highly mechanised sugar industry in the world. Increased productivity – Recovery rate is highest in the world (around 90%). Good quality.

Vast natural resources remain long-term economic strength. World’s largest & most efficient producer of sugar. Cheap labour costs, but creates jobs. Concentrates around 60% of world ethanol production from sugar cane – an alternative to fuel. Sugar-alcohol & related industry has attracted FDI. Devaluation of currency increases exports.

EU firms have structured through concentration of production & economies of scale EU has highly regulated sugar market. Self-financing sugar programs.

Weakness Exports around 80% of production at low world price. Balance quantity sold domestically also at world price. Operating in a high wage environment. Growers and millers are tied contractually & cannot expand or contract production. Lacks competition domestically as all sugar is marketed through state trading enterprise. Enjoys high currency exchange rates. Export relies on unstable market like Russia or Arabian countries where import volumes fluctuate significantly.

Over reliance of Brazilian economy on sugar. Govt. policies are at times not clear. Sugar millers lack large international exposure and/or experience. Millers are perceived as protected entrepreneurs, and thus the image of this industry does not convey the advantages that it has. Harvesting workforce is not qualified and mechanisation is bringing problems for workforce reallocation. Family management is still in place. Modern techniques are needed to be employed. Several mills have financial problems. High inflation & interest rates and heavy external debt burden.

Without subsidies & protection, the survival of EU sugar companies is threatened. EU’s (almost) total sugar production is from sugar beet – production cost of which is substantially high. Beet sugar is mainly grown in developed countries with temperate climates – does not enjoy the favourable energy balance that makes cane so attractive for renewable energy source. Protected EU market from competition reduces incentive to upgrade technology and efficiency.

Opportunities Expected based on policy changes especially in the triad economies of EU, USA, & Japan. Lie in use of differentiated & value-added sugar. Diversifying in energy sector.

Expected with opening up of triad economies. Lie in exporting ‘home-grown’ technology in producing fuel-alcohol from sugarcane production. In the use of differentiated and value-added sugar.

Reduced policy intervention will result in significant gains to EU member states. With increased in world prices, EU manufacturers can better export.

Threats Most vulnerable to fluctuations of world sugar prices with no Govt. assistance. Brazil’s increase in sugar production will find its way in international market. Industry threatened from environmental issues. Climatic variability.

Sugar buyers – like food & beverages industry cannot apply supply management concepts. Climactic variability. Entrance of large MNCs to tap domestic market and international markets when liberalised.

WTO requirements and pressure for liberalisation threaten EU to reduce protection afforded to EU sugar producers – that threatens EU sugar firms. From Brazilian sugar in future (otherwise the market is protected).

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Table 5.2: Strategy Options for Australia

Internal Factors

External Factors

Internal Strengths • Educated, skilled labour force. • Highly experienced in global

market (e.g. export). • Good infrastructure. • Large areas of cultivable land

with suitable climatic conditions.

• Most technically efficient with low production cost and recovery rate being highest in the world.

• Good quality of product and services.

• High concentration on R&D. • Strong Australian dollar (also

weakness). • Highly deregulated market

(also weakness).

Internal Weaknesses • High labour & social costs. • Small domestic market size. • High reliance on exports (75%

of production) on low world price.

• Strong Australian dollar (also strength).

• Growers and millers are tied contractually & cannot expand or contract production.

• Relatively no Govt. support. • In the sugar belt, alternate

agricultural production options are limited.

• Lacks domestic competition due to ‘single desk selling’.

• Export relies on unstable market – Russia & Arabian countries, where import volumes fluctuate widely.

• Climatic variability. External Opportunities • Brazil: increased natural

wealth, investment opportunities, & management expertise.

• Pacific Rim & Asia: increased wealth, investment opportunities.

• USA, EU, and Japan: expected based on policy changes in the triad economies.

SO: Aggressive Strategies • Expanding to Brazil & Asia

markets. • Concentration on management

training & redesign staff structure.

• Can bring in technological advancement & investments to related & supported industries in Brazil & Asia.

• Provide product differentiation to consumers of Brazil and Asia.

• Aggressively pursue at WTO on EU sugar subsidies.

WO: Diversification Strategies • Diversify to allied & non-sugar

processing activities. • Diversify in ethanol production

for export and energy sector. • Set up plants in Brazil and

Asia to exploit cheap labour and cut costs.

• Provide consultancy services.

External Threats • Government policies on sugar

in the triad economies of USA, EU, and Japan.

• Constant economic instability due to fluctuating world sugar prices.

ST: Turn-Around Strategies • Seek government relief to

write off loans for turn-around firms and restructuring in sugar industry.

• Establish wider consultancy and expert services on sugar to other sugar producing companies and nations.

WT: Defensive Strategies • Concentrated efforts among

the government, business & labour sectors to cope with the problems of overvalued currency, unemployment, high wages, high social taxes, protected policies in some nations, volatile export demand & fluctuating world prices.

Source: SWOT framework adapted from Weihrich, 1999.

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Table 5.3: Strategy Options for Brazil

Internal Factors

External Factors

Internal Strengths • Vast natural resources with

suitable climatic conditions. • Cheap labour force but source

of job creation. • Good infrastructure. • World’s largest and most

efficient producer of sugar. • Concentrates around 60% of

the world ethanol production from sugar cane.

• Strong sugar-alcohol industry and network.

• Extensive national R&D network that has a proven track record in PROALCOOL program.

• Weak currency increases exports.

Internal Weaknesses • Harvesting workforce not

qualified. • Mechanisation is causing

problem for workforce reallocation.

• Economy relies heavily on sugar.

• Sugar millers lack international exposure and/or experience.

• Millers are perceived as protected entrepreneurs, and the image of the industry does not convey the advantages that it has.

• Govt. policies are at times not clear.

• Family management still in place and modern techniques are needed to be employed.

• Several mills have financial problems.

• Poor infrastructure facilities. • High inflation, interest rates &

heavy external debt burden. • Climatic variability.

External Opportunities • Various open economies like

Australia and other developing and prospering economies like India, for ethanol production.

• USA, EU, and Japan: expected based on policy changes in the triad economies.

SO: Aggressive Strategies • Exporting ‘home-grown’

technology in producing fuel-alcohol from sugarcane production.

• Engage in joint venture with foreign firms for technological and management advances and skills.

• Improve regulation and standardisation within Brazil to attract more FDI.

• Provide product differentiation to consumers of Brazil and Asia.

• Aggressively pursue at WTO on EU, USA & Japan sugar subsidies.

WO: Diversification Strategies • Continue to strengthen on the

diversification of sugarcane in ethanol production for export and energy sector.

• Diversify to allied & non-sugar processing activities.

• Provide consultancy services on producing ethanol.

External Threats • Government policies on sugar

in the triad economies of USA, EU, and Japan.

• Constant economic instability due to fluctuating world sugar prices.

ST: Turn-Around Strategies • Seek government relief to

write off loans for turn-around firms and restructuring in sugar industry.

• Establish wider consultancy and expert services on sugar and ethanol to other sugar producing companies and nations.

WT: Defensive Strategies • Concentrated efforts among

the government, business & labour sectors to cope with the problems of high interest rates, high inflation, heavy external debt burden, unemployment, protected policies in some nations, volatile export demand & fluctuating world prices.

Source: SWOT framework adapted from Weihrich, 1999.

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Table 5.4: Strategy Options for the European Union

Internal Factors

External Factors

Internal Strengths • Educated, skilled labour force;

pride in quality. • Experience in global market

(e.g. export). • Stable labor-management

relations. • Strengths in large companies

in sugar and in chemical, pharmaceuticals, and food industry.

• Good infrastructure. • Strong Euro (also weakness) • Accession of C&EECs* to EU. • Highly protected market with

external competition (also weakness).

• Strong government support. • Under restriction of EU sugar,

perfected concentration of production & economies of scale.

• Strong lobby groups for change (also weakness).

Internal Weaknesses • High labour & social costs. • No incentive in responding to

external changes. • Slowness in innovation. • Few natural resources. • Relatively high unemployment

rate. • Strong Euro (also strength). • High cost of accession of

C&EECs. • Regulated market with

protection (no growth prospect) & subsidies (also strength).

• Lacks favourable advantages of sugar cane – cost of production & energy balance.

• Strong lobby groups for change (also strength).

External Opportunities • C&EECs: expansion &

investments opportunities of EU companies.

• Brazil: increased natural wealth, investment opportunities, & management expertise.

• Pacific Rim & Asia: increased wealth, investment opportunities.

SO: Aggressive Strategies • Expanding to C&EECs, Brazil,

& Asia markets. • Concentration on management

training & redesign staff structure.

• Can bring in technological advancement & investments to related & supported industries in Brazil, C&EECs, & Asia.

• Capitalise on low-wage & high skilled workforce from C&EECs.

• Provide product differentiation to consumers of C&EECs, Brazil, and Asia.

WO: Diversification Strategies • Diversify to allied & non-sugar

processing activities. • Set up plants in Brazil,

C&EECs and Asia to exploit cheap labour and cut costs.

• R&D investments & activities can be concentrated in high-tech & less costly countries like Hungary.

External Threats • WTO pressure for

liberalisation of EU sugar. • Australia & Brazil have

initiated dispute proceedings at WTO against EU sugar subsidies.

• C&EECs: structural imbalances due to high unemployment & migration.

• C&EECs: political & economic uncertainties, legal & economic structures still in transition.

• EU: Economic instability due to accession of C&EECs.

• Import concession to sugar exporting countries of C&EECs due to their accession to EU.

ST: Turn-Around Strategies • Use bargaining power to seek

government relief from regulations, tax, and any change in regime thereby arresting any social imbalances and mass immigration.

• More guarantees from banks to write off loans for turn-around firms and restructuring in C&EECs sugar industry.

• Establish wider banking network in C&EECs.

WT: Defensive Strategies • Concentrated efforts among

the government, business & labour sectors to cope with the problems of overvalued currency, high wages, strong labour unions, high social taxes, & WTO pressure.

• Establish production bases in C&EECs in non-sugar activities (allied sector) to reduce effects of high costs.

* C& EECs: Central and East European Countries Source: SWOT framework adapted from Weihrich, 1999.

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Table 5.5: Illustrations of Strategy Option Positions AUSTRALIA Internal

Factors External Factors

Internal Strengths

Internal Weaknesses

External Opportunities

SO: Aggressive Strategies .

WO: Diversification Strategies

External Threats

ST: Turn-Around Strategies

WT: Defensive Strategies

BRAZIL Internal

Factors External Factors

Internal Strengths

Internal Weaknesses

External Opportunities

SO: Aggressive Strategies

WO: Diversification Strategies

External Threats

ST: Turn-Around Strategies

WT: Defensive Strategies

EUROPEAN Internal UNION Factors

External Factors

Internal Strengths

Internal Weaknesses

External Opportunities

SO: Aggressive Strategies

WO: Diversification Strategies

External Threats

ST: Turn-Around Strategies

WT: Defensive Strategies

1990s 2000s

1970s

1980s

Industry Government

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5.3 PESTLE Analysis Application and Inferences

A changing environment in the evolving global sugar economy is providing a number of different interacting forces which shape the world sugar environment. An overview of the international sugar scenario can be analysed under the framework of the following environmental variables:

P Political factors influencing the environment

E Economic factors

S Sociological influences

T Technological influences

L Legal factors

E Environmental/ethical issues

These dimensions provide a structured context within which to evaluate strategies,

such as those in the previous section. Given the range and variety of factors,

influences, and issues provided, the richness of detail is placed in Appendix B.

In drawing from Section 2.2.5 and Table 2.2, it is observed how firms and industries

are embedded in the national business process. These business processes emerge from

the ‘historical, socio-cultural, economic, and political distinctiveness of nation-states,

and their individual and collective (regional/global) political and economic

aspirations’ (Toyne and Nigh, 1998).

From the PESTLE analysis it becomes evident that the European Union stands out as

an epitome of the above stated concept. In its pursuit of its regional and global

political aspirations, the social welfare of its citizens has been given the prime

consideration in a ‘sheltered’ environment borne out of historical conditions. In such

circumstances many firms have grown large assured of fixed returns from their sale of

products irrespective of the unstable world market price. This also has enabled the

firms to exploit the advantages gained. For the European Union, competitiveness is

intrinsically and intricately linked with the socio-political objective of ‘simultaneously

maintaining and expanding the real incomes of its people over the long term’ (part of

OECD definition of competitiveness, Section 2.2.4 and as discussed in Appendix B).

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In Brazil, economic considerations have weighed heavily on the national government

to formulate and direct policies towards sugarcane cultivation and also in the petrol-

ethanol mix. Launching the PROALCOOL in Brazil in the mid-1970 was considered

as a panacea to first the ‘oil crisis’ of the 1970s and second to the difficult and

uncertain situation in the world sugar market due fluctuating sugar prices. Moreover,

government policies on foreign direct investment in the food-energy sector direct the

economic growth and social upliftment. However, the government needs to improve

the infrastructure facilities and the implementation of laws and regulations.

Australia is motivated by the economic consideration of a deregulated environment

with market forces seen as providing the most suitable solution, particularly by

government. The satisfaction that the Australian government can draw from the

favourable ruling at the WTO may result in strengthening its belief on a deregulated

market and striving towards elimination of distortions in world sugar market.

However, the past and current policies of the government and at times sporadic efforts

to redress the plight of the canegrowers, which resulted from a prolonged farm

income decline, have impacted considerably on the socio-economic fabric of the sugar

belt. Australian growers situations are in sharp contrast to that of the farmers of EU.

To summarise the PESTLE analysis, a comparative snapshot of the analysis among

Australia, Brazil, and European Union is provided in Table 5.6. Markedly different

situations can be seen. Such a framework details how each attains competitiveness or

seeks to attain it.

The next section provides an analysis of the combined effect of the country-specific

resources and the firm-specific resources of each regime through Porter’s home-

country diamond analysis.

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Table 5.6: Snapshot of PESTLE Analysis Australia Brazil European UnionPolitical Factors

A substantial reduction in govt. regulations over the years has now resulted in the industry performing in the relative absence of policy intervention.

Govt. no longer directly influences sugar production and exports. Presently, the sugar situation is more affected by govt.’s policy towards alcohol. Govt. now chiefly influences ethanol sales and prices through regulation of ethanol content in gasoline, a political imperative of sugar.

EU policy hurts domestic consumers who pay around three times world price. Accession of 10 new member countries of Central and East European Countries.

Economic Factors

In exporting around 80% of sugar production, main factors are: fluctuating & low world sugar price, exchange rates, foreign market intervention, domestic market, international supply & demand linked to increased production & consumption, international competition & subsidies, contract arrangement.

Brazil’s abundant natural resources remain a long-term economic strength. Sugar chain is presently linked to both food sector and energy sector. Entry of large European MNCs has generated immense interest in the domestic sugar-alcohol sector as well as its anticipated influence in global trade.

A highly regulated sugar system that provides significant price support to domestic producers. Regulation of production, export and import of sugar. EU’s fast-growing food processing industry is at a competitive disadvantage & profitability and jeopardises million of jobs in the industry.

Sociological Influences

Economic downturn of the industry due to low world prices have strongly impacted on societal sustainability of the coastal communities (local economic activity and employment) and where alternative agricultural production options are limited.

Strong linkage between the food and energy sector established through PROALCOOL has resulted in fashioning a strong agro-industrial system – that has created a significant number of direct and indirect jobs. Working conditions have also improved.

Industry provides livelihood for some 335,000 farms supporting 300,000 direct & indirect jobs. Mechanisation, use of improved varieties & herbicides has led to disappearance of labourers. Concept of Corporate Social Responsibility has been adopted.

Technological Influences

All cane has been mechanically harvested since 1979. Expanding R&D activities on the industry needs.

Harvesting machines are fast replacing people with crop harvested to more than 50% on many sugar plantations in the last decade. Sugar is now developed into an advanced industry with cultivation and processing getting integrated at various sites resembling petrochemical complex.

Increased harvests through fertilisation and mechanisation, and lower transport costs. Better cultivation techniques have improved capital utilisation. Improved refining techniques with quality equipment.

Legal Factors Regulatory framework is established primarily by Sugar Industry Act1999 that provides a framework for supply of cane by farmers to a mill and the vesting of raw sugar on behalf of all farmers and millers in Queensland

Federal law requires the practice of burning field residues that pollute air with ashes to end in near future.

CMO Sugar laid down regulation setting relationship between grower and processors and establishing inter-trade agreements.

Environmental/Ethical Issues

Sugar industry adjacent to environmentally sensitive areas international significance. Water quality and use of agricultural chemicals. Proper storage & disposal of farm waste.

Usually grown as a monoculture – that negatively affects environment exhausting soil. Other issues are: water contamination, impact of cane burning on air pollution, impact of alcohol engines on air pollution.

Sugar beet cultivation can be extremely harmful to the environment. Policy encourages sugar beet cultivation even in adverse climatic conditions with excessive use of pesticides and fertilizer. Sugar beet are affected by several diseases and farmers rely on large quantities of pesticides and herbicides.

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5.4 Porter’s ‘Diamond’ Model Analysis Application and Inferences

As discussed in Section 2.2.4, Porter’s ‘diamond’ model synthesises the four sets of

characteristics with two additional factors into a simple analytical framework that

provides the microeconomic foundations for the development of competitive

advantage. The characteristics and the additional factors that create the competitive

framework of a nation in which a firm or an industry operates are:

the strength of the factor endowments;

the demand conditions;

the firm’s strategies, structures and rivalries in an industry;

the strength and diversity of related and supporting industries;

the role of chance, and

the role of government.

Dunning (1997) notes that while recognising the efficiency of many markets

(particularly those supplying products for global customers), the governments need to

understand that the buyers and sellers are not the sole determinants of those

transactions. Those are influenced ‘by a host of exogenous forces, including the

macroeconomic and organisational policies of other governments, over which they

may have no immediate influence or control.’

The detailed analysis of the Porter’s ‘diamond’ attributes is placed in Appendix C.

Based on the analysis applied to three nations, a summary of the attributes is placed in

Table 5.7 for Australia, Table 5.8 for Brazil, and Table 5.9 for the European Union.

Further, a comparison of Porter’s home-country diamond analysis for the three

countries is provided in Table 5.10. Moreover, the concept of international business as

evolving and emerging from the interaction of a ‘multi-level, hierarchical process’

(Toyne and Nigh, 1998 and as identified in Section 2.2.5) has been explored through

the analysis of firm, industry, and national level of the three nations. A comparison of

the findings is provided in Table 5.11.

Porter’s home-country diamond analysis reveals a weak Australian diamond with

weak demand conditions. Australia, being a small resource-based economy, relies

heavily on exports based on available factor endowments to produce mainly raw sugar

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for the international market. This has resulted in the Australian firms acquiring the

necessary expertise in international business but competition in the domestic market is

weak because of a lack of rivalry among firms.

In Australia, national policies were directed towards agricultural reforms and

deregulation of the sugar industry. The sugar industry accepting this change in their

environment geared itself for the international competition. While the industry has

become one of the most technically efficient in the world the critically low world

sugar prices have raised serious concern for the industry for survival. Accordingly, the

firms are directing their efforts towards optimising their operation by being more

efficient and cost effective.

Porter’s single diamond analysis manifests a weak Brazilian diamond with

unsophisticated demand and weak conditions in respect of human skills and resources.

The nation and the firms (Brazilian origin) face financial difficulties despite being

endowed with abundant natural resources and a lack of firm rivalry.

In Brazil, the national government has blended their economic and political policies in

harnessing their natural resources with the economic need. This is been done through

allocation of resources in such a way that the abundance of sugarcane production can

be profitably aligned with the energy sector. This has led the sugar industry to

innovate and quickly adopt the new technologies to gain from the food-energy sector

of the economy. The present nature of the industry has become attractive even for

MNEs and FDIs. At the firm-level operations are directed towards improving

efficiency, finance, management, and working conditions.

The European Union, though not endowed with favourable natural factor conditions,

has improved on the other determinants of the home-country diamond under a

‘sheltered’ environment created by the government. For the EU, CMO Sugar regulates

all facets of the sugar industry production and marketing at the national and firm

levels. This has resulted in the industry becoming concentrated and reaping benefits

through scale economies. In the EU sugar regime, as there is restriction on growth in

production and processing capacities, the firms have directed their operations to

diversification, expansion to new markets, and mergers and acquisitions.

The national-industry-firm level analysis brings to focus the economic attributes as

shaped within the socio-cultural-political contexts at each hierarchical level of the

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economies considered. This analysis demonstrates how policies and conditions have

evolved at various levels and oriented interactions for business processes.

It is observed that Porter’s ‘diamond’ model highlights the various attributes that

effect firms, industry, and the nation. This model does not address the socio-political

context of a nation which provides the environment within which a business evolves.

Nation-bound firms exhibiting specific characteristics of their socio-cultural-political

settings can adopt different strategies to operate in the world market. Even the

objectives of firms participating in international business of a product may vary

depending on the socio-cultural-political background, as well as compulsions and

aspirations. Porter’s ‘diamond’ model does not capture the implications of such

situations through the six attributes of the ‘diamond’. The various findings obtained

can be carried forward towards building a more comprehensive conceptual framework

of competitiveness.

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Table 5.7: Porter’s Home-Country Diamond Model Analysis - Australia Factor Conditions

Demand Conditions

Related & Supported Industries

Industry Structure, Firm Strategy & Rivalry.

Role of Chance

Role of Government

Large area for cultivation – a readily available factor of production. (I) Climatic conditions (water & rain) adequate except at droughts. (I) A lack of soil fertility is a serious limitation on land use. (I) Reliance on as little labour as possible – a scarce factor of production. (F and I) Tremendous improvements in infrastructure. (F and I) Specialised labour resources – contractors & consultants are increasingly used. (F and I) Skilled labour force to operate sophisticated capital equipment. (F) R&D encouraged & funded by govt., individual industry, farmers’ councils & other stakeholders. (I) Sugar sector being highly capital intensive, banking sector is a key source of funds. (I and N)

Domestic market conditions have not played a significant role – small size of the population. (I) In fact sugar sector has depended on the export market – and as the industry has responded to changing demand of overseas customers, the variety of goods for domestic consumers has improved. (I)

High standards of operation & improved food safety and quality have been an advantage. (F) Joint research programme among stakeholders assisted in growth of new plant breeding and species. (I) Chemical & fertiliser sectors provided on-farm-consulting services to farmers. (F and I) Withdrawal of govt. leads to greater competition among suppliers is witnessed. (F and I)

Majority of firms are family owned & operated. (F) Farmers have undertaken the process of structural adjustment mainly through amalgamation. (F) Industry (millers and refiners) dominated by few large firms. (I) Competition arises in processing sector from the seasonal nature of supply – to maximize returns on capital invested. (F) Australian processors, exporters, & the govt. have actively promoted the product in international market. (N) “Single desk selling” in international sugar market. (N)

Entry of UK to EU – fixed exports through preferential trade received a heavy blow. (N) Emergence of Asian market – led to concentrating exports to these rapidly growing economies of Asia. Also resulted in enhanced competitive advantage as demand for diversification in product mix increased. (N) Trade barriers – some countries raised trade barriers while others lowered tariffs on import. (N) Asian Economic Crisis – impacted on exchange rate making Australian sugar costly. (N)

Govt. deregulated the domestic market. (N) Through policies, environment was created in which firms can upgrade competitive advantage. (I and N) Adjustment packages but no consistent constructive’ policy. (I and N)

Note: The letters in brackets indicate effects on firm (F), industry (I), and nation (N).

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Table 5.8: Porter’s Home-Country Diamond Model Analysis – Brazil Factor Conditions

Demand Conditions

Related & Supported Industries

Industry Structure, Firm Strategy & Rivalry.

Role of Chance

Role of Government

Abundant natural resources to fulfil market expectations. (I) Utilised improved varieties of sugarcane for greater productivity. (F and I) Creation of home-grown technology to harness alcohol fuel from sugarcane resulting in energy generation. (F and I) Extensive alcohol distribution network. (I) Lack of specialised human resources in international operations. (F and I) Harvesting workforce is not qualified. (F and I) Improvement needed in infrastructure – transportation, port facilities & information system in particular. (F and I) Attractiveness for end-user of sugar and for industrial use of sugar. (I)

Nature of home demand for sugar and alcohol is high and counterbalancing. (I) Local consumers less demanding than international consumers. (F and I) Demand from food manufacturers including those that produce carbonated drinks, chocolate, ice-cream, crackers, and pasta account for around 35%-45% of domestic sugar consumption. Remaining 55%-65% is direct household sugar consumption. (I)

Designers & producers of specialised clean production technology (in fuel/energy sector). (F) Byproduct industrialisation. (F) Energy co-generation. (I)

308 sugar mills – several families owned & family managed. (F) Primary means of competition in sugar is through low price & low value contribution of natural resource inputs. Some differentiation & value-added sugar. (F) Several mills have financial problems which reduces strategy amplitudes. (F and I) For alcohol, strategy is based on high petrol prices; least costly renewable fuel in the world; use of alcohol results in reduced emission of greenhouse gases; and lastly opening of international alcohol markets. (F and I) Rivalry in alcohol is from other energy producing firms. (F)

Oil crisis of the 1970s acted as motivation for the development of ‘Proalcool’ program – producing alcohol fuel for automobiles. (N)

Main focus shifted from food sector (sugar production) to energy sector (alcohol). (I and N) Govt. mandates alcohol percentage in the alcohol-petrol mix. (I and N) Govt. policies are not often clear. Proalcool institutionalise regime (N)

Note: The letters in brackets indicate effects on firm (F), industry (I), and nation (N).

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Table 5.9: Porter’s Home-Country Diamond Model Analysis – European Union Factor Conditions

Demand Conditions

Related & Supported Industries

Industry Structure, Firm Strategy & Rivalry.

Role of Chance

Role of Government

EU is one of the largest sugar beet producers with relatively favourable temperate climate conditions. (I) Sugar beet has a sugar content of 15-20% and resulting sugar yield is only about 8-10 tonnes per hectares against yields of around 15 tonnes per hectare from sugarcane. (F and I) Sugar beets are grown for about 8 months (against 10-18 months for sugarcane). (F and I) Beet sugar does not have the favourable energy balance that makes cane so attractive as a renewable energy source. (F and I) Beet sugar production costs are substantially higher than global cane sugar production costs. (F) Infrastructure facilities are good. (F and I) Production technology is relatively modernised. Protected from foreign competition reduces the incentive to uptake new technology and change. (Fand I)

Demand condition has divided sugar in 3 product categories: white granulated sugar, liquid sugar & speciality sugar. (F and I) Industrial users of sugar are the food processing industry, the chemical & the pharmaceutical industry. (I) 70% of total human consumption of sugar originates from sugar incorporated in food & drinks and 30% is direct consumption of pure sugar by households. (I) Varied product mix demands by the market have led to exacting & high standards. (I)

A vibrant chemical & fertiliser industry with a few home-grown companies now operating as MNEs. (F and I) The MNEs have engaged in research and innovation activities. (F) Transportation sector is very modern offering specialised services. (F and I) High standards of operation & improved food safety and quality have been an advantage. (F) Concern for the environment has led to various activities for a “green” and sustainable environment. (F and I)

EU sugar industry is dominated by a group of 10 leading sugar companies. (I) In addition to concentrated market, there is also some cross-ownership between sugar firms. (F) Owing to imposed restrictions on sugar expansion (due to quotas), EU sugar companies have diversified and the industry is characterised by 3 types of companies: i) specialised sugar companies, ii) diversified sugar companies, iii) food companies that have sugar activities. (F and I) Sugar trade between member states tends to be limited signifying lack of competition. (F) At a strategic level, companies do compete in terms of growth through merger and acquisition. (F) Moreover, some competition from High Fructose Syrup & High Fructose Corn Syrup in some industrial use as production cost is 33-40% of beet sugar. (F and I)

EU expansion will offer bigger market and a few firms are taking strategic position in the expanded market. (N) WTO negotiation might change the regime structure bringing in more competition for EU sugar. (N) Recent WTO ruling on complaints by Brazil and Australia has challenged the restrictive trade practices of EU. (N)

Govt. has regulated the EU sugar regime through Common Agricultural Policy objectives and principles implemented and characterised by:

A. Production Quota System

B. Price Guarantees C. Trade Regimes D. Storage Cost

Equalisation Scheme

E. Self-financing Regime

F. Refining Regime (N)

CMO Sugar is the key component of CAP. (N)

Note: The letters in brackets indicate effects on firm (F), industry (I), and nation (N).

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Table 5.10: Comparison of Porter’s Home-Country Diamond Analysis

Australia Brazil European Union

Factor Conditions

Large area for cultivation. A lack of soil fertility is a serious limitation on land use. Climatic conditions (water & rain) adequate but droughts. Labour is expensive (specialised and skilled) and scarce. Good infrastructure. R&D encouraged & funded by Govt., individual industry, farmers’ councils & other stakeholders. Sugar sector being highly capital intensive, banking sector is a key source of funds.

Abundant natural resources. Harvesting workforce is not qualified. Lack of specialised human resources in international operations. R &D activities for improved varieties of sugarcane and creation of home-grown technology to harness alcohol fuel from sugarcane generation. Extensive alcohol distribution network. Improvement needed in infrastructure. Attractiveness for end-user of sugar and for industrial use of sugar.

Relatively favourable temperate climate. Sugar beets grow for about 8 months (10-18 months for sugarcane). Sugar beet has sugar content of 15-20%; sugar yield only about 8-10 t/h (around 15 t/h from sugarcane). Also production costs are substantially higher than global cane sugar costs. Beet sugar does not have the favourable energy balance as cane for renewable energy source. Infrastructure facilities are good. Production technology is relatively modernised. Protection from foreign competition reduces incentive to uptake new technology and change.

Demand Conditions

Domestic market conditions have not played a significant role – small size of the population. In fact sugar sector has depended on the export market – and as the industry has responded to changing demand of overseas customers, the variety of goods for domestic consumers has improved.

Nature of home demand for sugar and alcohol is high and counterbalancing. Local consumers less demanding than international consumers. Demand from food manufacturers including those that produce carbonated drinks, chocolate, ice-cream, crackers, and pasta account for around 35%-45% of domestic sugar consumption. Remaining 55%-65% is direct household sugar consumption.

Demand condition has divided sugar in 3 product categories: white granulated sugar, liquid sugar & speciality sugar. Industrial users of sugar – food processing industry, the chemical & the pharmaceutical industry. 70% of total human consumption is incorporated in food & drinks and 30% is direct consumption of pure sugar by households. Varied product mix demands by the market have led to exacting & high standards.

Related & Supported Industries

High standards of operation & improved food safety and quality have been an advantage. R&D program among stakeholders resulted in new plant breeding and species. Chemical & fertiliser sectors provided on-farm-consulting services to farmers. Greater competition among suppliers with govt. deregulation.

Designers & producers of specialised clean production technology (in fuel/energy sector). Byproduct industrialisation. Energy co-generation

A vibrant chemical & fertiliser industry with a few home-grown companies operating now as MNEs. The MNEs have engaged in research and innovation activities. Transportation sector is very modern offering specialised services. High standards of operation & food safety and quality have been an advantage. Environmental concern led to activities for a “green” and sustainable environment.

Industry Structure, Firm Strategy & Rivalry

Majority of firms are family owned & operated. Industry is dominated by a few large firms. Competition arises in processing sector from the seasonal nature of supply – to maximise returns on capital invested. Australian processors, exporters, & the govt. have actively promoted the product in international market. “Single desk selling” in international sugar market.

308 sugar mills – several family owned & family managed. Primary means of competition in sugar is through low price & low value contribution of natural resource inputs. Some differentiation & value-added sugar. Several mills have financial problems which reduces strategy amplitudes. For alcohol, strategy is based on high petrol prices; least costly renewable fuel in the world; use of alcohol results in reduced emission of greenhouse gases; and lastly opening of international alcohol markets. Rivalry in alcohol is from other energy producing firms.

EU sugar industry is dominated by a group of 10 leading sugar companies. In addition to concentrated market, there is also some cross-ownership between sugar firms. Owing to imposed restrictions on sugar expansion (due to quotas), EU sugar companies have diversified and the industry is characterised by 3 types of companies: i) specialised sugar companies, ii) diversified sugar companies, iii) food companies that have sugar activities. Sugar trade between member states tends to be limited signifying lack of competition. At a strategic level, companies do compete in terms of growth through merger and acquisition. Moreover, some competition from HFS & HFCS in some industrial use as production cost is 33-40% of beet sugar.

Role of Chance

Entry of UK to EU. Emergence of Asian market. Trade barriers fluctuations. Asian Economic Crisis – impacted on exchange rate making Australian sugar costly.

Oil crisis of the 1970s acted as motivation for the development of ‘Proalcool’ program – producing alcohol fuel for automobiles.

EU expansion will offer bigger market and few firms are taking strategic position in the expanded market. WTO negotiation might change the protective regime structure. WTO challenge – Brazil and Australia have filed complaints against EU practices & policies.

Role of Government

Govt. deregulated the market. Through policies, environment was created in which firms can upgrade competitive advantage.

Main focus shifted from food sector (sugar production) to energy sector (alcohol). Govt. mandates alcohol percentage in the alcohol-petrol mix. Govt. policies are often not clear.

Govt. has regulated the EU sugar regime through Common Agricultural Policy objectives and principles.

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Table 5.11: National-Industry-Firm Level Analysis and Comparison Australia Brazil European UnionNational Level The thrust of public policies in the last

25 years has been directed towards reforms and deregulation with emphasis on ushering in more competitive environment in domestic market to promote greater efficiencies.

Political & economic reforms in 1970s & 1980s led to sugarcane production receiving considerable govt. support under PROALCOOL – promoting domestic production of fuel alcohol. Under the program, some of the most productive agricultural land was diverted to sugarcane production. Further reforms in early 1990s contributed to greater market orientation and stable macroeconomic environment for more FDI resulted in increased efficiency in sugar-fuel sector. Govt. encouraged R&D activities.

CMO Sugar in EU as one component of CAP governs regional distribution and contribution of beet production. The four main factors are: • Allocation of quota across member

states, factories and the associated system of delivery rights;

• Share of A/B quota per member state;

• Regional premiums; • National aid.

Industry Level The industry is committed to deregulation and concentrates on: • Whole-of-industry profitability; • Economically, environmentally, and

socially sustainable; • First-rate Research, Development, &

Extension; • First-rate people in sugar industry.

Industry is increasingly driven by economic concerns and market conditions in creating responsible and productive value chains in the food-energy sector of the economy. This has led to industry restructuring adopting new technologies, capturing economies of scale and innovating. MNEs have made significant investments in sugarcane-sugar and food-energy sector.

Under restriction from CAP and CMO Sugar, the industry has focussed on : • Concentration – reducing the

number of sugar producing and processing plants;

• Scale of production – reaping benefits from economies of scale.

Under restriction, the industry is driven towards diversification in sugar-related food industry, agro-industry, & non-sugar processing industry.

Firm Level The operations are directed towards a cost effective and efficient system of harvesting, transport and processing.

Activities are directed to improving economic performance – greater efficiency in raw materials & energy usage decreasing waste generation, adapting to new technology & processes for new products, lower costs of financing, improved working conditions, & decreased risks of accidents.

Strategies for improving the rate of return are primarily limited to reduction of costs through concentration and rationalisation – through mergers and acquisitions. Also expanding businesses to Central and Eastern European countries and diversifying to non-sugar processing activities.

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5.5 Summary

In drawing a conclusion from the three analyses conducted on the three nations

considered for this study, the results are summarized as under.

Australian firms and industry are pursuing competitiveness based on traditional

economic factors of uniqueness and efficiencies of their assets and capabilities. The

strategy as practised by Australian firms and industry is reflected in research and

increased productivity driven by industry level R&D. The realisation of the fact that

institutions, markets and firms, do not represent economic values alone is reflected in

the Australian Government’s recent action against EU export subsidies at the WTO.

The research highlights the fact that Australian firms in the current world sugar

market can attain international competitiveness in terms of market performance if

political effects are incorporated in their operations. Whether the second ‘income’

component of competitiveness can be met remains to be seen.

Brazilian firms have acquired assets and capabilities that are simultaneously valuable

and unique. This has enabled the firms to place themselves in such a position wherein

they can reap efficiencies through economies of scale and diversification. Moreover,

the sugar industry has strategically aligned itself with generation of fuel alcohol

resulting in a situation wherein Brazilian firms and the sugar industry, if required, can

partially protect themselves from any adverse effect of the world sugar market.

Additionally, such an environment in Brazil has been provided by the political effects

that have been shaped by changing economic imperatives, societal realities and the

underlying historical developments of the institutions. The Brazilian Government’s

intention to maintain its involvement in the pursuit of international competitiveness by

its firms can be gauged from the fact that it continues to formulate national policies

effecting the relative costs and factor endowments of the food-energy sector of the

economy. Also their involvement at the WTO against EU sugar export subsidies

reflects the political imperatives that the Brazilian government is so keen to impart in

keeping with the interests of concerned groups.

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The European Union firms are ‘intrinsically historical and social entities’ and have

acquired their dominant position, their unique assets and capabilities, and their

efficiencies in diversified activities under a shield of political regulation that

characterised the sugar production and marketing regime of the European Union. The

socio-political effect factor is the driving force of the EU firms’ quest for international

competitiveness.

The next chapter concentrates on the development of the conceptual framework of

competitiveness in international business and generates propositions based on the

application of the framework on the three largest sugar-exporting economies of the

world.

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Chapter 6

A Conceptual Framework of Competitiveness And

Its Application In this chapter a conceptual framework is offered that can aid analysis of the

phenomenon of international competitiveness. The framework outlined and applied in

this research explores four interrelated groupings of the determinants of

competitiveness: firm effects, industry effects, strategy effects, and socio-political

effects. These complementary effects are shaped by various attributes of firms,

industry, and nation interacting with one another. The application of the framework

on the three regimes highlights the variations in approaches of those seeking strategic

international competitiveness through the generation and the uses of resources in an

institutional structure shaped at the firm, industry, and national levels.

The goals of this chapter are:

• To understand how international competitiveness is achieved through the

interaction of various determinants (Section 6.2).

• To understand how the various determinants of competitiveness are applied by

different nation-bound firms to gain advantage (Section 6.3).

It will be seen that this chapter:

• Extends a conceptual framework of international competitiveness.

• Highlights the variation in the approaches of the firms to achieve international

competitiveness reflecting the country they represent.

• Highlights the importance of the non-market forces in each regime that shape

the various approaches of the firms to attain competitiveness.

6.1 Context

In constructing a composite framework of competitiveness which seeks to synthesise

premises from various perspectives and at various levels, four distinct classes of

effects identified are (i) firm effects, (ii) industry effects, (iii) strategy effects, and (iv)

socio-political effects. Each captures sources of distinct effects on competitiveness.

Alternately each idiosyncratically helps determine competitiveness. The distinct

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nature of these effects is borne out of the fact that they epitomise different conditions.

The firm and industry effects operate in different domains – the former through

idiosyncratic stock of resources and latter through structural market forces (Spanos

and Likoukas, 2001).

However, as Wernerfelt (1984) states, these effects are complementary as, in effect,

they represent both ‘internal’ and ‘external’ conditions. Mauri and Michaels (1998)

opine that ‘firm effects and industry effects capture the degree of heterogeneity within

an industry’. Added to this, the firm and industry effects are contingent on strategic

choices that firms make in response to external conditions. This phenomenon has

been highlighted by Porter (1991) when focusing on the fact that industry structure

characteristics are partially endogenously affected by the firms’ actions.

The political motivations (Grossman and Helpman, 1994, 1995) of governments that

make international competition imperfectly competitive (Eaton and Grossman, 1986)

among firms results from the policy environment of a nation in which firms and

industries function. Such policy environments stems from a nation’s society with its

objectives and aspirations (Buchholz and Rosenthal, 1995). These concepts draw links

from Section 2.1.4 wherein the socio-political attributes have been reviewed in the

context of this work.

Furthermore, Toyne (1989) and Toyne and Nigh (1998) (as highlighted in Section

2.2.5) call for international business to be observed as an exchange process not only in

commercial terms but also involving relationships between social actors resulting in

the interactions of varying socio-political parameters that emanate from different

nations. Added to this is the process that takes place in different socio-cultural

contexts at the different hierarchical levels of the individual, group, the firm, the

industry and the nation (as depicted in Table 2.2).

In respect to the present study, the ‘socio-political effect’ encapsulates those non-

market forces that contribute significantly towards competitiveness, though it is

believed that a multiplicity of approaches might help explain the complexity of the

external environment of international business.

6.2 Conceptual Framework for Competitiveness Resource-based theory explains the unique characteristics of the firm for enhanced

performance primarily aimed at increasing efficiency. The strategic management

theory coupled with Porter’s framework (influenced from traditional industrial

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organisation economics) also focuses and advances the role of the firm (against the

traditional concept of industry as the unit of analysis) with market position and

monopoly power of the firm as the main attributes of enhanced performance.

Further, the industry conditions are the immediate external environment that the firm

needs to adapt and react to through strategy in order to ‘create, protect and possibly

increase’ its market position, power, and efficiency. Furthermore, the broad external

environment that a firm and its industry have to encounter comprises external

parameters that are economic, social, political and technological in nature as well as

the nature of international competition. These broad external characteristics are

shaped by: the nature of governments, their roles, their policies; the framework of

institutions created; and public opinion and interest groups which can have a profound

impact on the changing nature of the external environment.

Figure 6.1 depicts schematically the concepts that have been derived from the various

theories considered and the corresponding literature review undertaken. Moreover,

competitiveness – the ability and the desire to compete to be more successful (as

identified in Section 1.1) is exhibited through measures of performance such as

market share, profitability, efficiency and uniqueness, and also through R&D and

innovation that a firm achieves. However, the performance of the firm is not in

isolation but is (as seen) in reaction to industry, national, and non-market conditions

through strategy. These dynamics result in enhancing the competitiveness of the

industry and the nation as well.

In arriving at the conceptual framework, the various effects identified are:

(i) Firm effects – provide sufficient conditions through the firms’ assets and

capabilities to maintain enhanced performance through increased

efficiency (RBV) and ‘monopoly’ power and ‘rents’ (Porter’s strategic

management view).

(ii) Industry effects – arises out of the industry forces that provide direct and

indirect competition to affect the sustainability of above average

performance.

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National + International EnvironmentStrategic Management

Theory

FIGURE 6.1: Schematic concept of International Competitiveness as derived from the theories.

(iii) Strategy effects – constitute the necessary conditions wherein the firm and

the industry react to the external environment – both the market and the

non-market influences.

(iv) Socio-Political effects – arises when firm and industry characteristics

interact in the non-market environment – that ‘includes those interactions

that are intermediated by public, stakeholders, government, the media, and

the public institutions’ (Baron, 1995).

The attributes of firm, industry, and the nation that produce the above four effects and

that has been inferred from the theories and literature review (in Chapter 2) are

synthesised in Table 6.1.

Industry Environment

Firm

Resource Based Theory

International Competitiveness • Market Share• Profitability • Efficiency &

Uniqueness • Performance

through R&D and innovation

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Table 6.1: Attributes of Firms, Industry and Nations towards Competitiveness Firm Industry Nation

• Specific asset positions (i.e. technological, financial, reputation etc. assets).

• Organisational and managerial processes (i.e. coordination, integration, learning, reconfiguration).

• Organisational factors – goal emphasis and human resources emphasis.

• Path dependency (i.e. firm’s history).

• Firm’s size (sales). • Market share diversity (as

a measure of heterogeneity and efficiency differences among firms).

• Performance (profitability) and market share (efficiency difference) resulting from inter-firm differences in technology, advertising, product differentiation.

• Long-term return (sustainability) and market share (as an asset).

• Productivity (through economies of scale and scope).

• Degree of multinationality.

- Share of foreign investment & employment;

- Share of foreign R&D.

• Strategies of individual firms.

• Market power – that provides the dominant status of the firm.

• Degree of diversification.

• Industry concentration (and entry barriers).

• Industry structure. • Industry based contextual

factors: - industry age &

maturity; - industry standard,

depreciation and valuation methods

- innovation/R&D intensities.

• Industry technology and rate of change.

• Industry membership. • Industry productivity. • Excess capacity. • Industry power regarding

suppliers and customers. • Intensity of competition. • Demand growth. • Industry growth rate. • Threat of substitutes. • Industry stability. • Concentration-Profitability

relationship.

• Size of home country. • Natural endowments &

created resources (as assets).

• Productivity (as a measure of the effectiveness of labour and capital employed).

• GNP growth. • Infrastructure facilities. • Industrial Policy. • Social and economic

welfare policies. • Nature of government. • Nature of institutions. • Public opinions and

interest groups. • Capacity and capabilities

to increase its supply participation (of a product) in a wider market.

This table synthesises notions from Dunning and Lundan (1998), Rumelt (1984; 1991), Hansen &

Wernerfelt (1989), McGahan & Porter (1997), Schmalensee (1985), Montgomery and Wernerfelt

(1991), Powell (1992; 1996), Wernerfelt & Montgomery (1988), Amit & Schoemaker (1993), Porter

(1980; 1990), Peteraf (1993), Schwalbach (1991), Dierickx & Cool (1989), Teece, Pisano & Shuen

(1997), Collis (1991)

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The proposed framework of international competitiveness adopts the basic logic of

LCAG framework and Porter’s ‘diamond’ model. It integrates the resource-based

view, the strategic management perspective and the international business concept

which highlights the interaction process involving actors from various socio-political

contexts.

In the proposed framework, firm effects, industry effects, and strategy effects (as

identified in Section 2.1.4) take into consideration the first and second quadrant of the

LCAG framework. Likewise, these three effects reflect the demand conditions, firm

strategy, structure and rivalry and related and supporting industries elements of

Porter’s ‘diamond’ model.

The socio-political effects (of the proposed framework) take into account the third and

fourth quadrant of the LCAG framework which acknowledge formation of the

conditions due to societal expectations and through a ‘multi-level, hierarchical

process’. This happening is linked to resources that a country inherits and develops

through its needs to satisfy the societal aspirations. Such processes are characteristic

of the socio-cultural-political environment of a nation. The conditions so formed have

considerable bearing on the nature of the government in a particular country and the

role it plays becomes crucial not only in achieving the nation’s goals but also in the

international arena.

The socio-political attribute of the proposed framework also affects on the other three

attributes. Further, this attribute mirrors the country-specific resources and the factor

conditions as alluded to by the Porter’s model.

However, the proposed framework differs from that of the LCAG framework and the

Porter’s ‘diamond’ model in respect to three crucial aspects. They are:

Incorporating the existence of the conditions that societal expectations create

and get reflected through a ‘multi-level, hierarchical process’ that is

characteristic of a socio-cultural setting,

The considerable bearing that such socio-cultural-political condition has on

firm, industry and strategy effects,

The role of the government is considered central to the competitiveness of a

nation-bound firm (as against peripheral).

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The attempt at integration of such environmental aspects with other effects of firm,

industry and strategy has so far not been previously pursued. One expression of the

conceptual framework proposed for international business is depicted in Figure 6.2.

Strategy Effects• Strategic

choices

FIGURE 6.2: Conceptual Framework of International Competitiveness.

6.3 Application of the Conceptual Framework

Using this framework, a variety of influences as earlier discussed can be brought to

bear on the attainment of competitiveness. These are presented in an illustrative way

by considering ‘how do firms attain competitiveness?’

6.3.1 Firm Effects

Black and Boal (1994) in a review of the resource-based view provide resource level

categorisations as discussed in Section 2.1.2. In particular they note resources broadly

as physical capital, human capital, and organisational capital resources.

In examining various aspects in Sections 5.2, 5.3 and 5.4, it is observed that

Australian sugar processing firms have shown their capabilities to marshal all the

above stated resources to be the most technically efficient with low production cost

and the highest recovery rate in the world. Moreover, with around 80% of their sugar

Firm Effects • Firm characteristics

- Monopoly power & rent (Porter)

- Increased Efficiency

International Competitiveness • Market Share • Profitability • Efficiency &

Uniqueness • Performance

through R&D and innovation Industry Effects

• Industry characteristics

Socio-Political Effects

• Nature of Govt. • Socio-cultural contexts. • Nature of institutions • Public opinion & interest

groups.

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production being exported, the firms have acquired specialised knowledge of

international trade. In such a context, it is proposed that:

P1: Australian firms will continue to attain international competitiveness

through uniqueness and efficiencies generated from their resources and

capabilities.

Firms in Brazil are idiosyncratic because throughout their history they have

accumulated different physical assets (Collis, 1991) based primarily on the nation’s

vast natural resources with suitable climatic conditions. Moreover, the firms

irreversible investments made in various inter-related assets (Collis, 1991) such as

sugarcane processing, power generation, and ethanol production, have resulted in

securing the distinctive value of the firm (Ghemawat, 1991). This has been made

further possible with the firms creating and acquiring assets from the domestic factor

markets (with which the country is relatively well endowed) and developing them

through economies of scale, ‘home-grown’ technology and increased efficiency. The

rationale for the asymmetric nature of the Brazilian firms (millers and refineries) is

borne out from the fact that each firm has the choice of different product market

positions (Collis, 1991) – sugar and/or ethanol – as the firms optimise the

attractiveness and the cost of building such a particular product market position.

Furthermore, Brazilian firms have attained their ‘strategic posture’ determined by its

specific assets – technological assets, complementary assets, market (structure) assets,

and the degree of integration (vertical, lateral, and horizontal) (Teece, Pisano and

Shuen, 1997) and through related diversification (Chatterjee and Wernerfelt, 1988).

Added to this, it is further stressed how firm-efficiency can be enhanced ‘through

combinations of competencies and resources’ that can be ‘developed, deployed, and

protected’ (Teece, Pisano and Shuen, 1997). Therefore, it is proposed that:

P2: Brazilian firms will choose to attain international competitiveness

through resources and capabilities generated through efficiency and anchored

in the food-energy sector.

Firms in the EU have their roots firmly entrenched in the socio-political environment

that was the legacy of World War II. Thus the firms developed and matured under a

high entry barrier condition with extremely limited or no effects from competitive

forces. In having been insulated from the highly volatile world sugar market, the firms

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went about creating distinctive competencies or strengths that are prerequisites for

success. These attributes of success particularly mandated by the task environment

and arising because of fundamental factors of the market relate to product, product

cost, product delivery, production, information and communication have been well

classified by Vasconcellos and Hambrick (1989).

In addition, Taggart and Taggart (1999) stress that ‘non-price competitive activity,

identified as an important element of competitiveness in imperfect markets, relies on

investment in R&D’.

The EU firms have acquired all the above stated essential assets and capabilities under

a protective environment that has enabled them to show their firm effects through

market position and monopoly rent as well as through efficiencies in various inter-

related activities pertaining to sugar and non-sugar business activities. It is therefore

proposed that:

P3: EU firms will choose to pursue international competitiveness through firm

effects borne out of their rent seeking monopoly position in enhancing firm

efficiency within such an environment.

6.3.2 Industry Effects

The Australian sugar industry has shaped itself by attuning to the domestic

deregulated environment and the highly competitive forces of the international

market. This has led to the industry being highly concentrated with strategy and

performance being determined primarily by existing participants and through entry

barriers. In such a situation, Mauri and Michaels (1998) state that ‘common structural

elements of an industry lead its members to share competitive characteristics’ and this

can exhibit a ‘convergent pattern of competition’ that can become industry

characteristics over a period. Further, Mauri and Michaels (1998), referring to the

works of Andrews (1971) and Ansoff (1965), emphasise that strengths based on key

success factors (KSF) need to be developed that are stable and externally determined

by the industry environment (Vasconcellos and Hambrick, 1989). Barney (1991)

notes that such course signifies that firms in the industry converge towards

competitive parity enhancing their chances of survival.

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In the above context, the Australian sugar industry has formulated their four KSF (as

identified in Section 5.4) in acknowledgement to the prevailing circumstances in the

world sugar industry. This dominance of the industry effects shows ‘the similarities in

response to industry conditions and imitation of successful strategies’. It is therefore

proposed that:

P4: Australian firms will continue to attain international competitiveness

through uniqueness and efficiencies generated in industry-level characteristics

of a united industry strategy and industry R&D efforts.

The competitive forces that are shaping the Brazilian sugar industry are driven by

market conditions and economic attributes of the food-energy sector of the economy.

This has led to the sugar industry becoming attractive with concentration also on

related industries – market positions that can be shielded behind entry barriers with

increasing rivals costs (Teece, Pisano and Shuen, 1997). Moreover, the advantages of

the Brazilian sugar chain have been reaped through ‘discovering, creating, and

commercialising new sources of value’ (Teece, Pisano and Shuen, 1997). Such

industry conditions help to economise the resources utilised by the firms for better

and increased efficiency and monopoly rents. It is therefore proposed that:

P5: Brazilian firms will choose to attain international competitiveness through

direct and indirect industry effects emanating from the food-energy sector of

the economy.

The industry characteristics in the EU have been formed under restrictions imposed in

expansion of sugar capacities due to quotas. This led to limited strategic choices that

were available to the firms and as a consequence three types of companies

characterise the industry – specialised sugar companies, diversified sugar companies,

and food companies with sugar activities.

In the relative absence of competitive forces and limited capacity for growth, the

industry structure has become extremely concentrated with high entry barriers. The

industry stability is guaranteed under a strong socio-political environment that has

also provided the industry power primarily in respect to the farmers of sugarcane. In

this context it can be proposed that:

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P6: EU firms will continue to pursue international competitiveness through

direct and indirect industry effects emerging from the present industry

structure tempered by its socio-political milieu.

6.3.3 Strategy Effects

Porter (1991) contends that in RBV, the success of firms based on unique resources

should be nurtured for further growth and success. Black and Boal (1994) referring to

the work of Barney (1993) state that the independent variables of RBV are defined at

a level of bundle of resources while ‘competitive advantage, not economic rent per se,

(the dependent variable) at a different level of analysis’ which is at the level of firm

strategies. In alignment with the above reasoning, Australian firms are in the process

of winning competitive advantage by harnessing the drivers of cost and differentiation

(Porter, 1980) in its specific industry. Viljoen and Dann (2003) write that in

attempting to overcome the commodity status of raw sugar and buyer power of the

refiners, QSC (the erstwhile sole selling exporting agency) has developed

differentiation strategies for Australian raw sugar such as:

(i) Offering just-in-time supply service to refiners;

(ii) Including a service guarantee in the contract of sale;

(iii) Implementing a quality consistency program to avoid the need for a

refinery to adjust the refining process with every new load;

(iv) Identifying shipping requirements of each refiner with regard to the size of

vessel and method of off-loading;

(v) Negotiating long-term sale contract with refiners, as refiners (and buyers)

dislike violent price fluctuations for raw sugar.

In effect, the Australian firms are primarily concentrating on the delivery of a given

set of customer benefits at lower costs than competitors, and/or providing customers

with a bundle of benefits its rivals can not match (Porter, 1980).

However, any strategy of related diversification is prominently not evident from the

firms’ activities and this way the firms are unable to position themselves strategically

in any other product market when sugar prices are under considerable downward

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pressures in the world market. Furthermore, Pettus (2003), in a study based on RBV

to explain how firms grow in a deregulated environment, highlights the fact the ‘firms

must utilize a specific sequencing of both acquisitions and internal development

decisions to grow’. Such activities however are also not perceptible with Australian

firms. It is therefore proposed that:

P7: Australian firms seek to attain international competitiveness with increased efficiency and productivity seen to be the most effective strategy despite ‘imperfect competition’.

Collis (1991) states that ‘strategy is constrained by, and dependent on, the current level of resources’. Further it is emphasised that strategy is to be devised relating to elemental features of firm performance that are ingrained in competencies and capabilities – nurtured and developed by positions and paths (Teece, Pisano and Shuen, 1997). Positions are created by the need to reconfigure firms’ asset structures in response to changing environments and to effect the necessary internal and external transformation (Amit and Schoemaker, 1993). Brazilian firms have attained strategic positions by their focus on acquiring a unique ‘vector of resources’ (Collis, 1991) and competencies which have been moulded to produce inter-related products. This situation has placed the firms in an enviable condition that enables them to choose and alter different product market positions. Therefore, it is proposed:

P8: Brazilian firms will choose to enhance their international competitiveness through their positioning of resources – natural and created, linked with the energy sector.

EU firms have operated in an environment that consists of the immediate or near non-competitive environment and the broader and stronger technological, economic, legal and socio-political environment. In such a situation, the firms have embarked over the years in the strategy process of consolidation, diversification, and expansion.

Consolidation has taken place through technology and through reducing production

cost, increasing plant capacities, benefiting from scale of production and reducing the

number of sugar processing plants. However, these consolidation activities are carried

out by firms within the quotas fixed by the EU. Further consolidation has been

effected through mergers and acquisitions and now expansion to newly joined Central

and Eastern European countries. Moreover, in anticipation of uncertain environment

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with negotiation at the WTO on sugar, firms have engaged in diversification strategy

into non-sugar processing activities. Teece, Pisano and Shuen (1997) state that related

diversification that builds or extends existing capabilities, is understandable when

firms’ traditional markets decline. In the EU’s case, it is restricted. The diversification

process is also seen in acquisition activities of firms in the food and agribusiness

industry.

The resource-based theory (Barney, 1991; Wernerfelt, 1984) advocates that the ability

of a firm to respond to strategic opportunities varies with its resource endowment –

inherited, created, and acquired, that are distinguished among firms. Rhee and Cheng

(2002) opine that the firms will have greater ability to drive more and newer

initiatives in reaction to environmental changes if they are ‘more resource rich’ – in

terms of both variety and amount. In keeping with the above view and in search of a

long-term strategy in apprehension of a change in the present non-competitive

domestic environment the EU firms have embarked on further consolidation,

diversification, and expansion in overseas market e.g. in Brazil. It can therefore be

proposed that:

P9: EU firms will choose to pursue international competitiveness through the

strategy of consolidation, diversification and expansion of resources and

monopoly positions both in domestic and overseas markets.

6.3.4 Socio-Political Effects

Mahon and Murray (1981) have highlighted the fact that the transition from a

regulated environment to a deregulated one produces dramatic environmental change

for a firm. The objective of earlier government regulation of the Australian sugar

industry was to provide security for the weaker stakeholders and prevent their

exploitation by the strong ones (Anthony and Higgins, 2002) and that resulted in

nurturing the growth of the Australian sugar industry and its stability. However, with

the increasingly difficult times with reduced sugar yields, low industry profitability,

and adverse internal and external factors, the debate over the direction of the

Australian sugar industry has shifted especially at the macro-policy level. The

uncertainty in the world sugar market has increased uncertainty in the domestic

market with emotive deliberations focus on deregulation, farm exits, government

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financial support and trade policy concerns (Rabobank Report, 2003). Further, any

meaningful breakthroughs in trade access for Australian sugar into the EU, US and

Japan would be positive for the industry. The Australian government is already

engaged in a trade dispute at the WTO about EU sugar subsidies, while the subject of

sugar access in the US needs to be vigorously pursued further.

P10: Australian firms will need to attain international competitiveness through

socio-political effects that can change the present environment in the world

sugar industry.

Helfand (1999) through his work on political economy of agricultural policy in Brazil

has explored the policy choice for the agricultural sector during the period 1964 to

1992 by examining the interactions of four key factors:

(i) the Brazilian state – as a multifaceted actor with diverse interest groups;

(ii) the interest groups;

(iii) the economy; and

(iv) the political regime – providing different decision-making environments

and forms of representation.

Further, Helfand (2000) tests various hypotheses focusing on:

(i) interest groups – agriculture and industry with concern about the welfare

of their members resulting from the outcome of the policy choice;

(ii) the goals of the state – assumed to have a multiplicity of goals;

(iii) political changes (that characterised the 1980s).

The study highlights how the changes in

(i) exogenous economic variables – in particular, the rise of oil prices

internationally and high interest rates that characterised the late 1970s and

1980s, and

(ii) the Brazilian political and institutional environment, which dramatically

changed in the evolving economic environment,

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resulted in an evolution of policy choices that characterises the period from 1964

to 1989. In spite of Brazil being ruled politically by the military from 1964 to

1989, the 1980s can be discerned as a period of transition towards a democratic

regime. Moreover, the easing of the political system, that followed, greatly

benefits the expression of newly emerging producer groups and their influence

over agricultural policy.

Pereira (2003) dwells on how agrarian reform during the opening of the political

system brought about democratisation of the economic and social policy in the

countryside of Brazil characterising ‘the promotion of conservative

“modernisation”’. The military regime subsequently formulated policies of

subsidised credit, tax breaks, price supports, incentives promoting development of

large, highly capitalised, mechanised farms with many producing for exports.

In the context of the above, the Brazilian Government will formulate national

policies emphasising relative costs and factor endowments directed at the fuel

alcohol production from sugarcane with committed support towards its R&D

activities. Today, sugar and ethanol production are so intertwined and attractive,

that they have generated various economic and social factors that need to be given

due attention by the government. Presently, though the government no longer

directly influences sugar production and exports, it does influence ethanol sales

and prices through regulation of the ethanol-petrol mix. Moreover, the strong

interest that the government has in this industry can be assessed from the fact that

it has initiated a formal WTO dispute challenge to EU sugar subsidies. Further,

the arrival of multinationals in the food-energy sector will attract government

attention with perhaps more laws and regulations. It is therefore proposed that:

P11: Brazilian firms will choose to pursue international competitiveness under

socio-political effects that are shaped by changing economic environments,

institutional environments, and interest groups.

LeClair (2000) states that government policies provide the basic foundation and the

licence to conduct business. Further, Teece, Pisano and Shuen (1997), while

impressing that those environments cannot be defined in terms of markets alone,

highlight the fact that public policies are usually recognised as important in

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constraining what firms can do. The authors add that in the above context, institutions

themselves become a critical element of the business environment and therein lies the

significance of national differences where various regulatory laws and systems are

bound by the socio-political issues.

The observations so stated are reflected in the present EU. The sugar regime is

controlled by the regulations of CMO Sugar and CAP. Ames (1991) states that:

The problems that the CAP created over the years are not independent from the

objectives of the policy itself, or from the set of principles on which it is based. The

institutional setting …involves a bargaining process among members with very

different interests, reflecting their very diverse farm structures. Policy decisions are

the outcome of a process that results in an uneasy compromise often only achieved

with high costs. (pp.286-287)

In light of the above circumstances, ongoing CAP reform exhibits serious limitations

as economic considerations are secondary to political ones. Moreover, any CAP

reform that is contemplated is not aimed at any of its fundamental principles. Given

the present structural characteristics, the CAP measures of external protection –

internal farm income support, import restrictions, and export subsidies – are highly

unlikely to be abolished. The accession of 10 new Central and Eastern European

countries will help strengthen the socio-political forces within the EU. However, the

interaction of domestic and world markets might force the EU to make some CAP

policy reforms so that the EU can be made to look responsive to market forces. Still,

even more than a decade later, it is worthwhile to quote Ames (1991) once again:

The eventual extent of this reform is still uncertain and it will be hampered by

contradictions inherent in the institutional setting of the European Community.

(p.287)

It is therefore proposed that:

P12: EU firms will choose to pursue international competitiveness through

their strong socio-political effects embedded in their inherited structural

environment.

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6.4 Summary

This chapter integrates various premises that are drawn from perspectives of strategic

management, the resource-based view of the firm, and from international business. In

the process, it has provided the conceptual framework of competitiveness in

international business.

The strategic management discipline and the resource-based view assign importance

to the role of resources in the attainment of advantage. The impact of resource

heterogeneity developed within the industrial organisation framework lay emphasis

on firm-specific advantages. The successful international operations are manifested

through firm-specific actions. The resource-based view of the firm stresses the fact

that the genesis of international competitiveness lies in acquiring unique resources

that are difficult to duplicate. International management literature provides analysis of

the strategy options for firms in terms of responses to different combinations of

environmental pressures that arise from different competitive conditions.

In the building up of a firm’s competitive advantages, nations play a crucial role. The

firms and the basic country-specific resources are embedded in the economic,

cultural, political, social, and institutional environments of a country. This contributes

to the shaping of a firm’s behaviour. Moreover, the many factors that influence

international competitiveness emerge from a link of hierarchical levels of firms,

industry, and the government.

Australian firms are firmly aligned to the principle as advocated in the resource-based

theory with no apparent signs of formulating strategies to contravene the adverse

global environment. The industry effect is prominent in relation to the R&D activities

and in convergence towards a competitive action. The non-market forces in the world

sugar market are largely ignored by the Australian firms in their pursuit of

international competitiveness. So in relation to the conceptual framework proposed,

the Australian firms are weak in their strategy and socio-political effects and are

surviving purely on their strong firm and industry effects.

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In Brazil there is a judicious mix of firm effect, industry effect, strategy effect, and

socio-political effect though there are scopes for improvements to further strengthen

these effects. Brazilian firms will choose to attain international competitiveness

through harnessing their vast natural resources and capabilities built on these

resources. The sugar industry has been extended to incorporate the energy sector so

that benefits can be reaped in the food-energy sector of the economy through the

common source of sugarcane. Further, the strategies are based on both the core

competence of firms as well as on related diversification resulting in a unique position

of the firm in both these related industries. The government seeks to play an important

role, not overtly, but through various policies in the energy related activities.

Moreover, the sugar industry is crucial for the government and the economy in respect

to socio-economic factors and therefore the government has shown an inclination to

remain engaged through policies on land reforms, foreign direct investments, and

entry of multinational enterprises.

In the European Union, the firms have attained various assets and capabilities under a

shielded environment that has formed through a strong bond among the socio-

cultural-political points of view. This factor represented as socio-political effect in the

conceptual framework is the engine that drives the EU firms for international

competitiveness with economic gains. The firms have attained strong monopoly

power and efficiencies through scale and scope which has resulted in industry

characteristics with strong R&D activities, industry stability, high profitability, and

high industry standards. Further, the EU firms’ asset positions such as technological,

financial, reputation have enabled the firms to embark on various strategies of

diversification and foreign direct investment like investing in Brazil to position

themselves either in search of resources and/or market power. It is therefore observed

that for the EU firms the four effects are very strong and interactive which places

them in a unique position to be highly internationally competitive.

Further, the application of this proposed framework is done through the generation of

the propositions. In doing so, this qualitative study heavily relied upon the

comparative analysis of three dominant sugar producing and marketing regimes of the

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world through SWOT (Section 5.2) PESTLE (Section 5.3), and the ‘diamond’ model

(Section 5.4).

The application of the proposed framework highlights, as encapsulated in Table 6.2,

the variations of the approaches that firms pursue to achieve international

competitiveness. These approaches are a reflection of the non-market forces that

shape the perceptions of the strategy formulation of the firms. The societal aspirations

of the people of the nations borne from either the economic considerations or from

historical circumstances do have a profound influence on the goals and the path taken

to achieve the objectives. However, the influence of non-market forces is obscured in

the measurement of firms’ performance through economic parameters.

The next chapter of this dissertation reflects on the importance of carrying forward the

research on international competitiveness wherein the socio-political effects can be

included in measurement to reflect its significance in a firm’s performance.

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Table 6.2: Snapshots of the four determinants of International Business orientations by firms

Australia

Brazil

European Union

Firm Effect

P1: Australian firms will continue to attain international competitiveness through uniqueness and efficiencies generated from their resources and capabilities.

P2: Brazilian firms will choose to attain international competitiveness through resources and capabilities generated through efficiency and anchored in the food-energy sector.

P3: EU firms will choose to pursue international competitiveness through firm effects borne out of their rent seeking monopoly position in enhancing firm efficiency within such an environment.

Industry Effect

P4: Australian firms will continue to attain international competitiveness through uniqueness and efficiencies generated in industry-level characteristics of a united industry strategy and industry R&D efforts.

P5: Brazilian firms will choose to attain international competitiveness through direct and indirect industry effects emanating from the food-energy sector of the economy.

P6: EU firms will choose to pursue international competitiveness on through direct and indirect industry effects emerging from the present industry structure tempered by socio-political milieu.

Strategy Effect

P7: Australian firms seek to attain international competitiveness with increased efficiency and productivity seen to be the most effective strategy despite ‘imperfect competition’.

P8: Brazilian firms will choose to enhance international competitiveness through their positioning of resources – natural and created, linked with the energy sector.

P9: EU firms will choose to pursue international competitiveness through the strategy of consolidation, diversification, and expansion of resources and monopoly positions both in domestic and overseas markets.

Socio-Political Effect

P10: Australian firms will need to attain international competitiveness through socio-political effects that can change the present environment in the world sugar industry.

P11: Brazilian firms will choose to pursue international competitiveness under the socio-political effects that are shaped by changing economic environments, institutional environments, and interest groups.

P12: EU firms will choose to pursue international competitiveness through their strong socio-political effects embedded in their inherited structural environment.

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Chapter 7 Conclusions and Future Research Directions

This chapter presents the theoretical conclusions of the research and offers some

thoughts on further development and application of the conceptual framework. This

research encapsulates the socio-political characteristics of a nation’s industry and

recognises its important role and effects on international competitiveness. Such things

have not been fully considered previously and this work can make only a small

contribution. As such this work remains exploratory. As in any exploratory work

considerable further development and simplification may be possible. The chapter

presents some future possible directions for further development of the conceptual

framework in this research.

The goals of this chapter are:

• To identify the distinct contribution this research makes to the body of

knowledge (Section 7.1).

• To summarise the meaning of competitiveness and how it is achieved in

different ways (Section 7.2).

• To understand the role of non-market forces in shaping competitiveness of

firms, industries, and nations (Section 7.3).

• To suggest implications of this research for theory, policy, and practice

(Sections 7.4).

• To discuss strengths and weaknesses of this study (Section 7.5).

• To suggest further research directions on competitiveness (Section 7.6).

It will be seen by the end of this chapter that material in this dissertation:

• Provides an improved understanding of the concept of competitiveness.

• Has highlighted important research issues and problems in respect to the

different ways firms are attaining competitiveness in the sugar producing

nations.

• Has implications for the theory, policy and practice of competitiveness.

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• Indicates research directions for a more comprehensive and rigorous study of

competitiveness.

7.1 Summary

The research on international competitiveness constitutes a wide body of conceptual

and empirical works, yet the concept remains enigmatic. This is implied from the fact

that studies often: (1) lack a holistic framework that would yield sets of both

determinants and measures of international competitiveness; (2) define,

operationalise, and categorise determinants of international competitiveness in

different ways and at different levels; (3) have an overruling consideration of

efficiency to the exclusion of other factors originating from political, government and

societal sources. The dilemma underlying international competitiveness is that there

are many ways to compete and, as has been demonstrated for sugar, these are varied,

variable, and complex.

This dissertation integrates perspectives from international business, the resource-

based view of the firm, and strategic management to propose a more comprehensive

framework of the concept of international competitiveness. It provides a systematic

approach for a more informed understanding of the diverse attributes and complex

relationships in international competitiveness. This study has sought to bring to a

particular focus the role of socio-political effects and the profound influences exerted

on competitiveness.

Three important themes underline much of this research:

The first is the crucial need for firms to understand political and social issues

and the environment so created. Assets and capabilities can be shaped

accordingly to gain competitiveness.

The second is the degree of impact of governmental and/or political and social

groups, those need to be anticipated and assessed for strategy formulation by

firms and industry to attain competitiveness.

The third is the importance of political behaviour in international business

activities and as exhibited by various governments. Such things help explain

relationships, market imperfections, market access and international

competitiveness.

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The linkages of business and society were recognised quite early, as noted by the

LCAG framework (as mentioned in Section 2.2.3 and Figure 2.1). However, this

concept was not enriched by further research. Porter (1980; 1990), working on the

industry quadrant of the LCAG framework, has developed his contribution in the

strategy field and even carried it forward to the theory of national competitive

advantage from roots in industrial organisational economics through his Five Forces

Model. Penrose’s work on the unique characteristics of the firms did allude to the first

quadrant of the LCAG framework. However, many non-market factors arising from

the contemporary political and social environment have not been considered.

This research contributes to the advancement of the existing theory and knowledge of

international competitiveness. An integrated conceptual framework for analysing

international competitiveness is presented. An application of the conceptual

framework is carried out on Australia, Brazil, and European Union. Based on the

different conditions under which the firms from these economies are operating,

various illustrative propositions are drawn that highlight the varied positions and

strategic choices that these firms are pursuing for international competitiveness. The

‘determinants of international competitiveness’ are thus more fully expressed. A

systematic, structured and detailed answer has been provided to the research question

which was ‘What are the determinants of competitiveness as pursued in practice by

firms in the sugar producing nations?’ (Section 1.1.4)

7.2 Conclusions about Research Issues

The final sets of determinants in the conceptual framework of this research illustrated

in Figure 6.2 are (i) firm effects, (ii) industry effects, (iii) strategy effects, and (iv)

socio-political effects. This framework depicts international competitiveness as

reflected through firm effects and as characterised and shaped within the environment

that is representative of the particular country and economy. The interactions among

firms, industry, and strategy have attracted considerable attention (Section 2.2) in

regard to competitiveness. However, the appraisal of non-market environments – such

as the political environment, societal issues, and role of government (Section 2.1.4)

though considered present has not been given full or effective recognition in the study

of international competitiveness.

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This research shows that the national differences (Section 5.2 and 5.3) shape the

trajectory of nation-bound firms in gaining international competitiveness. The work

highlights the role of the government as being central in an economy. It shows how

the role differs among economies based on the socio-political-cultural settings of that

country. Moreover, government intervention impacts not only on the entire economy

or sector but also on firms’ operations with international ramifications.

In the above context, the research presents varied results as depicted in the summary

to chapter 5 (Section 5.5). The main points that can be restated are:

Australian firms and industry are pursuing international competitiveness based

on traditional concept of economic factors such as uniqueness and efficiencies

of their assets and capabilities as the government is committed to the principle

of a deregulated domestic market and free (assumed fair) trade internationally.

Brazilian firms have acquired their valuable position based on their assets and

capabilities that have been nurtured by government policies driven by

economic needs and a national strategy.

The European Union firms have acquired a dominant position shaped and

nurtured by the socio-political environment created by the EU regime based

largely on historical imperatives.

7.3 Conclusions about the Research Question

In the search for the antecedents of international competitiveness as it is pursued in

practice by some of the sugar producing nations, it is observed that there are few

substantiative theories or models that overtly address the concept of competitiveness

in international business. Given the complexity revealed in this research, this is not

surprising.

This research draws on resource-based theory of the firm as well as on strategic

management theory for the theoretical foundations. Additionally, the study also draws

on the LCAG framework and also Porter’s ‘diamond’ model from his theory of

national competitive advantage in an effort to construct an integrated and a holistic

framework.

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The results of the research highlight the variations of the theme of international

competitiveness as is pursued in Australia, Brazil, and the European Union and as

reflected through firm effects from these three economies. The conceptual framework

highlights the nation-bound firm effects and reinforces the importance of socio-

political attributes that are different and unique in shaping the environment and firm

behaviour in pursuit of international competitiveness. Considering each industry

situation:

In Australia, the brunt of the competitiveness challenge falls on the industry.

To respond effectively to the current global environment, firms are relentlessly

developing a range of skills in the areas of technology, marketing,

management, human resources, and finance. Government believes in market

mechanisms and lacks the close and active partnership with the industry as is

so evident in Brazil and the EU.

In Brazil, coherent competitiveness strategy and policies by the government,

tailor-made to national circumstances, have a major influence on the creation

of industry and firm competitiveness.

In the European Union, government mitigates the risks of intensive

competition and thereby the EU firms have gained international

competitiveness creating a socio-political advantage. In this context, the

government plays a leading role in managing competitive strategy.

Each of these involves a distinctive interpretation of ‘competitiveness’ and

idiosyncratic answer in the case of sugar.

7.4 Implications for Theory, Policy and Practice

There are some implications for the use of theory from this research. In the pursuit of

the determinants of international competitiveness, the perspective of this research is to

study holistic frameworks of both market and non-market forces that influence

international business. The socio-cultural-political context and the regulatory

environment that emerges from society though acknowledged have not been fully

considered by both practitioners and academicians of international business. The

discussion on the effects and the outcomes of competition in international business are

generally conducted in the shadow of an economic perception which underrates the

significance of non-market effects originating from various institutions that are

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embodiments of societal aspirations. This research seeks to contribute towards this

apparent gap by providing a conceptual framework of international competitiveness

that is shaped by the four main determinants proposed.

International business occurs between entities that are products of various

organisations and institutions formed from different socio-cultural-political contexts.

This results in differences in the objectives and approaches towards the pursuit of

international competitiveness. The initial environment that is provided at the national

level for an entity predisposes it to act and react in the international environment. The

associated need is to study the various different processes and forces that

simultaneously interact in an international milieu. It is in the context of the above, that

this research has made an endeavour to bring to light the central theme of the socio-

political effects that needs to be properly and more fully recognised.

Reflecting on this, business managers of firms formulating various strategies in

international business should be more fully aware of the complex interactions that are

affected by varied economic practices, socio-political constraints and industry

characteristics in different nations. Thus the business managers of firms need to

analyse and evaluate pressures and stimuli emanating from non-market phenomena as

they seek market opportunity. Firm managers can strengthen or otherwise influence

the industry effects, the socio-political effects or both to their advantage. So they may

effect strategy implementation in achieving international competitiveness.

Governments need to be more fully aware of the interactive process that takes place in

international business between firms that are embodiments of different environments

and the need to pursue common interests that are borne from socio-political

aspirations. In such settings, government policy decisions should be made factoring in

the non-market attributes along with the economic parameters. Policy needs a broader

appreciation and basis.

7.5 Strengths and Weaknesses of the Study

Researches work on the conditions of non-market forces and their influences on

international competitiveness have generally been limited. This study has expanded

the knowledge base on international competitiveness. The perceptions of varied

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effects that socio-political factors can have on a nation’s government, industry and

firms have been highlighted. This research has directly addressed the core issue of the

non-market milieu that impresses upon a nation’s policies towards gaining

competitiveness. These in turn mould industry and firm strategies. Prior studies have

not presented an integrated framework that synthesises market and non-market

attributes of competitiveness. Also this research has provided a more adequated and

perhaps fairer reflection on the role of government as nations, their industries and

firms strive for competitiveness. Further, the methodological approach taken in this

research clearly differentiates the various elements of the non-market factors that

constitute the socio-political ambience of the economies compared and contrasted.

The analysis of this study also suggests that:

Understanding non-market forces by firms and industries in the conduct of

international trade and business can act as a catalyst for determining and

shaping strategies,

Understanding and evaluating non-market determinants which enhance

competitiveness also lead to firms’ and industry’s endeavour to seek various

perspectives for changing the ‘rules of the game’ to their advantage.

This research thus appears to advance a plausible explanation for why some nation-

bound firms have achieved competitiveness in an ‘imperfect market’ and are in search

of such ‘unnatural market imperfections’ for enhanced competitiveness. Many

situations of international competitiveness might be fruitfully explored through the

proposed conceptual framework.

In spite of its potency the results of this research study should be considered with

some caution as the sample economies examined are relatively few, and somewhat

unique in their setting. In international business, the complexity of the field and its

environment is considerable and many exogenous variables may impact. How these

are to be incorporated into the proposed conceptual framework warrants future study.

Apart from the theoretical issues there are also measurement difficulties in terms of

completeness, validity and reliability. Research studies tend to choose and focus on a

small subset from a large set of firms’ activities and proceed to create groups and

typologies. In the process problems arise not in what is included in the research study

or the model, but what is excluded.

117

These important issues should also be kept in mind regarding the results of this study:

The sample economies considered for this research are cast from the position

of an agricultural industry, and any generalisation of the results would need to

be checked as to the relevance for firms, industries, or similar settings.

The study basically is limited to a single industry, and while this allowed for

concentrated focus on firms, industry and strategy effects, it clearly limits and

constraints the generalisability of the results.

The international environment for this study is built specifically around

Australia, Brazil, and the European Union and generalisation of any kind

should keep these locations in mind. Any wider application of this study

requires both sufficiently similar products and markets.

The number of economies considered is small. Some of the other influential

world economies, notably USA and Japan on the demand side are not

accounted for. Nor are some of the major exporting nations of sugar from

developing economies such as Thailand have been examined.

The nature of the phenomenon being studied is complex and when discussing

such dynamic concept, a small sample size can only make the findings

tentative.

The research is built on a foundation of sources and data that are mainly

secondary in nature. Moreover, a study based on qualitative research may

suffer from low credibility, deserved or not.

While acknowledging such things and the necessarily limited nature of the research

presented, it has been demonstrated that useful understanding of competitiveness can

be gained from the approach developed.

7.6 Implications for Further Research

This study seeks to understand the determinants of international competitiveness by incorporating the significance and the role of non-market and socio-political attributes. However, it is suggested that future research may be pursued by drawing on various disciplines that would further contribute to the comprehension of

118

international competitiveness and make the body of knowledge more coherent and grounded, methodologically more potent, and appropriately supported by empirical studies.

7.6.1 Multidisciplinary Study

Many researchers (e.g. Dunning, 1989; Toyne and Nigh, 1998) have highlighted the positive impact of drawing from other intellectual fields for knowledge generation and development. The relational parameter that has been identified as constantly associated with international competitiveness implies that the behavioural and social constructions, and associated perspectives can be studied drawing on other theoretical domains such as sociology and political science. This can further a holistic view and wider explanations of international competitiveness.

In order to augment the conceptual paradigm of international competitiveness presented in this dissertation, one of the possible theories that can offer a promising addition is strategic-trade theory. This theory, as pioneered by Brander and Spencer (1985), concentrates on an imperfectly competitive world wherein the roles of trade policy and export subsidies are being considered. Additionally, the theory can be reinforced with political-economy motivations of various governments. Such work would complement that undertaken here.

7.6.2 Conceptualisation, Operationalisation, and Measurement

The conceptual framework of international competitiveness proposed becomes more

grounded when the four determinants and their interactions are empirically tested. In

order to operationalise the concept, it is important that measures be developed where

appropriate that are embedded in theoretical foundation and empirical works. This

will provide a foundation for examining the relationships among various variables and

also to the international competitiveness outcomes.

It is proposed that further research be done so that the empirically tested studies may

explore associations among the specified variables identified and provide a more

informed understanding to the concept of international competitiveness.

7.6.3 Methodological Rigor

119

In an endeavour to enhance the methodological rigor, it is suggested that future

research should involve case studies which advance understanding of the complex,

dynamic, and intangible nature of the determinants of international competitiveness.

The collection and analysis of qualitative data would be of benefit.

An efficient means of testing a wide range of variables may also be sought. This

might combine the macroeconomic of nation, industry and microeconomic of firm

analysis. There are difficulties inherent in such an exercise as is evident in the cases

here studied.

Finally, the complex causal relationships between determinants of international

competitiveness and its measures, as also among variables within these groups, need

to be analysed through more sophisticated analytical approaches. Moreover, the

differences that exist among the various variables in different economies need to be

highlighted, analysed and appreciated

7.7 Conclusion

This study on international competitiveness is based on research that has primarily

focussed on firm resources and capabilities, the resource-based perspective, on

environmental conditions, the strategic management perspectives and the wider

influences of society and governments. This led to a focus not only on the firm and

industry level conditions but also on crafting and implementing strategies while

taking into account the environmental dimensions created by the institutions that exist

in each economy considered.

The concept of competitiveness in international business based on present study has

been delineated and detailed with an extensive comparative study developed. It is

hoped that future researchers may reflect positively on this work, despite its apparent

limitations. Further development and refinement of the approach offered here will, it

is hoped, advance understanding in the important area of international

competitiveness, and of how it is sought in international business.

120

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135

Determinants of International Competitiveness: A Comparative Study of the Sugar Industry in Australia,

Brazil, and the European Union

Shantanu Banerjee

APPENDICES A - C

The material in the following appendices should be read in conjunction with the specific references to the sections in the main text of the dissertation.

136

PREFACE TO APPENDICES

The following appendices contain details supporting the analysis stated in Chapter 5,

Sections 5.2 to 5.4 of the dissertation.

Appendix A describes the various SWOT attributes of the three main sugar exporting

economies of the world. This appendix extensively dwells on the strengths and

weaknesses of three economies to analyse their advantages and disadvantages in the

formulation of their various strategies as described in Section 5.2.

Appendix B contains details on an array of factors that influences the environment

within which firms and industry are embedded. This appendix provides more detailed

information of the context within which firms operate and behave. Based on such

evaluation, analyses and comparison of the business environment in the three

prominent sugar exporting economies have been done in Section 5.3.

Appendix C provides detailed analysis of the various attributes of Porter’s ‘diamond’

that shapes firms, industry, and the nation towards competitiveness. Further to this,

firm, industry, and national levels analysis is drawn to explore the interaction of these

‘multi-level, hierarchical process’ that influences each other towards attaining

competitiveness. The results of such analyses have been placed in Section 5.4.

137

APPENDIX A

Detailed Listing of SWOT Attributes

(I) Australia

Strengths:

Good infrastructure and low production costs have enabled the firms and the

industry to perform well in the relative absence of policy intervention

(ABARE, 1999).

The industry is one of the most highly mechanised sugar industries in the

world with an impressive track record of technological development:

(i) the world’s first mechanical cane harvester was built in

the coastal town of Bundaberg in 1890,

(ii) bulk handling systems are particularly effective and

efficient, and

(iii) there is a long and proud history of supporting research

from farming to processing (Antony and Higgins, 2002).

Australian firms fare substantially better than the other countries, with an

overall recovery (rates of extraction of sucrose) of approximately 90%. (Most

other countries achieve recovery rates of 78% to 80%).

Increased productivity, cost efficiency and quality have made the firms and the

industry one of the most endowed – both natural and created – in the world.

Weaknesses:

Growers and millers are locked into prescribed practices. Individually they

cannot significantly expand or contract production. They cannot market their

own production.

The Australian industry is operating in a high wage environment in

comparison to the other sugar producing and competing countries.

‘Australia’s major competitor, Brazil has experienced a major collapse in its

currency in recent years compared with Australian dollar, that has massively

enhanced the Brazilian sugar industry’s competitiveness against Australia and

A 1

its ability to sustain its industry under low world price conditions’ (Advance

Cairns, 2002).

Australia regulates its market with a massive monopolistic state trading

enterprise. This results in lack of competition in the marketing of Australian

sugar.

Australian domestic market takes up a sizeable quantity – 15% to 20% of its

yearly output, but the Australian cane growers enjoy none of the protective

subsidies enjoyed by their European or American counterparts. The industry

survives in an unprotected international environment.

Exporters continue counting on unstable markets like Russia or Arabian

countries where imports can fluctuate significantly and affect price and their

return.

Opportunities:

Opportunities are foreseen with policy options wherein ‘full sugar market

liberalisation in the United States; that the white sugar intervention price in the

European Union would be reduced to around the world price; and that barriers

to sugar imports in Japan, China, Mexico, South Korea and Canada would be

removed’ would result in an estimated 41% rise in world sugar prices by 2005

and volumes of sugar exported rise for Australia by 16%, (ABARE, 1999).

In diversification, especially to the energy sector.

Threats:

Australian firms would be most vulnerable to the fluctuation in the world

sugar prices as there is no prospect of the industry receiving State assistance.

In the current situation, the terms of trade faced by growers and millers

continue to decline forcing a relentless need for improved efficiency in

production, harvesting, milling and marketing (APSRU, 2004).

‘The industry is located in an environmentally sensitive narrow coastal strip,

and there is widespread community and industry interest in ensuring

production does not damage this special environment, that includes the World

Heritage listed wet tropical rainforests and the Great Barrier Reef’ (APSRU,

2004).

A 2

Climatic variability.

Any easing of the fuel alcohol blending requirement for gasoline in Brazil

would have a dampening effect on the world and create the prospect of

Brazilian sugar flooding the world market.

(II) Brazil

Strengths:

It is the world’s largest and most efficient producer of sugar explained by the

firms’ agricultural efficiency, technology and cheap labour costs.

Advantages have resulted from large size and scale, productive labour usage,

technology dominance, alcohol distribution network, high nationalisation

level, energy creation, by products of industrialisation (in several sectors, like

orange juice production, wood, paper, plastic, energy co-generation, and

others), environmental protection.

Brazil’s strength in its sugar – alcohol and related industry, has attracted large

external investments, and consolidation is in course.

Yields from sugar cane have also increased with the development of raw and

more productive sugarcane varieties.

Brazil’s concentration of 60% of world ethanol production from sugarcane as

an alternative fuel that saves on import. The Brazilian sugar industry was

largely built around its subsidised sugar-to-alcohol program.

Sugarcane is important for job creation.

Sugar exports generate credits for the Brazilian trade balance.

Devaluation of its floating currency increases attractiveness of Brazilian sugar.

Sugarcane biomass resource is particularly valuable in developing countries

like Brazil, due to population pressures, the need for rural development, and

dwindling supplies of forest-based biomass.

An extensive national agricultural research network that already has a proven

track record.

Newly arrived European MNCs could strengthen and restructure the Brazilian

industry through the process of mergers and acquisition, infuse fresh funds and

accelerate growth in the domestic market and enhance exports.

A 3

Weaknesses:

Over reliance of Brazilian economy on sugar – cars were powered by pure

ethanol distilled from crops, stoves were fuelled by it, and only a quarter of it

was exported.

The image of this industry in Brazil though improving is not perceived with

the advantages it has. This is because the millers are used to be seen as

protected entrepreneurs, and there is also a history of large incentives from

governors in the past.

Predominant reliance on expensive overland truck transportation to move most

bulk commodities to export positions. As a result, farm-gate-to-port charges

will likely remain closely tied to fuel costs.

Brazil’s internal transportation and marketing infrastructure, and port facilities

and operations, are still inefficient and costly, and will require substantial

productivity growth.

Brazil still has troublesome macroeconomic environments that include large

public sector and agricultural debt.

Government policies are at times not transparent.

Brazil still has poorly functioning domestic credit institutions.

Sugar millers don’t have large international exposure and/or experience, and

trading companies are necessary to perform exports.

The harvesting workforce is not qualified and mechanisation is bringing

problems of reallocation of this workforce.

Several family owned groups and family management are present. Information

systems and information sharing have a lot to improve. Modern and effective

management principles and techniques need to be employed.

Several mills have financial problems which reduces strategy amplitudes.

Opportunities:

Opportunities are foreseen with policy options wherein ‘full sugar market

liberalisation in the United States; that the white sugar intervention price in the

European Union would be reduced to around the world price; and that barriers

to sugar imports in Japan, China, Mexico, South Korea and Canada would be

removed’ would result in an estimated 41% rise in world sugar prices by 2005

and volumes of sugar exported rise for Brazil by 23% (ABARE, 1999).

A 4

The opportunities regarding sugar are related to the high efficiency in sugar

and cane production, attractiveness of growing international markets for end-

user sugar and for industrial uses of sugar, lowering barriers, organic markets,

differentiation and value-added sugar.

Opportunities also lie in the attractiveness in overseas markets of the

utilization of Brazil’s ‘home-grown’ technology like producing fuel-alcohol

from sugarcane production.

Regarding alcohol, opportunities are high oil (petroleum) prices – alcohol is

one of the least costly renewable fuels in the world; the growing importance of

the environment (alcohol can be used as an additive to gasoline and diesel),

and opening of international alcohol markets.

Sugarcane being produced predominantly in the developing world, the

advanced expertise found in major producing countries like Brazil and India

offers good potential for South-South co-operation.

Expanding the use of a renewable energy resource has obvious appeal for

international efforts to reduce carbon emissions.

Threats:

Sugar being one of the most blocked chains in the world, the sugar buyers (for

instance food and beverages industry and others) cannot apply supply

management concepts and buy, according to quality standards from the

cheapest suppliers.

Climatic variability.

Entrance of large MNCs, mainly European, in the Brazilian market by

acquisitions of Brazilian sugar mills to take advantage of the huge potential of

the internal market and also the potential for sugar exports from Brazil, and

also when the international market is more liberalised.

(III) The European Union (EU)

Strengths:

EU firms’ strength has been built on concentration of production and

economies of scale.

A 5

The EU has a highly regulated domestic sugar market wherein the sugar policy

works by holding the internal domestic price of sugar at a sufficiently high

level to provide adequate returns to sugar producers.

Self-financing sugar program.

Weaknesses:

Without subsidies and protectionism, the survival of European sugar

companies is threatened.

The EU produces almost all of it white sugar from beet and currently beet

sugar production costs are substantially higher than global cane sugar

production costs.

Beet sugar is grown mainly in developed countries with temperature climates,

and does not have the favourable energy balance that makes cane so attractive

as a renewable energy source.

The protection of the EU market from foreign competition reduces the

incentive for the uptake of new technology and change, and this induces

inefficient growing and milling practices.

Opportunities:

Reduced policy intervention in the EU sugar market would result in significant

welfare gains to EU member states and to sugar exporters with cuts to the

intervention price being more effective than reduction in the EU sugar

production quota.

The estimated effects of lowering the EU’s white sugar intervention price to

approximate world price is an almost 20% rise in the world raw sugar price

(ABARE, 1999).

Threats:

Over time, the requirements of the WTO and progress towards liberalisation

will increase the pressures for reductions in the protection afforded to the

European Union sugar producers.

From Brazilian sugar in future (otherwise the market is protected).

A 6

APPENDIX B

Detailed Listing of PESTLE Attributes

(I) Australia

Political factors

The Center of International Economics (CIE) Report (2002) states that the Australian sugar industry has functioned for an extended period within one of the most regulated industrial structures created for any industry in Australia. The various industry reviews that took place in the 1980s and 1990s demonstrated the gains from legislative change, and accordingly the change in the industrial structure was brought in. The Sugar Industry Act 1991 liberalised some of the regulation holding back the industry.

Australia has been at the forefront of world agricultural trade reform at the Uruguay Round and in the process introduced a number of reforms in its own economy. Despite an environment of declining real prices, eased restrictions allowed areas of cane, and yields of cane and sugar output to expand rapidly. Presently the government is committed to deregulation and has left the industry trying to compete in the domestic and the world markets at extremely depressed world prices.

In the recently concluded US-Australia Free Trade Agreement, sugar was kept out of the Agreement by the US under pressure from the US sugar lobby (enjoying the protecting benefits of the US government) resulting in a huge disappointment and setback to the Australian sugar industry.

However, the Australian government being committed to the principle of free trade and agricultural trade challenged EU sugar subsidies at the WTO. Recent ruling by WTO against EU sugar subsidies have provided a boost to the Australian government though the ramifications of this ruling is still to take effect.

In December 2002, the Federal Government’s 3cents/lb sugar levy was passed in Parliament with ‘this deal costing $16 million to taxpayers’ (Rabobank, 2003).

Economic factors

Recent years have seen sugar:

• Plagued by low profitability margins despite ongoing improvements in technical and cost efficiency; and

B 1

• Decline in productivity due to seasons of poor weather, in conjunction with the increasing competition in foreign markets, threatening a devastating economic impact.

The economic factors that can lead to sustainability of the Australian sugar industry can be better understood with a look into the variables affecting the costs and revenues as shown in Table B 1.

Table B.1: Variables affecting revenue and costs of sugar production in Australia.

Revenue Costs Dependent on production and cane price Production is influenced by farm size,

weather (climatic conditions impact on production variability), pests, disease, technology & its adoption or yield generation, capital employed (financial & human/ organisational).

Cane prices are subjected to the vagaries of world sugar price, exchange rates, foreign market intervention, domestic market, international supply & demand linked with increase in production and consumption, international competition & subsidies, contract agreement.

The price received for raw sugar in the world market is heavily distorted stemming largely from government policies in relatively small number of countries – especially USA, EU, and Japan. The domestic policies also have the combined effect to make prices not only depressed but also volatile. Diversification from the monoculture of sugarcane is contemplated to be an option to improve farm productivity and ultimately its revenue. This option suffers the limitation of: Geography, Capital investment necessary, Market access, and Agronomy.

Industry considers it more viable to look for diversification of product from sugarcane, utilising existing equipment, infrastructure, and growing expertise, without undermining viability of entire districts. Some diversification into electricity generation & downstream uses of molasses has been possible by sugar mills, direct revenue benefits to growers do not flow.

Include land values and input prices (both fixed and variable costs), government influence costs and environmental compliance costs. The variables of the costs of production include: Farm, district, size, soil type & whether

cane is irrigated or rain fed. Largest cash costs are in cane harvesting,

fertiliser/chemicals, fuel, repairs, maintenance, overheads and wages.

In irrigated areas, water is also a significant input cost.

Interest costs and lease payments are also significant costs borne by farmers.

B 2

Sociological influence

Sugar Research and Development Corporation (SRDC, R&D Plan 2003 – 2008) states that the industry’s economic downturn has impacted strongly on the societal sustainability of the coastal communities that are dependent on it. Around 20,000 people are employed by the sugar industry and they, with the 6000 growers that farm along the Queensland and NSW coast, and the communities of which they form an integral part, rely heavily on the well-being of the sugar industry.

Economic activity and employment centres locally around the sugar industry which is mainly concentrated in the coastal portions of north-eastern Australia (ranging from the Atherton Tableland to northern New South Wales). ‘The industry provides basic regional infrastructure and generates significant wealth from a part of Australia where alternative agricultural production options are limited’ (SRDC, R&D Plan 2003 – 2008).

Technological influences

The arrival of the German built ‘Claas’ harvester in 1957 encouraged local manufacturers to develop more efficient green harvesters. All cane in Australia has been harvested mechanically since 1979, with about 1200 machines now in use.

Green cane harvesting was driven by a need for more flexible and efficient ways of harvesting, particularly in the excessively wet conditions that occur in Far North Queensland.

Over the past two decades, the majority of farmers have adopted green cane harvesting and associated trash blanketing practices.

The industry’s adoption of green cane harvesting after about half a century of almost universal cane firing has delivered considerable agronomic gains, including greater soil moisture retention, better weed control, reduced erosion, improved soil structure and minimum tillage.

It has also provided greater flexibility in the timing of harvesting operations, especially during wet weather.

The industry is expected to see great progress made in digitisation of industry operations with the availability of new Information Technology and in plant improvement with new advances in Biotechnology.

B 3

Legal factors

The regulatory framework for the Queensland sugar industry is established primarily by the Sugar Industry Act 1999, as amended (the Act). Responsibility for the Act resides within the Queensland Department of Primary Industries (QDPI). The legislation seeks to provide a framework for the supply of cane by farmers to a mill and the vesting and marketing of raw sugar on behalf of all farmers and millers in Queensland.

The Queensland Government submitted that its strategic policy direction for the sugar industry is to devolve as much control as possible to industry to make its own decisions. This direction has manifested in several legislative developments:

(i) The Sugar Industry Amendment Act 2000 provided for the transfer of Queensland’s seven bulk sugar terminals to industry ownership. The terminals are now owned by Sugar Terminals Limited (STL), a company in which both farmers and millers own shares. The terminals are operated by Queensland Sugar Limited (QSL) – an industry owned corporation, under a contractual agreement with STL.

(ii) Under the Primary Industries Bodies Reform Act 1999 (PIBR Act), the statutory producer representative body for the growing side of the industry – CANEGROWERS – became a private body.

(iii) In May 2001, the Queensland Government approved the transfer of the Bureau of Sugar Experiment Stations (BSES), to an industry-controlled company equivalent corporate structure, and the establishment of a joint Industry/Government Steering Committee to develop options for its incorporation. The Steering Committee is to report to the Queensland

Government with a view to introducing legislative change that will provide for the transfer of BSES to industry ownership and control.

The Sugar Industry Act 1999 assigns a regulatory role to the BSES, and there are close links with the Plant Protection Act 1989 which, for the purposes of preventing, controlling or removing pest infestations of plants, is administered through the QDPI Animal and Plant Health Service. QDPI has overall responsibility for the management of exotic pest and disease emergencies in Queensland including those related to sugarcane. There are collaborative arrangements with BSES, the Australian Quarantine and Inspection Service (AQIS), other States and Territories and Industry,

B 4

through a consultative committee to address exotic disease incursions when required. The Sugar Act 1999 has been amended with the introduction of the Sugar Industry Reform Act 2004. However, various provisions of the new Act will come into effect in future years (of 2005 and 2006) and its implications remain unclear.

QDPI also acts as a consultant in negotiations with the National Registration Authority, when specific chemicals for use in the sugar industry are being assessed. In addition, the sugar industry, as with all chemicals users, is subject to chemical usage controls under the provisions of the Control of Use Acts, namely the Agricultural Chemicals Distribution Act 1966 and the Chemical Usage (Agricultural and Veterinary) Control Act 1988, which are administered by QDPI.

Environmental issues

‘The sugar industry’s mainly coastal location, adjacent to environmentally sensitive areas of international significance (the Great Barrier Reef, rainforests, and coastal wetlands), places particular responsibility on the industry to ensure that its practices are environmentally sustainable’ (SRDC, R&D Plan 2003 – 2008).

The introduction of the Environmental Protection Act 1994 – combined with a fundamental desire to protect the rich landscapes that are a part of cane growing regions and increasing pressure from environmental activists – has made the adoption of sustainable cane growing practices an important issue for the sugar industry.

The Queensland sugar industry has made significant commitment to improving its environmental performance. The industry’s proactive approach to this task started with the commissioning of an independent and extensive audit in 1995 to determine the impact of cane growing practices on the environment. CANEGROWERS, BSES and CRC Sugar responded to the recommendations of the audit with the development of an Environment Management Strategy, which contained four broad objectives:

1. To adopt agricultural practices that minimise off-farm impacts and ensure the sustainable and efficient use of soil and water resources;

2. To achieve a balance between sustainable cane growing, the protection of natural systems and the fostering of biodiversity;

3. To achieve appropriate use of agricultural chemicals and proper storage, use and disposal of dangerous goods and farm waste;

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4. To raise the level of communication and public relations on environmental matters.

(II) Brazil

Political

During Brazil’s political reforms in the 1970s and 1980s, sugarcane production received considerable government support under a national program – PROALCOOL, to promote domestic production of fuel alcohol. Under the program, some of the most productive agricultural land was diverted to sugarcane production.

Brazil has for decades pursued the predominantly economic policy of import substitution and the establishment of industries protected from international competition. This however resulted in a substantial distortion of factor and product markets. It was only since the beginning of the 1990s this protective policy has been abandoned in favor of a rather market oriented policy (Gaese, 1997).

Brazil’s trade liberalisation and macroeconomic adjustment program was made particularly difficult by the adaptation of agricultural sector. This sector suffered has a history of high indebtedness that was further compounded by the impact of recent high interest rates. In an effort to tide over the difficult situation, the government considers that one of its major tasks is to bridge the gap between arrangements adopted under previous development models and current economic realities.

The government no longer influences sugar production and exports though for many years the Brazilian Government taxed its sugar exports in order to keep domestic sugar prices low. Presently, the sugar situation is more affected by the government’s policy toward alcohol – chiefly influencing ethanol sales and prices through regulation of the ethanol content in gasoline (Haley and Suarez, 2003).

Economic factors

Brazil today is the world’s largest producer of sugarcane, sugar, and fuel alcohol (ethanol). Moreover, currently Brazil’s sugar and ethanol industries operate in an economy that has experienced large declines in government intervention, increased privatisation, and reduced inflation. However, adverse effect on the combined industries of sugarcane, sugar and fuel alcohol has been observed owing to the economy been burdened by high international debt, high internal interest rates, and a depreciating currency (Haley and Suarez, 2003).

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The Brazilian economy has changed significantly since 1992 which has been driven in large measure by a broad economic stabilisation program put into force in July 1994 – the Real Plan. The Real Plan is built to give new impetus to the series of previously achieved reforms – including the opening of the economy, the deregulation, liberalisation of the exchange market, and the normalisation of relations with the international financial community. The Real Plan was undertaken through three basic elements:

(i) a monetary reform including the creation of a new currency (the “Real”),

(ii) the elimination of indexation in contracts – including wages and exchange rate, and

(iii) greater reliance on market mechanism.

The sugarcane chain in Brazil is one of the oldest chains, being linked to some of the main historical events of the country. Estimates, as per UNICA – the Sugar Mills Association – indicate that more than US$ 12 billion is involved in this chain (US$ 1 billion in the agricultural supplies, US$ 3 billion in farm production, US$ 1.2 billion at the sugar mills, US$ 3 billion in distribution and marketing and US$ 2.8 billion in tax generations).

Brazil’s sugar chain changed their main focus in the seventies with the concentration shifting from the food sector (production of sugar) to the energy sector (alcohol), with the development of the Brazilian “PROALCOOL” Program – motivated by the oil crisis. The program had strong government support and incentives that encouraged new sugarcane mills and distilleries. This enhanced alcohol production for use as car fuels. This created a situation where by the end of the 80s, more than 90% of the cars produced were totally moved by hydrated alcohol. In 2001, though, alcohol cars did not reach 1% of new car sales, but still a large (but declining) fleet was running. The effect of reduced alcohol use for car fuels resulted in sugar gaining importance again, (counterbalancing alcohol) and reaching equality in terms of sales.

In the sugarcane chain, besides the farms to mills, the main clients are:

• The main food industries in the country – segmented in beverage carbonated industry, chocolate industry, ice-cream industry, candy industry, powder beverage industry, conserve industry, juice industry, diary industry, gelatin and jam industry.

• Another important channel is the large fuel distributors.

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• Vast majority of exports are done through large trading companies.

• Other channels are the chemistry industry, cosmetic and pharmaceutical industry and paper mills.

For the Brazilian economy, sugar and alcohol are its most important products followed by its byproducts as bagasse – that can be used to generate energy. Some sugar mills are completely self-sufficient in energy while some are even able to sell the energy surplus to the electrical network thus starting a promising market. Other byproducts are molasses, cellulose paste and leaven.

In the present sugar industry of Brazil, four main aspects are emerging:

(1) The merger of factories – to exploit the synergy of combined operations,

(2) The participation of rich north-eastern Brazilian sugar groups, and

(3) The presence of MNCs in the sugar industry.

An interesting aspect especially in the Brazilian market and the significance, in general, in the international sugar market is the entrance of large multinational, mainly European companies, in the Brazilian market by acquisitions of Brazilian sugar mills. This movement highlights the high attractiveness of the Brazilian sugar market – not just related to the huge potential of the internal market, but also the potential of sugar exports from Brazil. More importantly, the newly arrived European MNCs can exert tremendous influence in global trade once the international market is more liberalised.

Some important MNCs that have entered Brazil are:

• French Union DAS, that bought sugar mills,

• French group – Beghin-Say that bought two sugar mills in the state of Sao Paulo in 2001,

• English group – Tate & Lile, and

• Swedish Glencore.

Sociological influences

Making ethanol from sugarcane in Brazil through PROALCOOL, the Brazilian alcohol programme, is the largest commercial biomass programme for energy production in the world.

The important part of the programme’s objective had been the creation of new skilled and unskilled jobs.

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Additionally, the programme is almost entirely based on locally manufactured equipment and helping to establish a strong agro-industrial system, and this has created a significant number of indirect jobs.

There are currently one million people working in the sugar-alcohol sector, with

300,000 jobs in 350 private industrial units and 50,000 sugarcane growers.

The seasonality of sugarcane production has a big impact on its ability to create high

quality jobs. Climatic conditions and agronomic characteristics of the crop limit the

harvesting season to six months out of the year in Brazil. Because the work associated

with sugarcane production is highly seasonal, jobs tend to be temporary; this, in turn

leads to high turnover, difficulty in training and, consequently, low wages.

Job creation induced population growth, in most cases reversing migration to large

urban areas. The impact on population was considered highly positive (more jobs,

taxes leading to better infrastructure) in the central and southern parts of Brazil, but

smaller in other regions.

Under a monoculture regime, producers are dangerously reliant on world prices –

both of sugar and ethanol. Monocultures limit the availability of land for essential

food crops for the local population.

Moreover, as per National Confederation of Agricultural Workers in Brasilia,

mechanisation of sugarcane harvesting is leading to a decline in the number of people

working in Brazil’s sugar industry to 700,000 from 1.2 million.

Working conditions have also improved. In Sao Paulo state, for example, authorities

moved to prohibit the burning of sugarcane. Although burning makes it easier to

harvest cane by hand, because much of the stalk is removed, it is also dangerous

because of potential harm to the lungs of cane cutters and the chance that winds could

cause field fires to go out of control, burning cutters to death (Romero, 2000).

Some argue that rural workers’ economic gains have fuelled the drive to mechanise

agriculture, however in the sugar workers’ case, the advances are deceptive because

the growing expense of hiring labourers has led many growers to replace people with

machines (Romero, 2000).

Technological influences

In the sugar plantations in various parts of south-eastern Brazil, harvesting machines are fast replacing people. During the last decade, the share of the crop harvested

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mechanically rose to more than 50% on many sugar plantations. The trend shows few signs of letting up as mechanisation moves forward. Sugar is now developed into an advanced industry, with cultivation and processing integrated at various sites and at places where processing and production facilities resemble a futuristic petrochemical complex (Romero, 2000).

Legal factors

The legal issues are linked to the institutionalisation of PROALCOOL such as impact of alcohol engines on air pollution and the impact of cane burning on air pollution. Federal law requires the practice of burning field residues – that pollutes the air with ashes – to end in near future.

Environmental/ethical issues

The environmental implication of sugarcane production is linked to the fact that it is usually grown as a monoculture. Monocultures can eventually work out negatively for the environment as they exhaust the soil and supersede the production of basic food crops (Pome, 2003).

It is expected that the impact of any phase out of the EU’s trade distorting policies will lead to higher prices of sugar which might lead to an expansion of monocultures of sugarcane in Brazil. This might have negative environmental consequences as they erode biodiversity, and are highly vulnerable to diseases, storms and other unpredictable natural events. It is well proven that monocultures have 60-80% more soil erosion, crop damage and water loss than those that ‘traditional’ farming that uses crop mixing, biological pest control, water conservation and agro forestry (The Economist, 2000).

The environmental issues as looked at from the Brazilian viewpoint are:

• Soil quality;

• Water contamination;

• The impact of cane burning on air pollution;

• The impact of alcohol engines on air pollution.

(III) The European Union

Political

The Common Agriculture Policy (CAP) principles emanated precipitately from the

still vivid memory of postwar food shortage, and consequently since then, agriculture

has constituted a key element of the European Community (Pome, 2003).

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The Wall Street Journal (Sept.16, 2002) reports that:

For European nations, agricultural protectionism has its roots in the post-World War

II determination that their citizens should never again suffer rationing and hunger.

The Common Agricultural Policy, or CAP, designed to encourage farmers to grow

almost everything Europe needs, is one of the EU’s cornerstones.

In the 1960s, when West Germany and France moved to create the Common Market,

France insisted on protection for its heartland farmers as payback for allowing in

German manufactured goods. By the end of that decade, European farmers were

locked into a policy of guaranteed high prices for crops buttressed by massive

production subsidies and high tariff barriers. And the CAP was on its way to

becoming part of the European social model, with farmers organized into powerful

labor unions that doled out quotas, ran pension schemes and founded a rural banking

system.

The CAP, among the EU’s policies, is regarded as one of the most important policy

areas in relation to:

• Its share of the EU budget – almost 50% (though decreasing over the years),

• The vast number of people affected by it, and

• The extent of sovereignty transferred from the national to the European level.

Moreover, the significance of the CAP, nowadays, is also portrayed by the fact that:

• It is directly related to the Single Market and

• The single currency.

These are two key areas in achieving European integration (Pome, 2003).

Right from its inception in the 1950s, the CAP principles worked on subsidising

agricultural production to boost output and maintaining high prices for foodstuffs, and

hence satisfactory incomes for farmers, by buying and storing what was not bought in

the market at these prices. The political power of the farming lobbies in EU countries

has frustrated attempts to reform it by paying farmers set-aside money not to produce

crops. Though this had some effect it has always inhibited major reform.

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Ames (1991) while making an observation on the political economy of the

agricultural policy making in the EU notes:

The European Community has emerged as a major agricultural exporter and importer.

Its internal decisions on agricultural policy have profound influence not only on the

inhabitants of the EC, but also the rest of the world. The negotiating process by which

the Community arrives at its proposals under the Common Agricultural Policy or its

position in the Uruguay Round of Multilateral Trade Negotiations is a complex

process involving Community institutions, national governments, lobbyists, and the

endogenous rules of procedure that control the policy-making process itself. The

interaction of Community, national and private interests in the EC policy-making

process makes negotiations with the third parties like the United States a complex and

often confrontational process. (p. 375)

In addition to above, Banerjee and McGovern (2003) state that EU is guided by the

OECD’s definition of national competitiveness as stated in Section 2.2.4.

In alignment with the above thought and the OECD definition, Ames (1991) drawing

on the political economy model of Rausser and Foster (1990) of agricultural policies

involving two interest groups – producers and consumers, operating within the

objectives and decision rules of the government, states that the current agricultural

policies of the EU represent ‘short-term equilibria in political/economic markets for

social-welfare policies’. Moreover, Bureau, Guyomard, and Requillart (2001, p. 660)

state that ‘a political consensus has kept the sugar regime almost unchanged for

years’.

The need for reform of Europe’s sugar regime is becoming more urgent in light of EU

enlargement and the impending start of WTO trade negotiations. However, in the light

of the aforementioned background, achieving sufficient support for such a change will

not be easy. Past attempts to reform the EU sugar regime have miserably failed for

lack of political support. Subsidy reforms for other products such as cereals and diary

products have succeeded primarily because of their large burden on the EU budget.

The sugar regime is self-financed and therefore, there is no budgetary pressure for

reform. Sugar production has also not attracted the attention and concern of Europe’s

politically powerful environmental groups. Although sugar price supports encourage

intensive agriculture, sugar beets are usually grown in mixed farming enterprises and

therefore have not been among environmentalists’ major agricultural concerns.

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Economic factors

The EU sugar regime has several impacts on Europe’s economy:

• It hurts European consumers - paying up to three times the world market price for their sugar – an annual “sugar bill” of around seven billion Euros.

• It is increasingly placing the EU’s fast-growing food processing industry at a competitive disadvantage in the world market and this in effect jeopardizes the 1.5 million jobs supported by the industry.

• It encourages excessive and intensive sugar beet cultivation - that encourages environmentally damaging pesticide and fertiliser use.

• It binds the EU’s leverage to negotiate robust market access commitments in food and processed-food products.

• Extension of the current EU sugar regime to the newly joined Central and Eastern Europe would lead to tremendous economic pressures for the EU and would be significant blow to these countries economic reform efforts towards a market-oriented one.

The above scenario is borne out of the commercial fact that sugar currently accounts for up to 40% of the cost of the sweet industries’ products and therefore has a large impact on the industries’ profitability.

Rabobank International (2002) reports that the EU sugar industry is dominated by a group of 10 leading sugar companies that account for over 70% of the total EU quota sugar.

Sociological influences

The Swedish Competition Authority Report (2002) states that:

Sugar beet growing represents some 45,000 full-time equivalent agricultural jobs. Due to technical progress, mechanisation, use of improved varieties and herbicides, the employment of agricultural laborers has practically disappeared in many regions. Fewer than 300 000 (four per cent) of the EU’s seven million farms grow sugar beets. The sugar processing industry employs 52 000 although most of these jobs are only seasonal.

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CEFS (2003) – the industry association of sugar producers, adds that ‘the EU’s sugar

production provides a livelihood for some 335,000 European farms. Beet cultivation

and processing facilities are located in all of the Member States of the European

Union except Luxembourg plus Switzerland and Hungry. These factories support both

directly and indirectly 300, 000 jobs’.

It needs to be ensured that due to the sugar regime in EU –

The exports of processed products do not become a loss-making business;

A situation should not arise wherein food processors decide to move their

businesses overseas where sugar and other production factors are cheaper.

The sweet industries are the largest consumer of refined sugar, accounting for 25% of

total consumption. It will therefore have serious implications if food processors

decide to move their business with EU losing jobs not only in this sector but also in

sugar beet cultivation and processing jobs.

The concept of Corporate Social Responsibility (CSR) is adopted by the European

Union. CSR ‘demands that a company conduct its business in a socially acceptable

manner and that it be accountable for the impact of its activities on the lives of

individuals both within and beyond the company’. Further, ‘the concept of social

responsibility aims to encourage companies to commit themselves beyond their

strictly legal obligations so as to create a growth dynamic based on responsible

practices and enhanced motivation of personnel’.

Technological influences

The Swedish Competition Authority Report (2002) reflecting on the importance of

technological advances makes the observation that ‘the optimal plant size is a

compromise between the need to minimize fixed costs and the need to minimize

transport costs. The plants will thus be dispersed, and a processor will naturally

possess some market power over buyers located far away from any alternative

supplier.’ Keeping the above consideration in view, the said report further notes that

‘for the sugar industry, the optimal plant size has been constantly increasing. Factors

that have contributed to this development are increased harvests through fertilization

and mechanization, and lower transport. Further, it is argued that better cultivation

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techniques have improved capital utilization and that interest rates have fallen since

the Commission last made its estimates of processing costs’.

Quoting Committee of Industrial Users of Sugar (CIUS) Proposal 1998, the Swedish

Competition Authority Report (2002) states that– ‘CIUS has made estimates of the

actual processing costs of sugar, and they argue that the effective support price should

be reduced by 16.5 per cent in order to reflect improvements in, among other things,

sugar extraction from beets, reduction in energy usage, energy prices and interest

rates’.

In recognising the fact that ‘the sugar yield from sugar beet depends firstly on its

sucrose content, which varies from harvest to harvest, and, secondly, on the refining

techniques used and on the quality of the equipment costs’, the Swedish Competition

Authority Report (2002) notes that there is constant progress on technical aspects,

mechanisation, use of improved varieties and herbicides.

Legal factors

The regulation setting up the relationship between the grower and the processors and

establishing inter-trade agreements dates back to the origins of the CMO Sugar.

Environmental issues

Sugar beet cultivation can be extremely harmful to the environment. Sugar beets are

affected by several diseases and suffer if planted in fields heavily infested with weeds.

Therefore, as varieties resistant to these diseases are not available commercially,

farmers rely on large quantities of pesticides and herbicides to achieve control (Kaffka

and Hills, 2002).

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APPENDIX C

Detailed Listing of Porter’s ‘Diamond’ Attributes

(I) AUSTRALIA

Australia is a small resource-based economy that depends heavily on the economic

opportunities of the global market. This becomes a feature of crucial importance in

respect to agricultural outputs considering the substantial contribution agriculture

makes to export earnings (on aggregate nearly 20% to Australia’s total export

earnings). Consequently, Australia relies heavily on the natural environment – its

large land base in particular. Coupled to this, is the fact that Australia has a small

population signifying that it can produce more than it can consume. However, factors

which make Australia’s position vulnerable are an expensive labour force and need to

produce export-oriented product.

National level

In the last twenty five years, the thrust of public policies in the Australian economy

had been directed towards reforms and deregulation with emphasis on ushering in a

more competitive environment in the domestic market that promotes greater

efficiencies. This has resulted in the structural adjustment of the various sectors of the

economy while facing up to a number of internal and external pressures and

challenges.

Industry level The Australian cane sugar industry – one of the most technically efficient – is the

world’s seventh largest producer. Being strongly linked to the world market – both in

terms of the quantity (around 80% of its sugar production is exported) and price (the

only sugar producing nation to sell domestic sugar at the world price) – the viability

of the Australian industry depends largely on the conditions and prices in the world

market.

However, ‘in the Australian sugar industry today, an understanding of the need to

reform and to steer away from the rigidities and inefficiencies of the past

arrangements in today’s fast moving global environment has taken deep roots.

However, deregulation has left the industry trying to compete in the domestic and

international markets at abysmally low world market prices’ (Banerjee and

McGovern, 2003).

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The Australian sugar industry identified the following key industry needs (Banerjee

and McGovern, 2003):

Whole-of-industry profitability through:

o Internationally competitive whole-of-industry systems

- Improved understanding of marketplaces, economics,

customers,

- Improved capability for options analysis, system

optimisation, and risk management across industry value

network (production, harvesting, and processing,

marketing).

An economically, environmentally, and socially sustainable industry that

has:

o Sustainable farming systems in harmony with the environment and

community

- Rationalisation of farms and blocks to achieve better

economics of scale in sugar production

o Sustainable harvesting, processing and distribution systems in

harmony with the environment and community

- Integrated, cost-effective harvesting, milling, and transport

processes

- More efficient use of capital invested and of the capacity of

resources in the harvesting, processing, and distribution

system

o Efficient and effective marketing of Australian sugar

- Enhanced capability for identification of developments,

trends, risks and opportunities in the international market

- Improved capability for crop estimation to aid logistics and

marketing

First-rate Research, Development, & Extension (RD&E) through:

o Enhanced performance from the RD&E system

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- Expanding R&D on the industry needs

- Increased cost effectiveness of RD&E through better

integration for the entire RD&E effort for the sugar

industry.

First-rate people in the sugar industry

o Progressive enhancement of skills, competence & capacity

- Fostering leadership and creativity/innovation

Firm level

At the individual firm level, the operations are directed towards a cost effective and

efficient system of harvesting, transport and processing coupled with the vagaries of

climate.

Porter’s Home-Country Diamond Model Analysis

Factor Conditions

Australian sugar production enjoys the natural advantage of large areas of cultivable

land with suitable climatic conditions – one of the most important physical resources

that can be considered a basic and inherited factor of production. Added to this,

Australian farmers undertake fertiliser management and soil testing to manage and

improve soil fertility. Climatic conditions are generally favourable but are crucial as

this factor focuses on rainfall and water availability for irrigation – although these are

adequate, reliability is a constraint owing to seasonal drought.

Another basic factor of production – labour, has gone through a process of

metamorphosis with structural adjustments occurring in the sugar industry along with

deregulation in the economy. There has been a decline in the labour force and

consequently mechanisation followed. This required the farmers to acquire knowledge

to operate sophisticated capital equipment and to improve their skills. As a sequel to

these developments, the basic factor of labour got upgraded to such an extent that it is

becoming expensive and scarce and can now be regarded as an advanced factor of

production. Additionally, with most Australian farms being family owned and

operated, there is limited use of hired unskilled labour and as a result farmers are

increasingly making use of specialised labour resources including contractors (e.g. for

harvesting, fencing) and consultants (Davidson and Chantalakhana, 2001).

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The sugar industry is highly capital intensive. In order to make the industry viable,

profitable and efficient, the Australian Government invested in research and

development. This resulted in deriving benefits from various research and

development corporations that were set up to serve the industry with input on

directions of research coming from farmers and other stakeholders.

In respect to infrastructure, the Australian sugar industry is well served.

Demand Conditions

The sugar industry has always depended on export owing to the small domestic

population and consumption. Accordingly, the domestic market conditions have not

played a significant role in developing the capabilities and determining the strategies

of the firms and industries to counter international market conditions. However, the

industry has responded to changing demands of overseas customers, thereby

improving the quality of goods in the domestic market.

Related and Supporting Industries

The high standards of operation and improved food safety and quality have proved to

be a big advantage to the Australian sugar industry. Moreover, the joint research

programs among stakeholders assisted in the growth of new plant breeding and

species. Further, in terms of supporting industries, the supplier companies like

chemical and fertiliser sectors, provide on-farm-consulting services to farmers

(Davidson and Chantalakhana, 2001).

An environment of greater competition among suppliers was ushered in when the

government deregulated a wide range of sectors with private firms being more active

even in certain activity that was done by government agencies.

Industry Structure, Firm Strategy & Rivalry

The Herfindahl-Hirschman Index (HHI) of the Australian sugar industry is larger than

4,400 which indicates that the Australian sugar industry is very concentrated (Linde

et.al., 2000) towards the consumer end of the supply chain.

The majority of Australian farms are family owned and operated at the raw

production level. Farmers have undertaken the process of structural adjustment

mainly through amalgamations. This rationalisation has brought in more efficiency

gains and improved market capabilities as the farmers and the mills are able to take

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advantage of economies of scale in reducing production costs. The rationalisation has

also resulted in the emergence of vertically integrated enterprises engaging in several

stages of operations and distributing risk among several operations thereby reducing

the unit cost of production further (Davidson and Chantalakhana, 2001). Moreover,

the formation of large companies due to rationalisation and restructuring increases the

capability of these firms to make major investment for diversification in product

choices and better and improved technology for efficiency gains.

The competition that arises between firms is in the milling/processing sector of the

industry owing to the seasonal nature of the sugarcane supply. With interconnected

factors of seasonality of sugarcane, its perishable nature, and the need to maximise on

capital invested, it becomes imperative for the processing firms to ensure

simultaneously a sufficient supply of sugarcane and sufficient capacity to process all

sugarcane (the basic raw material) at harvest time.

Australian processors and the government have been actively engaged in promoting

the product in the international market. Until very recently, government through its

‘single-desk selling’ program used to market all of the sugar in the domestic and

international market. Now, under Queensland state legislation, sugar produced by

Queensland mills is acquired by the industry owned marketing company, Quieensland

Sugar Limited (QSL).

Role of Chance

There have been three significant chance events that have affected the Australian

agribusiness sector (Davidson and Chantalakhana, 2001):

• Entry of the UK to the European Union;

• Emergence of the Asian market;

• Reduction in trade barriers.

Role of Government

Government deregulated the sugar market and through public policies created an

environment wherein the firms can upgrade their efficiencies and competitive

advantage.

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(II) BRAZIL

Brazil’s developmental capability and competitive future are so coherently bonded to

its natural environment – rich in natural endowments to attract foreign investments –

that when allied with agricultural sector, like the sugar industry, and productive

markets, the resultant situation can present new and promising economic

opportunities in a changing global market.

Abundant natural resources that comprise high quality agricultural land, ample

rainfall, a variety of climatic conditions and productive coastal zones, constitute a

recognised set of country-specific resources. However, Brazil’s position is vulnerable

owing to (Schnepf, Dohlman and Bolling, 2001):

(i) A combination of market and government factors wherein Brazil’s natural

resources tend to be used in production processes for low value-added

products with increased waste;

(ii) Development policies and a historically unstable macroeconomic

environment – high inflation, a heavy external debt burden, high interest

rates, poorly functioning domestic institutions, and periods of severe

currency overvaluation creating unfavourable investment climate.

National level

Political and economic reforms undertaken by Brazil during the 1970s and 1980s,

resulted in sugarcane production receiving considerable government support under

PROALCOOL – a program to promote domestic production of fuel alcohol. Under

the program, some of the most productive agricultural land was diverted to sugarcane

production. Further reforms in the early and mid-1990s contributed to greater market

orientation and a more stable macroeconomic environment for investment and

decision making. Moreover, these economic and policy reforms increased efficiency

in the sugar-fuel sector by ushering in improved transportation and marketing

infrastructure that lowered production and marketing costs and enhanced transmission

of international market signals (Schnepf, Dohlman and Bolling, 2001).

The Brazilian Government encouraged R&D activities towards improved crop

varieties suitable to soil and tropical conditions and advocated and promoted large-

scale mechanised agriculture.

However, Brazil’s infrastructure development holds the key to future growth.

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Industry level

Industry is increasingly driven by economic concerns and market conditions in

creating responsible and productive value chains in the food-energy sector of the

economy. This has led to restructuring of the industry with a growing predominance

of large-scale commercial farms that are innovative, quick to adopt new technologies,

and able to capture the economies of scale. Further, multinationals agribusinesses

have made significant investments in the sugarcane-sugar industry that has vested

interest in the continued development of the food-energy sector.

Firm level

At the individual firm level, activities are directed to improving economic

performance by greater efficiency in raw materials and energy usage leading to

decrease in waste generation, adaptation of new technology and processes in creation

of new products, lower costs of financing, improved working conditions of people and

decreased risks of accidents.

Porter’s Home-Country Diamond Model Analysis

Factor Conditions

Brazil is endowed with abundant natural resources to fulfil market expectations.

Brazil has developed improved varieties of sugarcane crops suitable to the soils and

tropical conditions for greater productivity. The creation of ‘home-grown’ technology

to harness alcohol fuel from sugarcane resulting in energy generation and the

extensive alcohol distribution network are directed towards increased factor

specialisation and increased level of value-addition through differentiation, economies

of scale and scope, and converting factor inputs toward higher value uses.

However, Brazil is yet to develop many specialised production factors capable of

meeting future demand. Specialised human resources like skills in international

operations and qualified harvesting workforce, along with more and better

infrastructure will need to be developed to support a competitive and sustainable

advantage. Specialised extension capacity will be critical to disseminate innovative

practices and make them more mainstream. This implies developing specialised

infrastructure in the form of extension centres in different countries depending on

their major advantages in climatic conditions, soil or other factors. This specialisation

represents a significant change to the current diffuse nature of agricultural research

C 7

and extension. Preparing extension workers can also be achieved either through

producer organiations or company-based technology transfer to growers through

contractual agreements.

Demand Conditions

In the domestic market, the demand from food manufacturers including those that

produce carbonated drinks, chocolate, ice-cream, crackers, and pasta account for

around 35% to 45% of domestic sugar consumption. The remaining 55% to 65% is

direct household sugar consumption. Local consumers are less demanding than

international customers. This is a significant weakness that can be addressed through

consumer education in local markets. Ideally, local markets would be differentiated

based on different tastes, cultural practices, and customers’ buying patterns.

Strengthening local market demand by creating a knowledgeable group of consumers

and producers could quickly elevate the local competitive platform. Highly visible

certification systems could also go a long way in strengthening this dimension.

Related and Supported Industries

Strong characteristics in this area would include designers and producers of

specialised clean production technology in fuel/energy sector, laboratory services,

waste management firms, certification services – all supporting international demand

characteristics and more sustainable production techniques.

Brazil lacks effective conditions in this competitive dimension. Priorities in this area

include developing innovative companies dedicated to inputs, increasing the number

and quality of laboratories to verify product attributes and product inputs, the number

of consulting firms to assist in the design of farm management and input strategies

and creating a large pool of accredited certifiers.

Brazil needs locally-based technical support industries, equipment (hardware) and the

capacity to extend and disseminate knowledge on practices more consistent with

target markets. Brazil’s industry is fed on traditional inputs, so the products will be

competing in unfavourable conditions. New technology and equipment will reduce

waste and elevate output, thereby making production – both for domestic and

international market – more efficient and competitive. Fiscal incentives may be

warranted to import this equipment because of positive externalities. Specialised

support is needed, in the form of laboratory facilities and procedures to certify that

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products are free of certain residues, in order to expand penetration of export markets.

Establishing these facilities will make export promotion more economical in the long

run.

Industry Structure, Firm Strategy & Rivalry

Brazil’s sugar industry is closely interconnected to the fuel alcohol industry. The

sugarcane industry is formed by a complex of 308 mills and distilleries that produce

more or less half of their sugarcane and buy the rest from over 16, 000 planters. The

production is concentrated in the state of Sao Paulo, where more than half of

production is located. The PROALCOOL program attracted new enterprises and

plantations which have also spread to other states.

The industry is controlled by private investors and is far from homogeneous. Many

are family-controlled groups but many now have professional management, and some

have associated in co-operatives. One of them – COPERSUCAR – became a major

trader and also runs the most important research centre, which has helped boost

productivity. The experience of the 1970s and 1980s shows that irrespective of its

conservative views, the industry has the ability to respond quickly if the opportunities

are well understood.

The sugarcane industry has been traditionally owned by Brazilian entrepreneurs but

very recently international groups bought the control of three major mills. Until

recently, the sector was organised under many associations. Several competing

leaderships were developed when the government controlled all alcohol activities.

The transition to a market orientation is showing the importance of unifying efforts to

seek common goals.

At present, the industry is more capitalised and a growth of the crop area is expected

in the years to come. This might lead to more net revenue for the sector. However,

since blending with gasoline is close to its technical maximum, the reduction of the

domestic market for pure alcohol will increase exposure to the export market.

Demand for ethanol should increase in the international market, as many countries

plan to switch from MTBE (methyl tertiary-butyl ether – a chemical compound used

in petrol to replace lead as an octane enhancer). Chances are, however, that this will

also be a protected and volatile market as importers will subsidise domestically

produced feedstocks – sugar beet in Europe and corn in the US.

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Role of Chance

The oil shocks of the 1970s hit the Brazilian economy hard driving the energy

dependent nation into the depths of financial woes and hardship. This crisis acted as

motivation for the Brazilian Government to create and develop PROALCOOL – a

program producing alcohol fuel for automobiles and energy from sugarcane.

Role of Government

The government in an effort to counter the oil shocks of the 1970s, concentrated on

allocating its vast natural resources towards the energy sector (production of alcohol),

from the food sector (sugar production). This has resulted in Brazil being the largest

producer of sugarcane, sugar, and ethanol in the world today. Presently, the Brazilian

Government mandates alcohol percentage in the alcohol-petrol mix.

However, government policies are often not clear in respect to the sugarcane-alcohol

sector.

(III) THE EUROPEAN UNION (EU)

National level

The Common Market Organisation of Sugar (CMO Sugar) in the EU is one of the

components of CAP. The characteristics of CMO Sugar are enunciated in Table C 1.

The four factors that are important and govern the regional distribution and

concentration of beet production are (Linde et. al., 2000):

• Allocation of quota across member states, factories and the associated

system of delivery rights;

- share and absolute amounts of quotas have not changed

very much over time,

- increase of the total of the quotas were mostly caused by

the accession of new member states,

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- The distribution of quotas or beet delivery rights to

individual farmers is usually based on historic relations

between the factory and the farmers.

• Share of A/B quota per member state;

• Regional premiums;

- this is attributed to regions with a sugar deficit with the

objective to assure that the market premium in the deficit

regions accrues to the farmers. The level of the premium is

supposed to be more or less equal to the cost of transport of

sugar from the nearest surplus region.

• National aid;

- within the context of CMO Sugar, Italy, Spain and the UK

were allowed to provide specific national aid to their sugar

sector. This program still exists in southern Italy, and has

contributed to maintaining and/or expansion of beet

production in the regions concerned and that are having a

comparative disadvantage in beet production.

Industry level

The foundation of the sugar industry in the EU, under CAP and fixed production

quotas of CMO Sugar, is built on:

• Concentration – in terms of reduction of the number of sugar

producing companies and number of sugar processing plants;

• Scale of production – in terms of reaping the benefits of economies of

scale.

The operation towards reduction in per-unit cost is a crucial factor behind the

concentration and rationalisation of the sugar manufacturing industry (Linde et. al.,

2000).The increase in the capacity of the processing plants can result in economies of

scale benefits reducing the overall costs per unit of output. This increase in the

capacity can be achieved in two ways (Linde et. al., 2000):

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• Internal concentration – companies having a number of processing

plants can choose to close one or more plants concentrating on the

remaining ones. This can happen till the higher average per-unit costs

of transporting beet from farmer to plant outweigh the per-unit cost

reduction through increased economies of scale.

• External concentration – companies having only one plant can merge

with another company or purchase one or more plants to combine and

enlarge the scale of production. This concentration of production can

decrease the costs of transportation of beets and enlarge the catchment

area of a particular plant.

The sugar industry being a capital-intensive one, sugar processing is characterised by

high economies of scale which has been made more feasible with the development of

high capacity processing equipment. Moreover, in the sugar industry, the

concentration of production occurred in line with Brozen’s (1982, as quoted by Linde

et. al., 2000) view that such phenomenon will continue as long as the minimum

efficient scale (m.e.s.) of production increases while supply and/or demand do not

increase. The m.e.s. of production is the smallest output at which average costs are

minimised (Besanko et. al., 1996 as quoted by Linde et. al., 2000). However, Brozen

(1982, quoted by Linde et. al., 2000) goes on to add that sometimes regulatory

constraints will impede concentration of production and that apparently has not been

the case in the EU sugar industry (Linde et. al., 2000).

This twin process of concentration has resulted in not only a decline of number of

sugar companies but also a decline of processing plants with the average daily

capacity of plants increasing by about 25% (Linde et. al., 2000). Further, the

restrictions under the CMO Sugar is becoming an important driving force in the

industry to diversify in the sugar-related food industry, agro-industry and also to non-

sugar processing industry.

Firm level

EU sugar firms cannot expand their sugar processing capacity and business in the EU

as the EU quotas are fixed. The strategies for improving the rate of return are

primarily limited to reduction of costs through concentration and rationalisation

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(by means of mergers and acquisitions). This is owing to two main reasons (Linde et.

al., 2000):

• Input prices i.e. beet prices, are more or less fixed; and

• Negotiation margin regarding output – sugar, prices is limited.

In addition to the above, the uncertain context created by the future WTO negotiations

has created circumstances wherein the firms are searching for medium- to long-term

strategies in (Linde et. al., 2000):

• Expanding their business to Central and Eastern Europe; and/or

• Diversifying their business to non-sugar processing activities.

Activities towards the implementation of the above strategy could be identified with

respect to firms like Agrana, Eridania Beghin-Say and Eastern Sugar now controlling

the whole Hungarian sugar industry. Moreover, EU sugar processing firms have also

bought major interests in the sugar plants in the Czech Republic, Poland, Slovakia,

Romania, and Lithuania.

Diversification activities have been exemplified by notable firms like Eridania Beghin-Say (Italian/French), Cosun and CSM (Dutch), Sudzucker (German), and Danisco (Danish) who have stuck to their ‘core competence’ in sugar as far as markets and process technology are concerned, but have concentrated on acquisitions related to the food industry and agribusiness. Diversification has also been sought and pursued through vertical integration with particular investments being in the food industries that use sugar as a major input like ice cream production and bakeries (Linde et. al., 2000).

Porter’s Home-Country Diamond Model Analysis

Factor Conditions

The EU is the largest sugar beet producer with relatively favourable temperate climate conditions. Sugar beets have a sugar content of 15-20 per cent against the sugar content of 12-18 per cent in sugarcane. However, the yields of beet per hectare are much lower than the yields of sugarcane and the resulting sugar yield is only about 8-10 tonnes per hectare against an average estimated yield of 15 tonnes per hectare from sugar cane.

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Sugar beets are grown for about eight months before harvesting whereas sugarcane is

grown for 10-18 months before harvest. Sugar beet harvesting takes place in autumn

and early winter, when the sugar content is at its highest. Contrary to cane sugar,

sugar from sugar beet is produced in a single process. However, sugar beet does not

have the favourable energy balance that makes cane so attractive as a renewable

energy source. Moreover, the production of sugar from beet is costly compared to

production of sugar from cane. In addition, production of sugar from beet in some

regions in the EU is costly compared to production of sugar from beet in other regions

outside the EU due to the high costs of production that producers of sugar face within

EU.

The Swedish Competition Authority Report (2000) states that:

Beet yields vary considerably among sugar producing Member States. Since the

CMO Sugar aims to protect the financial situation of beet growers even in relatively

inefficient regions, it puts normal market forces out of play. The yields between 4

tonnes/hectares in the south of Spain to 12 tonnes/hectare in France (Åberg (1999))…

The best conditions are found north of Loire, in Belgium and in Germany. A typical

yield of white sugar is around 9 tonnes/hectare. Average yields in Spain and Finland

are far below this, 6 and 5 tonnes/hectare respectively, followed by Sweden and Italy

with 7 tonnes/hectare.

The infrastructure facilities are good and technical progress in production is

evidenced through the use of mechanisation and improved varieties of crop and

herbicides/insecticides. In fact, for the sugar industry, the optimal plant size has been

constantly increasing due to factors of increased harvests through fertilisation,

mechanisation and lower transport costs. However, CMO Sugar has provided a

protective environment and insulated the domestic market from outside competition

and this reduces somewhat the incentive to change and uptake new technology.

Demand Conditions

The demand conditions have divided sugar into three product categories: white

granulated sugar, liquid sugar, and speciality sugar. This categorisation seems

applicable to both industrial and household sugar. White granulated sugar is in solid

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crystallised form, with average size of 0.6 mm, and is sold to both industrial buyers

and household customers. Liquid sugars produced either by dissolving granulated

sugar or as a byproduct of the sugar refining process, are mainly used by the food

processing industry. Speciality sugars refers to all sugars other than white granulated

like brown sugar, caster sugar (sugar crystal of smaller size than white granulated

sugar) and icing sugar (ground white granulated sugar).

The Swedish Competition Authority Report (2000), writing on the demand

characteristics, states that:

(i) Industrial buyers of sugar are the food processing industry,

and the chemical and pharmaceutical industry;

(ii) 70 per cent of the total human consumption in EU is sugar

incorporated in food and drinks, and 30 per cent in direct

consumption of pure sugar by households.

(iii) The chemical and pharmaceutical industries represent less

than 2 per cent of the total sugar consumption.

The varied product mix demands by the market have led to exacting and high

standards of quality in sugar.

Related and Supported Industries

The related and supported industries that have greatly impacted on the sugar industry

are the transport sector, the infrastructure sector like the harbour activities, electricity,

maintenance, informatics and automation, and cauldron making.

There is a vibrant chemical and fertiliser industry with a few home-grown companies

now operating as multinational enterprises (MNEs). The industrial buyers of sugar,

primarily the producers of soft drinks, confectionary, ice-creams and bakery products,

do have some of the world renowned brands and companies. High standards of

operation, the research and development (R&D) undertaken for innovation activities

by the MNEs, and the improved food safety and quality have provided an added

advantage to the sugar industry.

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Moreover, concern for the environment has also led to various agricultural activities

for a ‘green’ and sustainable environment for sugar beet cultivation.

Industry Structure, Firm Strategy & Rivalry

Rabobank International (2002) states that the EU sugar industry is dominated by a

group of 10 leading sugar companies. Sudzucker, with its headquarters in Germany,

has the largest quota of 2.4 million tonnes – corresponding to 16.4% of the total

amount (14.5 million tonnes) of EU sugar quota. Moreover, by acquiring Saint Louis

Sucre in France (that has 5% of production quota), Sudzucker has become a distinct

leader in the EU market. Other notable sugar companies are Beghin-Say (14% of total

EU quota), British Sugar (8%), Nordzucker (7%), Danisco (7%), Az. Ebro Puleva

(5%), Pfeifer & Langen (4%), and Cosun (4%). In effect, the quota of the 10 largest

companies account for over 70% of the total EU quota sugar.

Linde et. al. (2000, p. 182) report states that:

At the Member State level, the concentration of the sugar processing industry is very

high with a HHI of 10,000 in eight Member States, a HHI of well over 3,500 in three

other member states, and a HHI in the range of 1,500 to 2,500 for France, Italy and

Germany. However, when the EC market is regarded as own market, and the HHI is

based the share of individual companies in the total EC market, the HHI is the modest

in the range of 700 to 800 (depending on whether share in quota or total production is

taken as a basis).

Further to the above, the Swedish Competition Authority Report (2000) states that:

In addition to the concentrated markets, there is also some cross-ownership between

sugar firms within the Union, e.g. Sudzucker (Germany) owns 50 per cent of Agrana

(Austria) and 13.5 percent of Azucarera Ebro (Spain). (p. 10)

Furthermore, writing on the vertical integration trend in the industry, the Swedish

Competition Authority Report (2000) states that:

The sugar industry is becoming further integrated as the trend towards vertical

integration between growers and sugar processors continues. This is the case e.g. in

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Germany, where Nordzucker and Sudzucker are cooperatives owned to a large extent

by beet growers. Due to beet growers owing Sudzucker, sugar processors owned by

Sudzucker in Belgium, France (SLS) and Austria (Agrana) are to some extent

cooperatively owned as well. In France, beet growers have purchased a stake in

Beghin-Say, and the Italian part of Beghin-Say has been purchased by Italian beet

growers. In Finland, the monopoly, Sukros, is 80 percent owned by Danisco and 20

per cent by Finnish beet growers.

In the EU the quotas have always imposed restrictions on expansion in sugar and this

has led to a number of EU sugar companies having diversified their activities,

resulting in an industry characterised by three types of companies (Rabobank

International, 2002);

i) specialised sugar companies;

ii) diversified sugar companies; and

iii) food companies which have sugar activities.

Further, the number of firms and their size varies considerably among the EU

countries with the big companies having activities in more than one country or

industry and with various smaller companies with fewer factories operating at

regional level, often with sugar as their main activity without any diversification.

In respect to the rivalry and strategies among firms, Rabobank International (2002)

states that the EU beet sugar companies each have their sugar production quota for

which (a) they receive at least the minimum intervention price and (b) match national

consumption levels (for a large part these quotas), resulting in relatively little sugar

for exports (with the notable exceptions of France, Belgium and Germany). Therefore,

for the sugar industry, competition in terms of marketing and sales is therefore at

domestic level. Also within countries, competition tends to be limited, partly by the

fact that in some countries sugar production in dominated by a few players, while

having close long-term relationship with sugar buyers. The balance is exported and

channelled through trade houses. At a strategic level, however, these companies do

compete in terms of growth through merger and acquisition. This strategy is also

extended to seek the best opportunity available in Eastern European countries (EECs)

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– that joined the EU in May 2004, with the allocation of production quota to the new

members. The structure of the EU sugar industry is anticipated for a change with the

current activities of sale, merger and acquisition of various companies (in EECs) and

further diversification into starch sweetener production and other industries like food

ingredients.

However, competition to sugar from other sweeteners does exist but is limited. High

Fructose Syrup (HFS) and High Fructose Corn Syrup (HFCS) are used in some

industrial products as production cost is 33 – 40% of the beet sugar. However, this

competition is limited because quotas also apply to alternative product group –

production of which is 300,000 tonnes compared to nearly 15 million tonnes of sugar.

Further, sugar is preferred for many food products because of its sweetness, taste and

conservation characteristics and moreover, restrictive regulations apply for the use of

intense sweeteners for their use in food products – this again provides sugar the

competitive edge.

Role of Chance

The expansion of the EU will offer a bigger market for EU firms providing

opportunities for investment in sugar and other related industries. Moreover, this

chance happening offers EU sugar firms further opportunity to access new markets

and cheaper factors of production.

Added to the above, EU firms are expecting changes in future of the sugar regime

owing to pressure from the WTO and the challenges from Australia and Brazil at the

WTO against EU subsidies on sugar.

Role of Government

The government has formulated and regulated the EU sugar regime through CAP

objectives and principles and through CMO Sugar in all its aspects of production and

marketing (both domestic and international) of sugar.

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