What Drives Firm Profitability? A Comparison of the US and EU Food Processing Industry

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in Non-technical summaryThe present project analyses what drives profitability in the food sector and compares the results with the manufacturing industry in general but also between the European Union and the United States.One of the main findings is that competition is stronger and profitability is lower within the food sector as compared with the manufacturing sector in general. This is mainly attributable to a high market saturation and to the fierce competition between the big retail companies. While the competition profits the consumer, it puts strong bargaining pressure on the producers. Therefore, one of the main drivers of profitability and profit persistence within the food sector is firm size. Larger producers seem to be in a better bargaining position against the retail sector and this seems to be both the case in the EU and in the US.A determinant where the food sector seems to differ between the two regions is firm's growth. While the impact of firm's growth on profitability is positive in the US, it is insignificant in the EU. This may be because while growing firms have to take into consideration higher costs and this may decrease profitability.And this may explain yet another difference between the determinants of profitability in the food sector in the US and in the EU. While the impact of (long-term) debt is positive in the US, it is negative in the EU. By having easier access to debt, US firms are presumably able to better counteract this potentially negative effect of growth. Long-term debt can enable firms to make the necessary investments that help to ensure competitiveness in times of crisis. In the EU firms indebted in the long run seem to find it more difficult to cope with risk.The results have not only purely descriptive value but can also be useful when designing policies aimed at supporting food sector firms or the food sector as a whole. This is important as today firms are facing economic circumstances characterized by reduced entry barriers and possibilities to operate in previously hardly accessible foreign markets. Those developments are a consequence of intensified globalization represented by trade agreements such as the NAFTA or the formation of a single market for goods and services within the EU. However, these deregulations of borders and international trade have led to a significant intensification of competition among firms across many sectors. Pressure on the margins and competitiveness ...

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