Report says ensuring development benefits from TNC involvement in agriculture is a challenge for policymakers

Geneva, 17 September 2009 - Foreign direct investment (FDI) can provide much-needed funding and expertise for agriculture in developing countries -- stimulus that is crucial for increasing productive capacity and output at a time of continuing global concern about agricultural output in poorer countries. But the potential of these investment inflows is far from being realized, UNCTAD reports in its annual study of global investment patterns.

The World Investment Report 2009 , subtitled Transnational Corporations, Agricultural Production and Development(1), was released today.

Transnational corporations (TNCs) have played a role in the commercialization and modernization of agriculture in many developing countries, the report says, although they are by no means the only - and are seldom the main - agents driving this process. TNCs have done so not only through FDI (for example, by setting up farms), but also through contract farming -- a non-equity form of involvement where, for example, a foreign supermarket or food processor buys crops through an arrangement establishing price, quantity, quality and other specifications. The report, known as the WIR, suggests that TNCs´ contractual relationships with local farmers can bring important benefits through their provision of inputs and their transfer of skills to a very large number of small farmers. TNCs also can confer benefits by easing the financial and technological constraints affecting small farmers by linking these farmers with global markets and by providing them with more predictable incomes. All of these are conducive to promoting sustainable and "pro-poor" agricultural development, and can help alleviate rural poverty. However, there is evidence that TNC participation in agricultural production also can have negative impacts. It can result in job losses, in restrictive business practices, or in excessive dependence among farmers on TNCs to supply inputs or buy produce. In addition, there are concerns about so-called "land grabbing". The actual impacts and implications vary enormously across countries and types of agricultural goods, and are influenced by many factors, especially the institutional environment of the host country.

Available evidence indicates that TNCs are mostly involved in the production of cash crops, the report says. Their involvement in staple food crops -- whose harvests are vital for feeding developing country populations -- is insignificant. This implies that there is no simple equation between food security and TNC participation in a host country´s agriculture. However, food security also includes a range of significant elements, such as food safety and affordability, to which TNCs can and do contribute. Most importantly, by providing finance, skills, and technologies, TNCs can make a difference in the larger context of host countries´ modernization and development. But more needs to be done to capitalize on this potential, the report says.

An integrated policy approach is essential

To meet rising food requirements and to revitalize agriculture in poor countries, policymakers need to promote investment - private and public, domestic and foreign, the WIR notes. Notwithstanding existing concerns about TNC participation, the report suggests that host countries should not underestimate the potential gains.

The key challenge is to ensure that TNC involvement, both through FDI and contractual arrangements, generates development benefits. Social and environmental concerns have to be addressed, particularly with regard to possible long-term implications for domestic agricultural development and food security. Governments therefore need to devise well-coordinated strategies aimed at long-term agricultural development. These strategies should not only aim at attracting TNCs to agricultural production, but should target related areas such as infrastructure, competition, trade, and research and development (R&D). International Investment Agreements (IIAs) can be an additional means of promoting TNC participation.

The WIR recommends that host countries pay particular attention to promoting contractual arrangements between TNCs and local farmers, such as contract farming. Policymakers should address specific obstacles to such cooperation, such as an asymmetrical access to information and legal services by TNCs and farmers, and should strive to safeguard the interests of smallholders. One method is through capacity-building and the development of model contracts that protect the interests of farmers in their negotiations with TNCs.

To maximize the contribution of FDI and contract farming to sustainable agricultural and rural development, special attention should be given to the domestic legislative framework and to investment contracts between the host government and foreign investors, the report says. These contracts should be designed to ensure that economic benefits are fairly shared.

Policies relating to the development of overseas food sources for home country food security have been criticized for aggravating food shortages in host countries and for depriving local farmers of land. Therefore, if developing countries consider investing abroad for food security reasons, they also should bear in mind that overseas food production in the form of contract farming may be a less controversial alternative to FDI, the report says. In addition, home countries could encourage their TNCs to invest in trading houses and in logistical infrastructure such as ports in developing nations. Close South-South collaboration between investing and recipient countries is termed essential.

Agriculture and food security recently have gained considerable international importance. Among possible future initiatives, the World Investment Report recommends that consideration be given to developing a set of internationally agreed core principles for large-scale acquisitions of agricultural land by foreign investors.