Productivity and competitiveness of the food manufacturing industry in Iran

• Main Author: Torghabeh, Majid Sanaei
• Format: Thesis
• Language: English; English
• Published: 2008
• Online Access: http://psasir.upm.edu.my/id/eprint/4719/1/FP_2008_14.pdf; http://psasir.upm.edu.my/id/eprint/4719/

Food manufacturing industry is an important industry in the Iranian economy and has been identified as a thrust area for development. The country has enormous potential in the production and export of various food items due to the abundance of resources and available markets in the world, particularly in the Middle East. In recent years, the government has encouraged the expansion of this industry in an effort to reduce its dependency on oil exports. However, there are various kinds of challenges which need to be addressed immediately to achieve this objective. These challenges have emerged due to the opening up of the economy leading to an influx of imported processed foods from other countries. In addition, much of the raw material is not fully utilized due to low processing level and there has been an ever increasing demand for food in the country every year. This study therefore attempts to evaluate the productivity and competitiveness of food manufacturing industry in the country so that necessary actions can be taken to improve its performance. There are two empirical analyses carried out namely total factor productivity (TFP) and Revealed Comparative Advantage (RCA). The TFP analysis of this study is based on the non-parametric approach of DEA and Malmquist index which allows for the decomposition of TFP into three constituent elements for different sources of productivity growth: technological progress (TECHCH), scale efficiency change (SECH), and pure efficiency change (PECH). Data were collected from the Statistical Centre of Iran and they were annual data of 22 four-digit industrial groups (ISIC Rev. 3) which made up food manufacturing industry in the country from 1997 to 2002. The RCA analysis, on the other hand, seeks to identify which industries in the country have a comparative advantage status in producing food commodities in the world market. The analysis was based on annual data from 1999 to 2003, published by the UN COMTRADE. The results of this study reveal several important findings. First of all, there was an improvement in the food manufacturing industry’s TFP growth. The highest and lowest TFPCH were 10.7 and 5.6 per cents, respectively, with the former being for the medium-sized firms in the private sector and the latter being for the medium-sized firms in the public sector. Secondly, most of the productivity growth measured for the food manufacturing industry as a whole was due to TECHCH whereas EFFCH was not found to exert a positive effect on productivity growth. On average, technical efficiency scores were estimated to be 0.94 and 0.92 for the large and medium enterprises, respectively. This implies that technical inefficiency could be reduced by 6 and 8 per cents through improvement in scale efficiency and elimination of pure technical inefficiencies, respectively. Thirdly, food manufacturing firms in the country had been scale inefficient due to slacks in production labour, fixed capital and energy use. To overcome this problem, there is a need to work on the optimal levels of input mix and to rationalize the process of acquiring and usage of inputs. Meanwhile, it was found that the growth in the number of food sub-sectors with an RCA index above 100 had been stagnant over the study period. In addition, food manufacturing industry as a whole had a comparative advantage in less than 20 per cent of all of its exported products in 2000 through 2003. Despite the advantages of abundant raw materials and cheap labour in the country, many food firms had not been able to expand and increase their market shares. This calls for the adoption of high-tech machine and technologies and the development of infrastructure to improve their competitiveness. Certain individual groups of commodities however, featured a very high comparative advantage status. These groups of commodities were Caviar and caviar substitutes, Frozen shrimps and prawns, Cucumbers, Apple juice and juice of other single fruit, Sunflower seed and safflower oil, Prepared cereals in grain form, Black tea, Sweet biscuits, Waffles, and wafers, Vegetable fats, and Inactive yeasts. As a conclusion, policy makers of the country should design a proper policy framework in addressing the identified problems of the industry. On the other hand, food manufacturers should find ways to improve the capacity utilization of factor inputs especially for raw material, capital and energy to avoid unnecessary wastage. They should also adopt proper methods of sourcing quality raw material for food production to shorten the supply chain which can reduce their production costs. Finally, Iran will be able to sustain or enhance its share in world`s manufacturing trade, however, this will depend on the capacity of its food manufacturing sector to adjust itself to the changing of world composition trade and to compete on the basis of both price as well as non-price factors.