Food legislation and competitiveness in the EU food industry

8/9/2019 Food legislation and competitiveness in the EU food industry

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European CommissionEnterprise and Industry

Food legislationand competitiveness

in the EU food industryCase studies inthe dairy industry


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Food legislationand competitivenessin the EU u Case studies in the dairy industryK. J. PoppeJ. H. M. WijnandsH. J. BremmersB. M. J. van der MeulenG. L. Tacken

Re erence No ENTR/2007/020Service Contract 477980

July 2008LEI, Wageningen UR, The Hague

European CommissionEnterprise and Industr


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ENTERPRISE & INDUSTRY MAGAZINE

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ContentsP r E F a c E 5

E x E c U t i v E s U m m a r y 6

1 i n t r o d U c t i o n 9

1.1. Relevance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9

1.2. Aim o the study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9

1.3. Structure o the report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10

2 r E s E a r c h F r a m E w o r k a n d m E t h o d o l o g y 1 1

2.1. Research ramework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11

2.2. The dairy industry as a speci c subsector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13

2.3. Methodology and databases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15

3 a d m i n i s t r a t i v E b U r d E n s 1 7

3.1. Key ndings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .173.2. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18

3.3. Delineation o concepts o administrative burden . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18

3.4. Theoretical ramework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22

3.5. Empirical results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28

3.6. Concluding remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37

4 F o o d P r o d U c t o r i g i n m a r k i n g s c h E m E s 3 9

4.1. Key ndings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39

4.2. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39

4.3. Trends in the agriculture supply chain and the retail sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40

4.4. Food marketing, labelling and branding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .444.5. Origin labelling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50

4.6. Experiences with origin labelling in ood . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .52

4.7. Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56

5 c o m P E t i t i v E n E s s o F t h E d a i r y i n d U s t r y 5 7

5.1. Key ndings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .57

5.2. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .58

5.3. The dairy chain and consumption trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .58

5.4. International trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .61

5.5. Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .65

5.6. Business dynamics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

735.7. Competitiveness at country level . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .76

5.8. Outlook: policy developments and scenarios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .84

5.9. Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .90


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6 r E c o n c i l i n g F o o d l a w t o c o m P E t i t i v E n E s s 9 1

6.1. Key ndings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .91

6.2. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .91

6.3. Competitiveness and ood law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .92

6.4. Accessibility to ood law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .93

6.5. Pre-market approval . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .946.6. Food sa ety standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .98

6.7. Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .100

7 i m P a c t a s s E s s m E n t F o o d o r i g i n m a r k i n g s c h E m E 1 0 1

7.1. Key ndings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .101

7.2. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .101

7.3. Identi cation o the problem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .102

7.4. Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .102

7.5. Main policy options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .103

7.6. Legal aspects o the options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .105

7.7. Co-labelling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1077.8. Impacts o options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .110

7.9. Comparison o options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .115

7.10. Policy monitoring and evaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .115

8 P o l i c y r E F l E c t i o n 1 1 7

8.1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .117

8.2. Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .117

8.3. Traditional quality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .118

8.4. Structural change and SMEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .119

8.5. Labelling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .120

8.6. Legal issues and administrative burdens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1208.7. Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .121

r E F E r E n c E s 1 2 3

a P P E n d i x 1 3 5

The research team . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .135


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Pre aceAny study looking into the competitiveness o the EU ood industry will recognise that developmentsat the EU and world level and relationships with the consumer will present signi cant challenges to the

uture o the sector. These include the CAP health check, issues o international trade, the regulatoryramework in which the industry operates, the position o small and medium-sized enterprises (SMEs)

and the sustainability agenda, in a context o changing li estyles, consumer pre erences and volatilecommodity markets. The task o enhancing the competitiveness and the innovative capacity o the sectorwhile taking account o issues o concern to consumers, not least ood sa ety, ood quality and awarenesso the environment, will be crucial in urther developing market opportunities and ensuring a sustainable

uture or the ood industry.

This study looked into a number o critical aspects o the competitiveness o the industry, namely theissues o administrative burden con ronting the sector, the issue o ood law or the regulatory ramework,and the issue o the ood chain, as well as looking in more depth at the competitive position o the dairyindustry.

With regard to ood sa ety legislation, the study ound that the European dairy industry has a strongpre erence or the European legal system and accepts the relatively high administrative burden that servesto guarantee ood sa ety and quality. On the other hand, in respect o ood law, the research inter alia raisesquestions about the complexity o current legislation and the impact o product approval procedures oninnovation. In relation to the ood chain, the study identi es current structural changes, in particular therole o supermarkets and the use o own brand labels at the retail level as signi cant developments.

The reports analysis o the dairy sector highlights the existence o global players and at the same timeindicates that most dairy companies are very small. Overall it cautions that competitiveness o the sectoris weak due in part to the limitations o the milk quota arrangements but that there is a signi cant level o new products being produced by the sector partly driven by packaging and ingredient suppliers.

All in all, and thanks to the authors o this in ormative study, we now have a better understanding o whatmight be called the mechanics o competitiveness. I would recommend the study to all those with an

interest in the uture development o the sector.

Heinz Zourek Director-General, Enterprise and Industry


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Executive summaryMain conclusion: Administrative burdens, access to raw materials and innovation are the mainissues needed to improve the competitive position o the European ood industry.

Background

The EU ood industry is currently con ronted with high ood prices in world markets; this has put agricultureand the ood industry back at the top o the agenda o international policy orums. The European Commissionalready announced in 2007 the creation o a high-level group on the ood industry. The EU hosts a airnumber o world-leading ood enterprises but competitiveness o the European ood industry is weak compared with the USA and Canada, an earlier study showed.

Research outline

This new study looked at our important aspects o the competitiveness o the European ood industry. First,the competitiveness o the dairy industry, as a subsector o the ood industry, was studied in more detail,with a ocus on innovation and business dynamics. Second, with the help o a survey, the administrativeburdens in the dairy industry were studied in more detail.

Third, this study o administrative burdens was mirrored by a legal study on the relationship betweenood law and competitiveness. This included our case studies, three in the Ital ian, French and Dutch dairy

sectors and one on novel oods.

The ourth important aspect was the chain structure and the use o labelling. In the tender document thatwas the basis o this research project, the European Commission proposed several options or a ood originmarking scheme. These were evaluated with an impact assessment against the background o the increasingmarket power o the retail sector and the importance o branding and private labels.

Competitiveness o the dairy industry

The dairy industry has innovative and global players but its competitiveness is weak. Improvements inlabour productivity and value added in recent years are o set by a signi cant loss in market share. Thequota system that restricts access to raw materials is ound to be an important cause o this development. The majority o dairy companies are very small; nevertheless, in most countries the industry is highlyconcentrated. There are many new product placements in the market, with packaging and ingredient

rms clearly contributing to innovation. The internal market is characterised by a stable milk market andincreasing demand or cheese. In Italy and Poland, the dairy industry is becoming more important withregard to export. In Germany, the trend in labour productivity at arm level is problematic.

Administrative burdens

European dairy companies have a strong pre erence or the European legal system and accept the relativelyhigh administrative burdens that guarantee ood sa ety and quality. Demands rom clients also drive oodsa ety and quality systems. Integration o ood sa ety and quality requirements can alleviate compliance


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costs. In some aspects o ood law, administrative burdens meet less acceptance. In particular, productinnovation is hampered by the content o ood law. Time-to-market o new products is long; costs arerelatively high and procedures are not transparent. On the other hand, process innovations are stimulatedby ood law, since systems and procedures have to be installed.

Food law and competitiveness

From a ood sector competitiveness point o view, several major shortcomings in EU ood legislation presentthemselves. Most o these shortcomings can be improved by improved compliance with the EC Treaty andthe general principles o ood law.

Food legislation is too complicated to reach its target audience. Technically the hygiene package holdssu cient fexibility to accommodate traditional and small-scale production, but Member States authoritiesand ood businesses are insu ciently aware o the possibilities.

Pre-market approval schemes impede innovation and the practices contribute little to maturing the system.Zero-tolerance levels should be applied as provisional measures only. The proposed overhaul o labellinglegislation seems only justi able i it goes urther in solving problems and simpli ying legislation than is

currently envisaged.

Chain structure and labelling

The modern supermarket system accelerates structural change towards vertical coordination o agri ood chains. Inmany EU countries, the top- ve supermarkets have a market share o at least two thirds, Italy being an exception.Retailers increasingly market their brand using private labels (own brands), that o ten o er a 30 % lower price.

Co-labelling (printing the name o the processor on the package o the end-producer/retailer) is onlybene cial i the producer (SME) makes a di erentiated product, not a commodity. This does not necessarilyneed public regulation. This would be hard to implement and leads to urther administrative burdens.

Origin marking is an intervention in ood marking, which is dominated by brands and private labels. It alreadyexists in the orm o PDO (protected designation o origin) or PGI (protected geographical indication) labels and ona voluntary basis. Experiences with origin marking are mixed. It makes sense i consumer pre erences are diverse;a made in the EU label hides quality di erences between regions and brands instead o exposing them.

Impact assessment o an EU marking scheme

A ood origin marking scheme made in the EU or made in Brazil label would not add much other thanadministrative burdens to existing labels in an era o brands and private labels o retailers. An obligation ornon-EU countries to label their products is the least burdensome or the EU ood industry, but it could lead tohigher prices, European consumers misperceptions and higher costs in exports i trading partners retaliated

with similar requirements. A mixed ood marking system mandatory or EU products, voluntary or importsdoes not make sense rom the objective o improving the competitive position o the ood industry as it leadsto higher operational costs and an increased administrative burden and not much extra commercial value.

Policy recommendation

We recommend not to ollow up the idea o mandatory origin marking. European policies could instead concentrateon: reducing administrative burdens and simpli ying legislation (see Boxes 6.1 and 6.2 or concrete suggestions);access to raw materials; and innovation to improve the competitive position o the European ood industry.

Tips for further reading in case of time constraints The study ends with a policy re ection (Chapter 8). Chapters 3 to 7 give the main results o the study.Each chapter starts with key fndings and ends with conclusions.


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1Introduction1.1. Relevance

The EU ood industry is currently con ronted with high ood prices in world markets; this has put agricultureand the ood industry back on the ront pages o the newspapers and at the top o the agenda o worldleaders and international policy orums. Recently the EU ood industry has also become more important

as a manu acturing industry. The ood industry is o ten located close to production, or which Europe iswell suited, or close to consumption. With some other industries declining, this has meant that the relativeimportance o the European ood industry within manu acturing is growing, although its importancein the total economy declines. A air number o world-leading ood enterprises are located in the EU.Nevertheless, competitiveness o the European ood industry is weak compared with the USA and Canada

Wijnands et al., 2007 .

This competitiveness can be improved by several strategies. Previous research (Wijnands et al., 2007)recommended enterprises to exploit economies o scale in the large open European market, to exploiteconomies o scope di erentiation based on cultural di erences in Europe and to try to be an innovatorin the use o new technologies.

Partly in response to that research, the European Commission announced the ormation o a high-levelgroup to discuss coherent uture public and private policies to improve competitiveness. To support thework o the group, the European Commission (Enterprise and Industry DG) commissioned additionalresearch in a number o topics related to competitiveness.

To pursue the strategy o high-value products based on the European diverse heritage in ood productionand on innovation, the European Commission is interested to know i an EU ood product origin markingsystem would have additional value. Global economic developments, consumer concerns on ood sa etyand the regulatory ramework to secure ood sa ety or to comply with objectives on sustainability a ectcompetitiveness. Introducing a marking system, whether voluntarily or compulsory, will have an impacton competitiveness and regulatory burdens. Be ore carrying out a ull impact analysis according to theguidelines in SEC(2005) 791, the dairy sector as a subsector o the ood industry was studied in moredetail, with regard to competitiveness and administrative burdens in the sector. In addition, the legal

ramework or the ood industry was reviewed to identi y opportunities or the EU legislator and executiveto remove avoidable obstacles or the ood industry as a means to reduce regulatory burdens and enhancecompetitiveness.

1.2. Aim o the study

The terms o re erence or this study according to the tender speci cations are:

1. a study on the competitiveness o a selected subsector o the European ood industry:a de nition o a subsector;b subsector competitive analysis;c impact o cumulative regulatory burdens;

2. an impact assessment o an EU ood product origin marking scheme:a objectives and easibility o the scheme;b assessment o possible options.


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Based on the terms o re erence, the aims o the study are two old:

1. an analysis o the actors in uencing the competitiveness o a subsector i.e. dairy o the Europeanood industry and its in uencing actors, including cumulative regulatory burden;

2. an impact analysis o the introduction o an EU ood origin marking scheme; the impact analysis takesinto account the regulatory burdens, the legal easibility, the commercial value o a marking scheme,

and the e ects on the development o the EUs competitiveness.

The two aims are addressed in an integrated research, as ar as possible. The impact analysis is carriedout or all ood products, whereas analysis o competitiveness and the regulatory burdens deals with thedairy sector.

1.3. Structure o the report

The next chapter o this report discusses the research ramework and methodology o the study. It alsoprovides the arguments or the choice o the dairy industry as a subsector to be studied in detail. Inaddition, the data collection is described. Readers that are mainly interested in the results o the study

may wish to skip this chapter.

Chapter 3 deals with the issue o cumulative regulatory burden, especially in the dairy sector. This chapterlooks into the complicated relationship between administrative burdens and competitiveness, presentingthe results o a survey. Chapter 4 discusses the economics o labelling in more detail in relation to theproposed ood product origin marking scheme. This chapter also provides more in ormation on therole o labels in ood marketing and the role o supermarkets with their private labels. Chapter 5 looks indetail at the competitive position o the dairy industry. Extra attention is paid to the issues o innovationand business dynamics. The chapter also includes the results o simulations with the GTAP model on thetrends in competitiveness. Chapter 6 is based on a legal study concerning ood law and its relation tocompetitiveness. The impact assessment or a European ood marketing scheme is reported in Chapter 7.For Chapters 3, 5 and 6 detailed background reports are available Bremmers et al., 2008; Tacken et al.,2008; Van der Meulen et al., 2008 .

Each o these chapters ends with conclusions. In addition to this, the report is concluded with a policyrefection that revisits the strategies or the European ood industry to increase its competitiveness throughinnovation and o ering traditional quality ood products. We link our ndings to these strategies, discussespecially the problems that many SMEs ace in a period o structural change, and re ect on the role o European policymakers in supporting the ood industry or the sake o European wel are.

The appendix provides more in ormation on the research team o the project.


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2.1. Research ramework

Four important topics on the competitiveness o the ood industry have been studied in this research:the administrative burden in a subsector o the ood industry the dairy industry , the competitiveness o that subsector, the economics o labelling, and a legal study on ood law. The study o these topics also

contributed to an impact analysis o the introduction o an EU ood origin marking scheme.

The competitiveness o the European ood industry has been identi ed as weaker than its competitors:weak in export growth, in labour productivity and in growth o the value added compared with its maincompetitor, the USA. Weak competitiveness may result in lower employment and income.

The impact assessment guidelines (SEC(2005) 791) distinguish general, speci c and operational objectives. The ambition o the EU, expressed in the Lisbon and Gothenburg agendas, is having a highly dynamic,competitive and environmentally sustainable economy.

Article 157 o the Treaty establishing the European Community recognises competitiveness asimportant.

1. The Community and the Member States shall ensure that the conditions necessary or the competitivenesso the Communitys industry exist.

For that purpose, in accordance with a system o open and competitive markets, their action shall beaimed at:

speeding up the adjustment o industry to structural changes; encouraging an environment avourable to initiative and to the development o undertakings

throughout the Community, particularly small and medium-sized undertakings; encouraging an environment avourable to cooperation between undertakings; ostering better exploitation o the industrial potential o policies o innovation, research and

technological development.

2. The Member States shall consult each other in liaison with the Commission and, where necessary,shall coordinate their action. The Commission may take any use ul initiative to promote suchcoordination.

3. The Community shall contribute to the achievement o the objectives set out in paragraph 1 through thepolicies and activities it pursues under other provisions o this Treaty. The Council, acting in accordancewith the procedure re erred to in Article 251 and a ter consulting the Economic and Social Committee,may decide on speci c measures in support o action taken in the Member States to achieve theobjectives set out in paragraph 1.

This title shall not provide a basis or the introduction by the Community o any measure which couldlead to a distortion o competition or contains tax provisions or provisions relating to the rights andinterests o employed persons.

2Research ramework and methodology


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The actions required under paragraph 1 can be seen as objectives that are more speci c than the generalobjectives rom the Lisbon and Gothenburg agendas. Metrics (indicators) on structural changes encouragingand ostering the activities mentioned are less obvious. There ore, research e orts have been addressed tothe industry dynamics, to get a clearer picture o structural changes, and to innovations as well as to theindustry environment, i.e. the legislation.

The operational objective o the impact assessment is the proposed introduction o an EU ood product

origin marking scheme. The introduction and implementation o an EU marking label can be achieved bydi erent policy options. The policy options are proposed in the tender speci cation:

option 1: regulation o a wholly voluntary system;

option 2: regulation o a mixed compulsory/voluntary system;

option 3: regulation o an obligatory origin marking or both imports o ood products and domestic oodproducts placed on the internal market.

r E s E a r c h q U E s t i o n s

The research questions to be tackled are listed below.

What is the impact o (cumulative) regulatory burdens? Which regulatory ramework would be chosen

i a genuine impact analysis would have been carried out?

What would the e ects o an EU ood product origin marking scheme on the cumulative regulatory

burden in the ood industry be? And what costs will that ramework induce?

What are the commercial bene ts or the EU ood industry o an EU origin marking label in general

and or the di erent options in particular?

What is the legal easibility o an EU origin marking scheme in relation to EU law and the WTO

regulations regarding country-o -origin labels in international trade?

What is the competitiveness o the dairy industry as a subsector and what is the impact o the EU

origin marking scheme on the competitiveness o the European ood industry, including innovation,industry dynamics and common agricultural policies?

r E s E a r c h F r a m E w o r k

The research ramework is given in Figure 2.1. The research starts with three topics or desk research,ollowed by eld work and data analysis.


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F i g U r E 2 1r E s E a r c h F r a m E w o r k

Field work

Analysis

Integration

Desk research

Synthesis

Legislation &administrative burden

Synthesis and testablehypotheses, questionnaire

Policies analysesCAP, WTO

Comm. value EU foodproduct origin marking

Selection stakeholderscarry out surveys

Analysis surveys onadministrative burden

Ex post and ex antecompetitiveness

Part I

Part IIImpact assessment

Accessing databasesEurostat, Amadeus, Trade

Analysis surveys onfood-marking scheme

Conclusions

Data selection

2.2. The dairy industry as a speci c subsector

A previous report Wijnands et al., 2007 analysed the competitive position o the ood industry and itssubsectors. To assess the administrative burden, business dynamics and innovation, this study deepensthe investigations in a subsector. The selection criteria or a subsector speci cation are:

weak and declining competitive per ormance, which justi es appropriate measures to be taken at theCommunity level;

a domain where regulatory burdens are likely to impede both competitiveness and innovation; tangible negative impact o external inter erences globalisation; international agreements; common

agricultural policy changes .

Based on these selection criteria and the acts in the previous study, the dairy industry NACE 155 wasselected or detailed investigations. The underpinning o this choice is:

weak competitive position in relation to the USA; one o the largest subsectors within the ood sector 14 % o total production value ; signi cant international trade 17 % o export value o the ood industry ; rapid product innovation; high level o regulations; heavily a ected by trade negotiations and CAP.

s E l E c t i o n o F c o U n t r i E s

A selection o countries is seen as necessary to retrieve su cient data or in-depth analyses. Even with aull compliance with Community legislation, institutions between countries di er, as do cultural di erences

(Ho stede, 1980). Institutions are embedded in norms and belie s and are changing slowly. Williamson2000 suggests periods o 10 to 100 years. A survey covering the EU-27 will blur the data, due to di ering

institutional rameworks. The survey should support three research objectives:

i to assess the regulatory burdens, namely cumulative regulatory burdens;ii an impact assessment o the EU ood product origin marking scheme;iii an assessment o the competitiveness.


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Regarding the rst objective, countries with di erent cultures need to be selected. The selection criteriaare:

(a) new versus old EU Member States; the ormer have had less time to adopt European institutions; mostnew Member States have a milk production below 1 % o the EU-27 total (only Hungary has 1.2 % andPoland 6 %); this is in contrast with the EU-15 Member States (except Luxembourg), which all have ashare above 1.5 %; we propose to include Poland as representative o the new Member States;

(b) countries with PDO or PGI, as an indication or EU ood product origin marking;

(c) northern versus southern countries; northern countries are more ormally oriented and, in southerncountries, in ormal arrangements are o larger importance Ho stede, 1980 ;

(d) continental versus Anglo-Saxon oriented countries;

(e) non-EU benchmark countries.

Regarding selection criteria b , it is relevant to select countries with origin label products. Barjolle andSylvaner 2000 provide an overview o the number o origin-labelled products per country. The top- ve

countries are summarised in Table 2.1.

t a b l E 2 1n U m b E r o F o r i g i n - l a b E l l E d P r o d U c t s a c c E P t E d a c c o r d i n g t oa r t i c l E 1 7 ( t o P - F i v E c o U n t r i E s )

c u t c ee e

FrancE 96 37

italy 80 30

PortUgal 61 9

grEEcE 60 20

gErmany 45 4Source: Barjolle and Sylvander, 2000, Annex 3, p. 50.

One striking di erence with the USA is the economies o scale. There ore, it is suggested to incorporatecountries with many small and medium-sized enterprises (SMEs) and countries with world-leadingenterprises. Countries with a relatively high share o SMEs are Italy and France. France and the Netherlandshave three enterprises in the top-20 global enterprises, Germany two Wijnands et al., 2007 .

Based on these considerations, we propose to select the EU countries presented in Table 2.2, in ordero pre erence. The given market share is based on the volume o cow-milk deliveries to the processingindustry.

As indicated, the results o the competitiveness analysis will be benchmarked with several world dairyproducers selection criteria e . It is not yet clear whether EU ood legislation induces a higher level o regulatory burdens than in benchmark countries. To assess this issue, analogous surveys should be carriedout in benchmark countries. We tried to investigate the possibili ty o data gathering in the USA and Brazil. These are the rst and second largest milk producing countries a ter the EU. The rst ve selected countrieshave 52 % o market share, the rst six cover 73 %. Data gathering in Germany and Italy have been donein collaboration with the MoniQa Network o excellence programme Pro . G. Schie er in Bonn and Pro .M. Mazzochini in Bologna . Data gathering in Brazil has been carried out by Pro . D. Zylbersztajn, Sao PauloUniversity, Brazil.


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t a b l E 2 2s E l E c t i o n o F c o U n t r i E s F o r q U E s t i o n n a i r E

c u EU ee % se e e

1 italy 8South European country, number o origin-labelledproducts, number o SMEs and strong competition

2 FrancE 19Number o origin-labelled products, number o SMEsand three top-20 rms

3 Poland 6 Representative or new Member States

4 nEthErlands 8 Northern country and three top-20 rms

5UnitEdkingdom 11 Representative common law Anglo-Saxon legislation

6 gErmany 21 Weak competition and two top-20 rms

7 Usa Benchmark country:largest non-EU producer 64 % o EU level

8brazil

Benchmark country:second largest non-EU producer 14 % o EU level

2.3. Methodology and databases

a d m i n i s t r a t i v E b U r d E n

The research on the administrative burdens in the dairy industry has been based on a desk study o theliterature and a questionnaire.

A web-based electronic questionnaire was set up and sent out in spring 2008 with a letter by post to alarge group o dairy companies in the countries given in Table 2.2, based on their address in the Amadeusdatabase. Letters and questionnaires were in the national language. A ter about a month, the companieswere phoned by students in their own language as a ollow-up. For Germany this was done by the Universityo Bonn and in Italy by the University o Bologna, both in the ramework o the MoniQa project. In Brazilthe University o Sao Paulo did this work.

Notwithstanding this high input in the survey, the results were not very satis actory. By mid-July we had onlyreceived 33 ully lled-in questionnaires rom Europe. The distribution was rather equal or the Europeancountries: Netherlands 12, France 6, Poland 1, UK 6, Italy 3 and Germany 5. It was there ore impossible toinvestigate di erences between Member States.

F o o d P r o d U c t o r i g i n m a r k i n g

The research on the ood product origin marking reported in Chapter 4 has been based on a desk studyo the literature. We paid extra attention to the structure o the ood chain and the developments in theretail sector, as the discussion on origin labelling is very much a reaction to a change in the balance o power in the chain, where the ood industry is losing market power to the supermarkets.

c o m P E t i t i v E P o s i t i o n

The methodology used in the analysis o the competitive position o the dairy industry Chapter 5 is thesame as in the previous study Wijnands et al., 2007 . Based on international trade theory, it addresses thedi erent aspects o competitiveness: competitive per ormance, competitive potential and competitiveprocess. Five main indicators are used to assess competitiveness: the growth in real gross value added o the dairy industry in the ood industry, the growth in revealed comparative advantage, the growth in world


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market share, the labour productivity measured in real gross value added per worker, and the growth inreal gross value added.

Main data sources come rom o cial statistics: Eurostat, OECD, UN and FAO. Business dynamics analysis hasbeen based on the Amadeus database. To explore uture scenarios, the GTAP model Hertel, and Keening,2003 has been used. More in ormation is given in Wijnands et al., 2007.

l E g i s l a t i o n

The research on the ood law reported in Chapter 6 has been set up as a classical legal study, with threecase studies: one in the Alpeggio region in northern Italy where traditional cheese-making is important ,one on the French cheese sector and one regarding experiences with the novel ood regulation.

i m P a c t a s s E s s m E n t

The methodologies used or the impact assessment are the European guidelines (SEC(2005) 791), includingthe March 2006 update.

s t a k E h o l d E r i n v o l v E m E n t

A dra t version o the report has been discussed with a group o experts, brought together by the EuropeanDairy Association. This included experts rom the Netherlands, France, Denmark, Finland and rom Brussels.In addition, valuable input was received and ndings were con rmed during a week o workgroups or thehigh-level group in Brussels, mid-July 2008.


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3Administrativeburdens3.1. Key ndings

Although European companies depict areas where EU ood law could be simpli ed and speci c areas

o regulations are seen as burdensome, they have a pre erence or the European system, which ostersood sa ety above litigation.

A distinction should be made between the orm and the content substance o ood law. In particular,

product innovative companies are dissatis ed with the content o ood law. Time-to-market o new outputis long, costs are relatively compared with the USA high, and procedures are not transparent.

European dairy companies have a strong pre erence or the European legal system; they are inclined

to accept relatively high administrative burdens especially in comparison with the USA or the sakeo ood sa ety and quality. In other words, they will not choose a policy that reduces administrativeburdens at the expense o ood sa ety and quality.

On the one side, companies in the dairy industry that oster product innovation will be negatively

impacted by procedural obligations. On the other side, process innovations are stimulated by ood law,since systems and procedures have to be installed. Companies that oster process innovations acceptadministrative requirements more easily than companies that oster product innovations.

Co-labelling printing the name o the processor on the package o the end-producer/retailer is only

bene cial bene ts outweigh administrative burdens i the producer SME procures a di erentiatedproduct, which is not easy to copy. For commodities (homogeneous produce which is supplied bymany companies , upscaling in intermediary production stages will be inevitable, to reduce costs. Inthe long run, SMEs producing homogeneous output will necessarily merge, to enhance economies o scale. Upscaling o commodity production will be to the bene t o e ciency o ood supply chains andshould there ore not be obstructed.

EU origin labelling will hide intra-communal ood sa ety and quality di erences. On the other hand,it could stimulate exports especially to non-western countries . Companies will pre er to distinguishthemselves on their brand name, PDO/PGI and ood sa ety and quality characteristics. Origin labelling (amade in the EU label) has a counter-productive e ect, because it hides company- and country-speci cdi erences. Moreover, the EU as a whole will be vulnerable should ood or political problems occur.

Despite the legal pressure to install HACCP Hazard analysis and critical control point systems, ood

sa ety and quality systems are primarily provoked by clients wishes rather than by legal obligations. Sothe costs which are connected to them would possibly have been made even i ood legislation did notimpose them. Integration o ood sa ety and quality requirements can alleviate compliance costs.

In general, there is not a broad pre erence or increased chain transparency. Technically there are high

impediments i such transparency should be improved by means o labelling.


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3.2. Introduction

Previous research (Wijnands et al., 2007) generated the ollowing generic results on administrativeburdens.

Administrative burdens are connected to prevention measures. Administrative burdens impede the innovativeness o ood companies. Administrative burdens are in uenced by the content o law and by the predictability and clearness o

regulations.

Built on these earlier ndings, in this chapter the ollowing sub-questions with respect to the associationbetween administrative burdens and dairy industry competitiveness are investigated.

What is the relationship between administrative burdens, innovation and competitiveness? What is the relationship between administrative burdens, ood sa ety and quality deployment and

competitiveness? What is the relationship between administrative burdens, ood labelling requirements and

competitiveness? What is the relationship between administrative burdens, supply chain transparency and

competitiveness?

3.3. Delineation o concepts o administrative burden

Governance o the European ood industry poses a choice between sel -regulation o which voluntarylabelling is an example) and command-and-control (o which mandatory ood labelling is an example), or acombination o these (Sinclair, 1997). Pure sel -regulation could have negative consequences or the wel areo nations i public goods (like environmental sustainability, population health) are involved, or whichproperty rights are ill de ned, or i a lack o transparency (regarding ood sa ety level, origin, or GMO content)creates a situation o asymmetric in ormation with possibilities o opportunistic behaviour; Williamson,1985 . An example o the rst is the adoption o environmental sustainability by private enterprise. A neo-classical approach to the environmental problem presupposes unlimited resource-substitution possibilities,a time-less world in which technological innovation is produced instantly and at will, and a voluntaryinternalisation. Sel -regulation as such does not make companies survive in a competitive environment,but the contrary Rumelt, 1990; Reinhardt, 1999; Christmann and Taylor, 2001 .

In the past, regulatory stringency has been the dominant instrument to achieve ood sa ety and sustainableproduction. The deployment o a hierarchical en orcement policy is considered by many as ine cientand costly, sti ing innovation and inviting en orcement di culties (Fairman and Yapp, 2005). Carriedout to the extreme, this policy would require the use o so many natural and social resources that thenet bene ts would be marginal. With respect to the ood industry, pure sel -regulation could go at thecost o consumers health. Moreover, leaving ood supply to the market would possibly lead to pricedeterioration to an extent that individual rms would perish in the long run. For a long time, theories o industrial organisation ostered the in uence o market structure on pro tability o rms Roquebert et

al., 1996 . It considers rms as passive entities, which is a narrow view o reality. Many rms in the presentEuropean ood industry have the power to pursue a market strategy. Food companies strategies should beconsidered in the e ect o rules and regulations. Nevertheless, the passive model o reactive adjustmentto environmental orces applies to many companies in the European ood industry, since most o thembelong to the SMEs < 250 employees , employing 61.3 % o personnel in the sector CIAA-a, 2005, p. 4 .Lengthy customs procedures are one indicative actor explaining the lack o export growth CIAA-b 2006,p. 28). The active model, however, stresses the inner strength o a company by exploiting its basic resources

a stream called the resource-based view; Barney, 1991 .

Why should companies comply with burdensome public regulations? According to Cornelissen 2004bthe pro t-seeking rm will comply with regulatory requirements i the bene ts o complying are biggerthan the costs, or alternatively, i the disadvantages o not complying exceed the costs o complying. Costsand bene ts can be vested in pro ts or reputation damage . Positive compliance decisions will be madecomparing the perceived marginal bene t o compliance or the perceived marginal cost o non-compliancewith the perceived marginal costs o compliance (Henson and Heasman, 1998, re erring to Baron and Baron,1980 . With respect to in ormation costs to be made to comply, rational rms and individuals will spend


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such costs to the point where the marginal bene ts (discounted error costs) are equal to the marginal costso in ormation procurement Ogus, 1992 . I marginal error costs are low, it ollows that individuals will notspend much money on in ormation costs. Where marginal error costs are high or instance, possibility o death, heavy injury, costly recalls in ood industry, etc. , the willingness to spend money on in ormationprocurement will be high. Since ood sa ety is perceived as a serious cause or possible personal harm, thewillingness to spend costs on reducing such risk through in ormation may be high.

In general, administrative burdens increase transaction costs in the market and will there ore impede thecompetitiveness o ood rms. It is not clear in advance whether administrative requirements are higherin a common law system UK, USA or in a regulatory European, continental system o law. Possibly the ex ante costs costs o acquiring and assimilating in ormation be ore the legal rule is ormulated are higher

Ogus, 1992 in a continental system, which is based on prevention o risks, instead o litigation. On thecontrary, the ex post costs in a common law system will presumably be higher.

Administrative burden is a concept easily used in politics. But there are di erent de nitions in use and itis not easy to be exact 1 . It is an expressed goal o the Commission to reduce administrative burdens by25 % in 2012. The e ect that is expected rom a reduction on EU as well as national levels is an increase o GDP o 1.4 % EUR 150 billion in the mid-term COM 2007 23 Gelau and Lejour, 2005 . For instance, orthe Netherlands at the end o 2002 the administrative burdens were EUR 23 780 per rm EUR 16.4 billion

or 689 623 companies in total, according to the Dutch EIM/CBS; Suyver and Tom, 2004 , while in 2007,on the basis o ministry plans in 2002, these burdens should be EUR 3 billion lower, reducing the averageburdens by EUR 4 500 per rm. However, it was also projected that large rms would bene t 13 timesmore than small rms. Small companies were projected to bene t EUR 3 560 (in total: 76 %), medium-sizedcompanies EUR 7 327 and big companies EUR 45 735 Suyver and Tom, 2004, Table 2 . Other countries andorganisations have proposed similar policy goals. In Sweden, an action plan was initiated to select areas o regulation that can be simpli ed or changed to reduce burdens, on the basis o the Dutch standard costmodel. Also organisations like the Con ederation o the Food and Drink Industries o the European Union

CIAA have proposed initiatives to improve and simpli y the EU regulatory ramework CIAA-a, 2005, p. 3 .CIAA is especially concerned about the research drain in biotechnology, the cost o pre-market approvalo novel oods, regulation about legal additives, easing up regulations or nutrition and health claims,

ood labelling modernisation, simpli cation and consolidation, the stimulation o sel -regulation and theexclusion o ood and ood ingredients rom the scope o REACH revised chemicals policy .

The delineation o administrative burdens (based on the standard cost model) is given in Figure 3.1.Administrative burdens, as to EU de nitions, re er in a broad sense (including labelling, monitoring, reportingand assessment to all in ormation requirements either to public or private bodies that are induced byregulatory activity and would not be collected i such legal obligations did not exist.

There is much diversity, however, in the vocabulary which is used to delineate regulatory includingadministrative burdens. The UK Hampton report suggests that the costs o regulation can be split upin Scrivens, 2007 :

policy costs: the costs inherent in meeting the aims o a regulation direct cash costs + investments, orchanges in organisation o a rm necessary to meet obligations ;

administrative costs costs o gathering in ormation about a business, or checking on a businessscompliance.

The report especially addresses the costs o inspection o regulatory bodies to guarantee compliance. Itargues, among others, that risk assessment can reduce the number o inspections, that such inspectionsshould be made only with a reason, and that orms and procedures should be simpli ed.

(1) And language does not help. Administrative has in general the meaning of induced by the administration, where administrationis used as, or example, US Administration, a synonym or government. In some languages (German, Dutch) administrative isassociated with accounting.


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F i g U r E 3 1d E l i n E a t i o n o F a d m i n i s t r a t i v E b U r d E n s ( b a s E d o n c o m ( 2 0 0 7 ) 2 3)

Regulatoryburdens

For publicauthorities,

voluntary sector

and citizens

Forenterprises

Direct nancial costs

Long-term structuralconsequences

Compliance costs

Direct nancial costs

Long-term structuralconsequences

Compliance costs

Substantivecompliance

costs

Administrativecosts

Voluntaryadministrative

costs

Enforcedadministrative

costs

Substantivecompliance

costs

Administrativecosts

Voluntaryadministrative

costs

Enforcedadministrative

costs

Further speci cations o the concept administrative burdens are ound in the outline that describes theDutch standard cost model to assess such costs. In the Dutch version The Hague, 2003 a distinction ismade between obligations to do or dont, and in ormation obligations. According to the Dutch system,administrative burdens are costs to enterprises to come up with in ormation obligations which result romregulation and legislation by the government.

Costs rom sel -regulation are not covered by the administrative burdens concept. The main di erencebetween the original Dutch standard cost system is vested in the act that the EU system includes alsovoluntary in ormation costs o public authorities, whereas the Dutch system only regards the in ormationcosts o enterprises. In the original Dutch outline, voluntary measures needed to reach in ormationrequirements are included in the administrative burdens concept, whereas in the derived EU system thereshould be a legal requirement to take in ormation measures. Bene ts which are connected to obligatoryin ormation requirements are not considered as a negative administrative burden. Administrative burdensin the Dutch system are measured using among others the ollowing principles The Hague, 2003 :

concrete and measurable not qualitative ; only costs are included, not the bene ts; i the costs are compensated by a nancial compensation, they are not included; structural costs should be quanti ed; one-time costs should be quanti ed and attributed to di erent periods; costs o monitoring legal changes are included in the concept; registrations or multiple purposes are attributed to regulation and legislation which cause the

burden.

The OECDs Red tape assessment Scoreboard project was initiated to compare administrative burdensover several countries among others: the Netherlands, the USA, the United Kingdom and Italy , using aslightly adapted version o the Dutch standard cost model; similar studies were per ormed by the WorldBank and the World Economic Forum (OECD, 2007). According to the OECD, the abandonment o additionalregulatory requirements which supplement necessary regulations could reduce administrative burdens.In a more open economy, governments are less able or willing to regulate domestic economic activity

Pevcin, 2006, re erring to Pryor, 2001 .

Within this research, administrative burdens (narrowly de ned) are the in ormation costs which are causedby changing legal requirements and made or complying with them. We call these level 1 costs (Figure 3.2). They can be measured or administrative bodies and/or or private enterprises. A broad view encompassesall impacts to administrative and/or private bodies so also costs, expressed in money terms, other thanin ormation costs are included . These we call level 2 costs. An even more broadened view encompassesnot only nancial burdens, but also qual itative burdens like environmental and socia l impacts . These arelevel 3 costs. The investigation o such causal e ects is o importance or the construction o an impact


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analysis. Last, also the voluntarily imposed burdens are included like private ISO or HACCP systems whichare installed to protect ood sa ety, and the like . These are level 4 costs in our analysis. We propose todepart rom this broadened view. However, empirical results should be organised in such a way that alsodata on the di erent levels can be provided.

Cumulative regulatory burdens, as de ned in COM(2006) 691 o 14 December 2006, are extra legislation whichimpedes the placing o a ood product on the market, with the ensuing consequences or competitiveness,

or are those that raise costs in an unjusti able way to economic operators, which lead to a price increaseo the end ood product, or prolong the time-to-market. Cumulative administrative burdens are caused byunnecessary legislation. Unnecessary regulation hampers international trade and competition. Regulationsare called unnecessary (cumulative) i they are not necessary or achieving the aim o a piece o legislationor or guaranteeing the level o protection the Treaties o er. WTO articles (Article XX) and agreements (with

respect to trade, sanitary and phyto-sanitary measures or instance) restrict regulation to a level that obstructsinternational trade more than is necessary to reach the legal objective (Kalinova, 2005).

As expressed, unnecessary or extra regulations (goldplating) can cause avoidable costs and obstructcompetitiveness substantially. For instance, the costs o plant variety protection with a 15-year protectionperiod are USD 5 687 in China, USD 10 480 in the EU and USD 4 344 in the USA based on Louwaars et al.,2005, cited in Tripp et al., 2007 .

The action programme (COM(2007) 23) addresses EC regulations and directives, national transpositionand implementing measures connected with these, as well as national and regional abundant in ormationobligations. Expressed priorities with respect to investigation o excessive administrative burdens areDirective 2000/13/EC o the European Parliament and o the Council o 20 March 2000 on the adjustmento Member State laws with respect to the labelling, presentation and advertising o oodstu s, as wellas in ormation obligations with respect to GMO traceability rules (Regulation (EC) No 1830/2003). Bothregulatory revisions can act upon dairy processors, as well as on other companies in the ood sector. Anexample o goldplating outside the ood sector is given by Directive 95/46/EC, governing the protectiono privacy. The directive contains 72 considerations and 34 articles, while the Dutch implementation (WBP Personal Data Protection Act) contains more than is required with a minimal implementation: 200considerations and 83 articles (Cornelissen, 2004b).

F i g U r E 3 2a b r o a d v i E w o F a d m i n i s t r a t i v E b U r d E n s

III

II

I

IV

information costs asa result of complying

expressed in money terms

II + non- nancial e ects

I + including other nancial

costs/e ects

III + voluntary measures forregulatory requirements

O ten, but not necessarily, goldplating is linked to such national add-ups in the transposition o EU law tonational law. Within our research, we conceive goldplating as being vested in:

the translation o EU regulations in national laws and other requirements; the translation o national laws and requirements in company in ormation systems and other company

devices like investments, procedures, etc. ; or instance, misconception o national rules could lead toover-compliance on a company level.

Both could impede or promote the competitiveness o the European dairy sector.


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Regulatory burdens are a result o legal CONTENT, but also o their FORM clearness, consistency, etc. .According to Cuijpers 2006 , vague and open norms, complexity and uncertainty o interpretation, newprocedures and burdens, dis-congruence with the privacy-understanding o citizens as well as the lack o stimuli or sel -regulation are the result o excessive legal requirements. The extra costs to be consideredin this respect are classi ed as mechanic costs (implementation o new prescriptions, handling and ITcosts as well as organisation costs education, in ormation, etc. , which accelerate costs o in ormationprocessing.

Regulatory and administrative burdens will disproportionally a ect competitiveness i :

1. the burdens are not compensated by bene ts with respect to ood sa ety and quality, improvedtransparency or other societal actors that positively a ect the ood system;

2. growth and market shares are a ected disproportionally;

3. innovativeness is obstructed more than necessary.

3.4. Theoretical ramework

Two complementary theoretical orientations can be used to measure the e ect o regulatory burdens,including its costs, on competitiveness o individual rms. We propose:

the total quality management ramework TQM ; the transaction cost ramework TCE .

Total quality management is a practical approach to enhance product as well as process quality aspects,strategic attitude top-management involvement and organisational behaviour through empowermento employees. Consumer needs, not technological governance, is the starting-point o all quality processes

Spencer, 1994; Hackman and Wageman, 1995 . As opposed to the Deming principles o quality, the TQMprinciples are not universally applicable, but their application depends on the characteristics o a speci c

rm. Process control is ostered to reduce unnecessary sacri ces o inputs. In general, it is supposed thatthe costs o bad quality are ar greater than the costs o avoiding bad quality Hackman and Wageman,1995), although quality has a price which could be excessive. So, with respect to quality costs, two opposingtendencies can be discerned: prevention (including appraisal) costs and ailure costs. Prevention costsincrease with higher levels o quality assurance within this outline: o regulatory stringency , while at thesame time ailure costs are reduced (costs o non-compliance, such as is the case with ood-borne diseases,etc.). While the European system osters prevention (risk avoidance) the US system o litigation osterscompensation o ailure. The question is what, at the rm level, the ideal combination is o both policies,given the act that prevention costs have to be weighted against ailure costs.

Transaction cost theory provides a new perspective on the structuring o economic organisation. Whileormer theorising conceptualised a rm as a production unction, transaction cost economics regards a rm

as a governance mechanism (Rindfeisch and Heide, 1997; Williamson, 1998). Likewise, economic organisation

can be governed in a hierarchical way (like a vertically integrated rm) or leave the economic exchangeand its characteristics to market governance. Hierarchies (integration) cause bureaucratic costs, whichinduce a tendency towards market governance. However, dimensions o governance like the necessity o asset speci c investments translated to the study at hand: investments in, or instance, quality assurancesystems induced by buyers to enhance ood sa ety , combined with lack o in ormation, asymmetricallydistributed in ormation, or (market) uncertainty, can lead to opportunistic behaviour and shirking, so that ahierarchy is pre erred (translated to our research: governmental intervention is necessary). Transaction costeconomics especially regards the consequences o incomplete contracts as a result o limited rationality andin ormation. In general, asset speci city orms a strong bias towards hierarchy (governmental intervention;David and Han, 2004; Geyskens et al., 2006; Poppo and Zenger, 2002). The role o ood labels rom atransaction cost perspective is to improve in ormation processing so that contracting is acilitated.

Within this research, the ollowing combinations o the two theoretical viewpoints can be discernedFigure 3.3 .


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F i g U r E 3 3t q m a n d t c E

Prevention

Voluntarylabelling

Obligatorylabelling

Strict privateliability (tort juridical system)

SanctionsAdministrative

nes

TQM costs

Failure

market

hierarchy

TCEgovernance

Figure 3.3 shows that labelling can be regarded as an instrument to promote market e ciency, or as aninstrument to control rms. Both are directed at protecting buyers rom ine cient purchase decisions.Perceptions on the use ulness o labelling in ormation a ects the opinion o whether or not mandatorynutritional labelling would be bene cial Gracia et al., 2007 . However, use ulness o labelling in ormationdoes not always implicate that buying behaviour is adjusted see in this respect: He e et al., 2007 . Withrespect to origin labelling, extensive research by Loureiro and Umberger (2007) in the USA shows thatUSDA ood sa ety inspection with respect to bee is pre erred by US consumers over country-o -originlabelling. According to these authors, indication o origin makes sense i the origin stands or higher oodsa ety or quality. Labelling bridges the in ormation gap between consumers/buyers and suppliers withrespect to basic characteristics o a product or service. Labelling which is not governed by regulationand certi cation is possibly a victim o opportunism. An example in this respect is eco-labelling. DespiteEuropean e orts to establish authorised, non-compulsory ecological labelling Eco-label I in Regulation(EEC) No 880/92 and Eco-label II in Regulation (EC) No 1980/2000; Proto et al., 2007), variations in eco-labelsare widespread and more con using than in ormative. According to Van Amstel et al. 2006 the reliability

o in ormation o ve investigated ood labels showed severe shortcomings, and do not ll the in ormationgap between seller and buyer.

The overview presented in Figure 3.3 coincides to a large extent with Loader and Hobbs 1999 options toreduce in ormation costs or consumers:

1. product certi cation or labelling at the rm level;

2. legislative protection in the orm o labelling regulations also in: Unneveher and Jensen, 1996 ;

3. tort liability law with the chance o market ailure .


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r E s E a r c h F r a m E w o r k

Next, we propose a research ramework which visualises the proposed e ect o regulatory burdens and keyactors innovativeness, strategy, ood sa ety system availability and in ormation-processing capabilities

impacting on the competitiveness o a highly innovative sector, such as dairy see Figure 3.4 .

F i g U r E 3 4F r a m E w o r k F o r t h E a n a l y s i s o F t h E a d m i n i s t r a t i v E b U r d E n E F F E c t s

Level of innovativeness

Administrativeburdens

Dairy sectorcompetitiveness

Food safety systemavailability

Company stategy

Information processingcapabilities

Company sizeIndustry variablesProduct characteristicsSupply chain structure

Changinglegal

framework of the dairy

sector

Other burdens( nancial and non-

nancial

- content- form

Components o the research ramework are addressed next.

i n n o v a t i v E n E s s a n d s t r a t E g y

Administrative and monitoring requirements will hamper the acquisition o capabilities to innovatedisproportionally because o resource scarcity at the rms level (compare: Avermaete et al., 2004; Batterink etal., 2006; Romijn and Albaladejo, 2002; Loader and Hobbs, 1999). Innovativeness can be radical or incrementalo a kind (Ettlie et al., 1984), can be process- as well as product-oriented, and address exploitative and/orexplorative changes o product-market con gurations. The innovation orientation is associated with a rmsstrategy. Regulatory demands converging with the companys strategy will be welcomed more easily thana generic ood and drink sa ety policy. This implies that the perception o a set o rules being burdensome`is dependent on the rm-speci c aims and strategies that are intended to be deployed. Firm strategies can

be classi ed on a range rom de ender to prospector Miles et al., 1978; Morgan et al., 2000 . A de endercompany will, in general, tend towards a cost-oriented strategy; it de ends its market share by the provisiono products with similar quality characteristics as competitors, but at lower prices. On the contrary, prospectorcompanies aggressively seek new market opportunities and develop new products and/or markets tooutper orm competitors. Prospector companies are well equipped or product change with available R & Ddepartments and in ormation and communication resources. Innovativeness and business renewal canbe a ected by legislative e orts along two routes: ormal and content. Searching or causes o excessiveadministrative burdens should there ore include an investigation o the ormal aspects connected to lawchange: its predictability, consistency, proportionality and the level o perceived behavioural control o changesin production and/or product characteristics. With controllability we depict the possibilities to implementand/or act in con ormity with regulator wishes. Proportionality re ers to a necessary balance o consequences

or companies, buyers and competitors, inside and outside the EU. Whether there is proportionality dependseconomically on the costs needed to comply versus the positive pro tability and cash- ow e ects that areearned. With respect to the dairy sector, it should be noted that many rms are highly innovative. Innovationin this sector is likely to be hampered by, among others CIAA-a, p. 6 :


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legislation on genetically modi ed organisms; legislation with respect to nutrition and health claims the possibility to claim a nutritional or health

bene t connected to a product); the changed consumer behaviour and consciousness o healthconsequences o ood intake as well as nutritional properties o novel oods makes innovation in thisarea o extreme importance;

pre-market approval schemes o novel oods and additives with an average time-to-market o twoyears.

While the European dairy sector in general is innovative, the spread in innovativeness is very wide, rangingrom companies that, or instance, pack milk and try to optimise processes, and companies that modi y

the basic characteristics o inputs Omega-3 or instance and/or output or instance, dairy products towhich health claims will be attached .

F o o d s a F E t y s y s t E m a v a i l a b i l i t y

Food sa ety systems can improve transparency and consumers trust, but in many cases companies areobliged to install or expand in ormation systems on legal grounds ( or instance, to adjust or ood labellingrequirements) (see: Caswell and Padberg, 1992; Przyrembel, 2004), which require extra costs. SMEs in

particular will possibly be more than proportionally a ected in their pro tability, while at the same timethey cannot easily harvest the quality premium. Administrative burdens are, among others, induced bycompulsory quality systems like HACCP .

Costs o quality assurance can be measured with the P-A-F method (prevention, appraisal and ailurecosts; Schi auerova and Thomson, 2006 . I these costs exceed perceived bene ts, ood legislation e ectson competitiveness will be registered. The rationale behind the model is that lower ailure costs are to becompared with increasing appraisal and prevention e orts, i product quality is improved. The schemecan easily be adapted to serve purposes in other elds, like environmental management (see, or instance,Watson et al., 2004), or the costs o law implementation. Formally, administrative burdens could be arrangedunder each category o quality costs, but the appraisal costs will be the biggest causal actor = costs o operating ood sa ety assurance systems . Executing ood sa ety requirements causes operational costs,while also prevention costs will accelerate administrative requirements. Prevention costs are costs whichare made to prevent con ormity with legal requirements. Companies can be con ronted with higheradministrative loads, but could take this or granted or di erent reasons, like improved competitive powerand/or a better ood and drink sa ety/quality. Food sa ety and quality assurance systems may there orebe adopted on a voluntary basis. While the systems cost money, they may reduce transaction costs ininternational trade by assuring a certain level o quality. They may there ore also serve as trade barriers(Holleran et al., 1999), and, in this way, adversely, stimulate competitive per ormance. We expect thatdairy companies that already have certi ed ood sa ety/quality systems at their disposal will implementregulatory changes with relative ease.

i n F o r m a t i o n a n d c o m m U n i c a t i o n c a P a b i l i t i E s

In situations o asymmetrically distributed in ormation and market imper ections, labelling can enhancefexibility, e ciency, responsiveness and in ormedness ( or instance, the willingness to comply by producers)in the market see extensively Van Amstel et al., 2006 . Provision o in ormation to the market, in the ormo labels, brochures, etc. requires the organisation to be able to process in ormation and to communicatein a structured way. Food labels can serve di erent purposes:

in ormation about a certain level o guaranteed ood sa ety; con ormation o a level o environmental con ormity; con ormation o a certain level o social adequateness o the processes behind the ood products; con rmation o identity origin ; in ormation about the composition o a product, i.e. its nutritional value Council Directive 90/496/EEC

on nutrition labelling or oodstu s .

Mark-o -origin labelling guarantees that a certain product has: 1 passed through, or 2 been produced,or 3 carries the legal assurance, or 4 is to a certain level produced in a certain place, region or country.


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In an economic sense, labels provide a message about sa ety, quality, taste or any other ood characteristicwhich in uences the perceived use ulness o that product. So they compensate or a lack o in ormednesson the side o the buyer o a product or service. Food labels are valued positively on an individual or rmbasis, i the marginal costs o providing them are lower then the marginal bene ts. In the case o marking

or origin, the bene t lies in the increased competitiveness or competitive per ormance or the company,as well as the social and environmental e ects o the labelling requirement. The role o labelling should beviewed in connection with the role o direct regulatory bodies (like the Food and Drug Administration (FDA)

in the USA or the European Food Sa ety Authority EFSA in Europe . The stronger the ex post litigation, thelower the perceived value o mandatory labelling providing ex ante in ormation will be. Since in generalthe European culture osters ex ante in ormation and prevention over ex post litigation, it is not surprisingthat a labelling policy over a system o rules and sanctions will be pre erred. Building in ormation andcommunication capabilities does not happen overnight, but is a process which takes place in phases. AsHutter states, responsiveness o rms to regulatory requirements is described in three phases (Hutter,2001, as cited in Cornelissen, 2004a :

1. the design o procedures/rules/systems to introduce the requirements in the organisation;

2. the operationalisation phase auditing, en orcements o rules, etc. ;

3. the phase in which rules/procedures compliance are part o normal, everyday li e.

In an assessment o competitiveness, the phase in which companies operate should be taken intoaccount.

Whereas ood labels create transparency on (among others) the characteristics o the supply chain, privatelabels play a special unction in this respect. Private labels are all merchandise sold under a retailers brand. That brand can be the retailers own name or a name created exclusively by that retailer () (PrivateLabel Manu acturers Associations de nition in: Bergs-Sennou et al., 2004 . They can create homogeneitywith respect to a multitude o suppliers on the one hand, but on the other hand the cra tsmanship o supplying intermediate companies is hidden. The more innovative the intermediary company is, themore disadvantageous this is, since innovation has a price which can only be earned back by means o a premium on the selling price. With the private label holder controlling the distribution channel, it is amatter o negotiation whether such a premium is harvested. Private label holders will take a strong positionbecause o the scale at which they buy. Moreover, i an intermediary producer also serves the consumermarket directly which could take place in competition with the private label it supplies , it experiencesprice erosion and sales decline because o the relatively low price o the alternative.

Private labels serve to reduce administrative burdens to the consumer (because o homogeneity o productand quality), while scale e ects lead to lower prices. On the other hand, they increase costs or (intermediate)producers (regulation o the supply by the direct label holder). They experience direct competition ortheir sales to consumers, and will possibly be inclined to sell at relatively low prices which is not the caseunder all circumstances; see Gabrielson and Srgard, 2007; Bergs-Sennou et al., 2004 . This suggests thatupstream producers o di erentiated products will oster transparency o the supply chain to enhancetheir image or the end-user.

c o n t r o l v a r i a b l E s : s i z E , n E t w o r k E m b E d d E d n E s s a n d P r o d U c tc h a r a c t E r i s t i c s

There are a number o rm characteristics (so-called control variables in the research ramework in Figure 3.4)that in uence the e ect o the legal ramework on competitiveness. An important control variable is thesize o companies. SMEs might be con ronted with disproportionately larger compliance costs, becauseeconomies o scale are lacking Loader and Hobbs, 1999 . Administrative complexity has, in the long run,a negative impact on the level o business ownership and thus entrepreneurship Stel and Stunnenberg,2007). Administrative burdens re er, among others, to the costs to be made to investigate changes inthe legal system. According to Cornelissen 2004a , small rms especially in biotechnology do notnecessarily have a limited knowledge and comprehension o the law. The research on the subject is notvery up to date. Cornelissen 2004a opposes the results o a study by Genn rom 1993 Genn, 1993 , whostudied the permeation o health and sa ety regulations in industrial and agricultural business. A distinctionwas ound between highly motivated, proactive employers (with numerous sources o in ormation and


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a perception o a need to keep in ormed and in line with regulations , and a second group o rms withemployers who were less motivated and reactive. This distinction was, in urther studies, also ascribed tolarge versus small rms. We propose that size is directly related to the capacity to in orm and be in ormedabout legal requirements and possible changes.

Companies are, to a smaller or larger extent, embedded in a web o relationships, orcing them to adoptthe norms and practices in the business network. But they also can be change-oriented and put their own

goals and standards rst, relying on unique resources to adjust their environment inside-out Porter andKramer, 2006 . In practice, both tendencies can occur at the same time and in the same organisation.

Food sa ety o ten cannot be inspected ex ante by buyers in the supply chain. A situation o in ormationasymmetry exists, in which sellers usually have more in ormation than buyers Loader and Hobbs, 1999 . The buyer could solve this problem by per orming checks themselves, which would lead to an increaseo transaction costs and thus loss o e ciency o markets . These extra costs could be exaggerated to anexcessive level. End-consumers in particular experience ood risks seemingly irrational and inconsistent(Verbeke et al., 2007), exaggerating ood risks (compared with experts opinions) beyond proportion.We suggest that the more embedded companies are, the more support they experience in assessingand coming up to legal requirements; they will there ore experience lower administrative burdens thancompanies that operate on an isolated basis.

Speci c requirements with respect to dairy products (like an almost complete absence o dioxin in raw milk)will have an impact on the production and procurement processes o raw materials. Di erences betweencountries will a ect the competitive position o the European dairy industry.

Generic trends and tendencies in the business environment (which can be categorised by means o Portersdiamond will a ect the individual business. Di erences between countries or regional di erences on aglobal basis will have to be considered.

Summarising, Figure 3.4 depicts that changing legal requirements (its content and orm, i.e. clearness,completeness, complexity, etc. , or instance with respect to ood sa ety and/or labelling requirements,have an in uence on rm management:

on the rms strategy deployment will, or instance, hamper or stimulate the strategy choice, i.e. whatmarkets to enter, what products to produce, what consumers to ocus on ;

the level o innovativeness; pre-market approvals, the possibility to claim health infuences, the level o protection o new products, etc. all will directly be a ected by legislation; moreover, administrativerequi

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Food legislation and competitiveness in the EU food industry