Vertical and Horizontal Integration in the Profitability of Malaysian Broiler Firms

  • Y. S. Tey Institute of Tropical Agriculture and Food Security, Universiti Putra Malaysia
  • P. Arsil Faculty of Agriculture, Universitas Jenderal Soedirman
Keywords: broiler, integration, value chain, financial performance

Abstract

Vertical integration has been widely promoted for offering production, transaction, and market benefits in the poultry industry. These benefits must be translated into profitability – a proxy of competitive advantage. This study aimed to identify the financial effect underlying the degree of backward, forward, and horizontal integration, alongside the financial strength and management capability of broiler firms. We used random-effects general least squares to analyze a panel dataset of broiler firms that publicly listed in Kuala Lumpur Stock Exchange Malaysia for the 2006-2018 period. Support is found for the hypothesis that forward integration enhanced profitability. In comparison, the operating margin had a greater influence on broiler firms’ financial performance. Notwithstanding value chain development, the relative findings suggest that efficiency remains a priority in a commodity-based broiler market. It is thus recommended that management capability be emphasized.

Downloads

Download data is not yet available.

References

Abdul Hadi, A. H. I., M. N. Shamsudin, A. Radam, & J. Selamat. 2013. Consumer preference for food attributes in Malaysia: case studies on broiler and beef. J. Int. Food Agribus Mark. 25: 137-153. https://doi.org/10.1080/08974438.2013.805453

Allen, J., & S. Lavau. 2015. ‘Just-in-time’ disease: biosecurity, poultry and power. J. Cult. Econ. 8: 342-360. https://doi.org/10.1080/17530350.2014.904243

Assefa, T. T., M. P. Meuwissen, & A. G. O. Lansink. 2015. Price volatility transmission in food supply chains: a literature review. Agribusiness. 31: 3-13. https://doi.org/10.1002/agr.21380

Baluch, N., A. S. Ariffin, Z. Abas, & S. Mohtar. 2017. Servitization in Malaysian poultry contract farming: a critical overview. Int. J. Supply Chain Manag. 6: 259-265.

Bamiro, O. M., & A. M. Shittu. 2009a. Vertical integration and cost behavior in poultry industry in Ogun and Oyo States of Nigeria. Agribusiness. 25:1-15. https://doi.org/10.1002/agr.20185

Bamiro, O. M., S. Momoh, & D. O. A. Phillip. 2009b. Vertical integration and profitability in poultry industry in Ogun and Oyo States, Nigeria. J. Hum. Ecol. 27:149-154. https://doi.org/10.1080/09709274.2009.11906204

Barbut, S. 2016. Poultry Products Processing: an Industry Guide. CRC Press, Boca Raton. https://doi.org/10.1201/9781420031744

Barney, J. 1991. Firm resources and sustained competitive advantage. J. Manage. 17: 99-120. https://doi.org/10.1177/014920639101700108

Bell, D. R., Y. Wang, & V. Padmanabhan. 2002. An explanation for partial forward integration: Why manufacturers become marketers. Working Paper, The Wharton School, University of Pennsylvania.

Ben‐Kaabia, M., J. M. Gil, & M. Ameur. 2005. Vertical integration and non‐linear price adjustments: The Spanish poultry sector. Agribusiness, 21: 253-271. https://doi.org/10.1002/agr.20046

Bhuyan, S. 2002. Impact of vertical mergers on industry profitability: An empirical evaluation. Rev. Ind. Organ. 20: 67-79.

Bhuyan, S. 2005. Does vertical integration affect market power? Evidence from U.S. food manufacturing industries. Journal of Agricultural and Applied Economics. 37: 263-276. https://doi.org/10.1017/S1074070800007240

Blažková, I. & O. Dvouletý. 2018. The causes of firm performance variation in the Czech food processing industry in the context of the outlier effect. Manag. Res. Rev. 41: 968-986. https://doi.org/10.1108/MRR-05-2017-0142

Brilliant, H. & E. Collins. 2014. Why Moats Matter: the Morningstar Approach to Stock Investing. John Wiley and Sons, New Jersey.

Chaddad, F. R., & M. P. Mondelli. 2013. Sources of firm performance differences in the US food economy. J. Agr. Econ. 64: 382-404. https://doi.org/10.1111/j.1477-9552.2012.00369.x

Chang, W., A. E. Ellinger, K. Kim, & G. R. Franke. 2016. Supply chain integration and firm financial performance: A meta-analysis of positional advantage mediation and moderating factors. Eur. Manag. J. 34:282-295. https://doi.org/10.1016/j.emj.2015.11.008

Constance, D. H., F. Martinez-Gomez, G. Aboites-Manrique, A. Bonanno. 2013. The Problems with Poultry Production and Processing. In: H. S. James (Ed). The Ethics and Economics of Agrifood Competition. Springer, Dordrecht. p. 155-175. https://doi.org/10.1007/978-94-007-6274-9_8

Damodaran, A. 2007. Return on capital (ROC), return on invested capital (ROIC) and return on equity (ROE): Measurement and implications. Working paper, Stern School of Business. http://people.stern.nyu.edu/adamodar/pdfiles/papers/returnmeasures.pdf. [2 June 2020]. https://doi.org/10.2139/ssrn.1105499

Dobashi, I., J. Fallon, F. C. Eizmendi, M. Loureiro, K. Matchett, R. Parrish, & B. Raquet. 1999. The Value Chain for Poultry. Working Committee on Food Products, Pacific Basin Economic Council.

Espino-Rodríguez, T. F., & V. Padrón-Robaina. 2005. A resource-based view of outsourcing and its implications for organizational performance in the hotel sector. Tourism Manag. 26: 707-721. https://doi.org/10.1016/j.tourman.2004.03.013

FAO. 2008. Poultry in the 21st Century: Avian Influenza and Beyond. Proceedings of the International Poultry Conference, held 5-7 November 2007, Bangkok, Thailand. Edited by O. Thieme and D. Pilling. FAO Animal Production and Health Proceedings, No. 9. Rome. http://www.fao.org/3/a-i0323e.pdf. [15 November 2020].

Ferlito, C. & H. Respatiadi. 2018. Policy reform on poultry industry in Indonesia. Discussion Paper. Center for Indonesian Policy Studies. https://repository.cips-indonesia.org/media/271878-policy-reform-on-poultry-industry-in-ind-52817e14.pdf [2 June 2020]. https://doi.org/10.35497/271878

Godwin, M. R. & L.L. Jones. 1971. The emerging food and fiber system: Implications for agriculture. Am. J. Agr. Econ. 53:806-815. https://doi.org/10.2307/1238092

Grau, A. & A. Reig. 2019. The industry effect and the decision to integrate vertically in a crisis context. Euro. J. Fin. 25:1591-1605. https://doi.org/10.1080/1351847X.2019.1628795

Grau, A. & A. Reig. 2020. Operating leverage and profitability of SMEs: agri-food industry in Europe. Small Bus. Econ. In press. https://doi.org/10.1007/s11187-019-00294-y

Gschwandtner, A. & S. Hirsch. 2018. What drives firm profitability? A comparison of the US and EU food processing industry. Manchester Sch. 86:390-416. https://doi.org/10.1111/manc.12201

Heise, H., A. Crisan, & L. Theuvsen. 2015. The poultry market in Nigeria: Market structures and potential for investment in the market. Int. Food Agribus. Manag. Rev. 18: 197-222.

Henry, R., & G. Rothwell. 1995. The World Poultry Industry. IFC Global Agribusiness Series. World Bank, Washington D.C. https://doi.org/10.1596/0-8213-3429-8

Hirsch, S., & J. Schiefer. 2016. What causes firm profitability variation in the EU food industry? A redux of classical approaches of variance decomposition. Agribus. 32: 79-92. https://doi.org/10.1002/agr.21430

Hirsch, S., J. Schiefer, A. Gschwandtner, & M. Hartmann. 2014. The determinants of firm profitability differences in EU food processing. J. Agr. Econ. 65: 703-721. https://doi.org/10.1111/1477-9552.12061

Hoffmann, I. 2005. Research and investment in poultry genetic resources-challenges and options for sustainable use. World’s Poultry Sc. J. 61: 57-70. https://doi.org/10.1079/WPS200449

Koller, T., R. Dobbs, & B. Huyett. 2010a. Value: The Four Cornerstones of Corporate Finance. John Wiley and Sons.

Koller, T., M. Goedhart, & D. Wessels. 2010b. Valuation: Measuring and Managing the Value of Companies. John Wiley and Sons.

Lotterman, E. 1998. Poultry: a quiet success story. Federal Reserve Bank of Minneapolis, Minneapolis. https://www.minneapolisfed.org/article/1998/poultry-a-quiet-success-story. [4 February 2020].

Mauboussin, M. & D. Callahan. 2014. Calculating return on invested capital. How to determine ROIC and address common issues. Credit Suisse. https://plus.credit-suisse.com/rpc4/ravDocView?docid=P8BJ3Y. [20 February 2020].

Minkler, A. P. & T. A. Park. 1994. Asset specificity and vertical integration in franchising. Rev. Ind. Organ. 9:409-423. https://doi.org/10.1007/BF01029514

Monsur, S. M. T. & T. Yoshi. 2012. Improvement of firm performance by achieving competitive advantages through vertical integration in the apparel industry of Bangladesh. Asian Econ. Fin. Rev. 2: 687-712.

Muazu, U. A., Z. A. Mohamed, M. N. Shamsuddin & I. Abdulatif. 2016. Measuring Market Power in the Integrated Malaysian Poultry Industry: New Empirical Industrial Organization Approach. J. Food Prod. Mark. 22: 455-470. https://doi.org/10.1080/10454446.2014.885860

OECD. 2018. Market examinations in Mexico: Case study of the chicken meat market. Organization of Economic Cooperation and Development. https://www.oecd.org/daf/competition/market-examinations-in-mexico-chicken-meat-market-2018.htm. [4 January 2020].

Rahman, M. S., D. H. Jang, & C. J. Yu. 2017. Poultry industry of Bangladesh: entering a new phase. Korean J. Agr. Sc. 44: 272-282. https://doi.org/10.7744/kjoas.20170027

Rani, N., S. S. Yadav, & P K. Jain. 2015. Financial performance analysis of mergers and acquisitions: evidence from India. Int. J. Comm. Manag. 24:402-423. https://doi.org/10.1108/IJCoMA-11-2012-0075

Riethmuller, P. C. & N. Chalermpao. 2002. Some issues associated with the livestock industries of the Asia-Pacific Region. RAP Publication No. 2002/06, Food and Agriculture Organization of the United Nations. http://www.fao.org/tempref/docrep/fao/005/ac448e/ac448e00.pdf. [2 January 2020].

Saleem, Q. & R. U. Rehman. 2011. Impacts of liquidity ratios on profitability. Interdiscipl. J. Res. Bus. 1: 95-98.

Stuckey, J. & D. White. 1993. When and when not to vertically integrate. MIT Sloan Manag. Rev. 34: 71-83.

Teece, D. J. 2010. Forward integration and innovation: Transaction costs and beyond. J. Retail. 86: 277-283. https://doi.org/10.1016/j.jretai.2010.07.013

Tey, Y. S., M. Brindal, S. Darham, S. F. A. Sidique, & M. Djama. 2020. Early mover advantage in Roundtable on Sustainable Palm Oil certification: A panel evidence of plantation companies. J. Clean. Prod. 252: 119775. https://doi.org/10.1016/j.jclepro.2019.119775

Wernerfelt, B. 1984. A resource-based view of the firm. Strateg. Manag. J. 5:171-180. https://doi.org/10.1002/smj.4250050207

Published
2021-03-09
How to Cite
Tey, Y. S., & Arsil, P. (2021). Vertical and Horizontal Integration in the Profitability of Malaysian Broiler Firms. Tropical Animal Science Journal, 44(1), 115-122. https://doi.org/10.5398/tasj.2021.44.1.115