Vertical integration important for innovation

Posted by Josette Dunn on 12th April 2010

In today’s highly competitive, saturated, and dynamic food market, innovation is unquestionably a major factor in successfully responding to and anticipating changing market conditions and consumers’ fickle food demands – and thus maintaining a profitable business.

Researchers from the Universities of Copenhagen (Denmark), Manchester (UK) and Saskatchewan (Canada) have analyzed the effects of organization, vertical integration, contractual and other network agreements, to try to better understand what determines innovation activities of agrifood firms.

They surveyed more that 400 Danish agrifood firms, and in addition to the above effects,  tested for the effects of other variables, such as market power, size, and stage
in the chain.

The first and most significant result they found is that organization matters. Vertical integration as well as contractual arrangements are significant determinants for firms’ innovation behaviour.

Vertical integration refers to companies in a supply chain that are united through a common owner. Usually each member of the supply chain produces a different product or (market-specific) service, and the products combine to satisfy a common need.

The researchers found that both upstream and downstream ownership (vertical integration) were significant, however, ownership by an upstream firm had a larger effect on innovation than ownership by downstream firms. Also, it was more important to own a firm than to be owned by one.

Contractual arrangements also had positive effects on innovation.

Whereas the sector was not significant in any of the findings, the stage in the chain was important. Wholesalers and retailers tend to have a larger number of new products, whereas manufacturing firms tend to invest more in R&D.