Boza et al. (2023) compared the competitiveness of Spain’s and Chile’s olive oil industries using quantitative metrics and Porter’s diamond framework. Spanish producers were found to be generally more competitive due to factors such as stronger home demand and a better-established supply chain.
Picture by John Cameron, Unsplash.
Where is olive oil produced?
Due to climate reasons, most of the world’s olive oil trees grow in the Mediterranean region. As a result, olive oil production is also concentrated there – the olives must be processed soon after harvest (sometimes within 12 hours), which gives very little time for them to be exported and processed elsewhere.
Among the producing countries, Spain is by far the largest: in 2023/24, it produced around a third of the world’s olive oil. Chile, in contrast, made up just 1% of the global output. (See Figure 1.)
Figure 1: Spain is by far the world’s largest olive oil producer
Source: World population review. Data manipulated by Bonsai Economics.
A quantitative assessment of international competitiveness
There is no single way to measure a country’s advantage or disadvantage in selling its products in the international market. Hence, Boza et al (2023) used three different metrics: international market shares (IMS), and the revealed comparative advantage (RCA) and trade competitiveness (TC) indices. We will just focus on the IMS metric as it is the easiest one to interpret.
The IMS metric hinges on the notion that a country that accounts for a larger share of the world’s exports of a product must be generally more competitive than one with a smaller share. In other words, if country A accounts for 40% of all olive oil exports, and country B for 5%, then country A must have some overall relative advantage in selling its product internationally.
Unsurprisingly given the relative size of their overall production, the IMS metric suggests that Spain’s olive oil industry is much more competitive internationally than Chile’s. (See Figure 2.) However, it does not help explain why.
Figure 2: Spain has often accounted for over 40% of all olive oil exports
Source: Boza et al. (2023), Bonsai Economics. Based on data from WITS-World Bank (2023).
Note: IMS for Spanish olive oil = Spanish olive oil exports / global olive oil exports.
Porter’s Diamond Framework
To understand why countries’ relative competitiveness might differ, Boza et al. (2023) relied on Porter’s diamond model. This framework was first developed by Michael Porter in 1990, and it distinguishes between four interrelated drivers of competitiveness:
Factor conditions. These include physical resources, labour, and general know-how.
Demand conditions. They refer to the domestic need for the product (e.g. demand for olive oil within Chile), as the home market is seen as a stepping stone to the international one.
Related and supporting industries.
Firm strategy, structure and rivalry. It refers to the ways companies are organised, managed, and compete with each other.
Government policy was also included as a factor that could influence any of the other conditions. (See Figure 3.)
Figure 3: Porter’s Diamond Model focuses on four key drivers of competitiveness
Source: Porter (1990), Bonsai Economics.
How does Porter’s framework apply to the olive oil industry?
Boza et al. (2023) gathered information on Porter’s factors through a series of semi-structured interviews with market participants from Spain and Chile. These allowed for various cross-country comparisons, out of which we will highlight four.
First, the structure of the two industries was found to be starkly different. In Spain, most production happened through cooperatives of small and medium-sized farmers. But in Chile, it was larger companies that dominated. It is unclear whether one of the two structures is generally more advantageous.
Second, home demand conditions were reported to be much stronger in Spain than in Chile. This result is unsurprising given the more central role of olive oil in the Spanish diet. In fact, an interviewee stated that annual per capita olive oil consumption in Spain was around 15 litres, whereas in Chile just 0.5. According to Porter’s framework, this may translate into a competitive advantage for Spanish producers.
Third, Spanish producers reported that they generally had better access to production inputs such as machinery and spare parts. While many supplying companies have branches in Spain, in Chile there are just a few local suppliers, and most inputs must be imported from abroad. For instance, almost all Chilean interviewees highlighted the challenge of having only two suppliers of glass containers, which prioritise the wine industry over the olive oil sector. This was reported to have often limited Chile’s olive oil production capacity.
Fourth, olive oil production is highly subsidised in Spain, but not in Chile. The EU’s Common Agricultual Policy (CAP), for example, provides subsidies for Spanish farmers that can represent 20-25% of the overall price. In Chile, most producers are not eligible for support, as it only covers small-scale businesses.
Conclusion
Overall, Boza et al. (2023) highlighted various reasons for the relative success of the Spanish olive oil sector, such as stronger home demand and government subsidies. However, the relative importance of each factor remains unclear.
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