Analysis of Factors Affecting Production of Agro-food Industry Products in Azerbaijan

doi.org/10.52340/eab.2025.17.04.06 The agricultural and agro-processing sector of Azerbaijan is of vital importance for the country\`s food security and economic sustainability. This article provides an in-depth analysis of the factors affecting the production of agro-processing products. The main goal of the study is to understand the economic, technological and social factors that increase or limit the volume of production in this sector. The development of the agro-processing sector is directly related to agriculture. If agricultural products are produced in a stable and high-quality manner, they will provide sufficient raw materials for agro-processing enterprises. As a result, the sector will develop more dynamically. Moreover, increased investment and the application of modern technologies are key drivers of productivity growth. The article measures the impact of economic factors on the production of agro-processing products using the LS-regression model, and the results show that several economic indicators have a positive impact on the development of the agro-processing sector. The author puts forward a number of strategic proposals for the further development of the agro-processing sector in Azerbaijan. These proposals can ensure the long-term development of the agro-processing sector and strengthen the food security of Azerbaijan. Keywords: Agro-processing sector, agriculture, competition, efficiency, correlation analysis, LS-regression, Belsley test, resource, investment JEL Codes: Q12, Q13, Q18, O13, C33, Introduction The agriculture and agro-processing sector is one of the main pillars of the economic stability and food security of every country. In modern economic conditions, the sustainable development of this sector is possible only with the effective management of the production chain, the application of scientific and technical innovations and the targeted policy of the state. The production of agro-processing products in Azerbaijan has undergone changes in recent years under the influence of various economic and technological factors. Increasing the production capacity of enterprises operating in this sector, stabilizing the supply of raw materials and expanding the consumer market are currently one of the important issues. The development of the agro-processing sector is not limited only to the volume of agricultural products. Factors such as investment opportunities, the level of production technologies, the state of infrastructure and market requirements also play an important role here. Strategic approaches are required to ensure the sustainability of local agro-processing enterprises against the backdrop of increasing competition in the global food market. In this article, the main factors affecting the production of agro-processing products in Azerbaijan are analyzed using economic and statistical methods and possible solutions for the development of the sector are examined. The calculations were performed in the MatWorks MatLab 2021 and EvieWs-10 software packages. Literature Review Becoming a strong society and a strong state in accordance with modern criteria on an international scale is possible only in an environment of free competition and transparent management of an open economic system that is constantly undergoing positive changes, which largely depends on the level of development of entrepreneurship, business, and the competitive environment. In other words, as a result of the pace of economic development in the country, as well as the correct and transparent management of the economic system consisting of industry, agro-industrial complex and service sectors, high development of the country\`s economy can be achieved. “The competitive advantage of the agricultural sector is determined not only by natural resources, but also by the efficiency of the workforce, the application of technologies and supporting infrastructure” [Warlina, Soegoto, Supatmi, Oktafiani & Jatnika, 2023, p. 53]. “The agro-processing industry is considered an optimal solution to ensure food security, increase the value and quality of products, and at the same time increase the competitiveness of agricultural products. This industry plays an important role in changing the structure of agricultural production, developing rural economies, and integrating agriculture into the global economy” [Linh Nguyen-Thi-Thuy et al. 2024]. The promotion of processed agricultural products within the industrial sector has a significant impact on the innovation of these products [Muangmee C. et al. 2024] “Azerbaijan’s agricultural sector mainly consists of crop and livestock production. However, the agro-processing industry is underdeveloped and needs support in terms of investment and infrastructure” [Fakhri J. Hasanov and others 2022] Azerbaijan faced political, social and economic crises immediately after gaining independence. These crises, which occurred in 1991-1996, had a serious negative impact on the country\`s economy, including agriculture. In those years, the economy weakened, production decreased sharply, household incomes and living standards decreased, and purchasing power decreased, which led to a decrease in demand. In such a situation, the process of taking measures related to the deterioration of economic indicators in agriculture emerged as a necessity. “Each of the problems that negatively affect the development of the market and slow it down is characteristic of many countries that have experienced a period of transition economies. In general, the solution of such problems is not short-term, but is included in the group of problems that can be solved within a certain period of time” [V.Abbasov, F.Suleymanov 2021]. The agro-processing sector is the most important link in ensuring the state\`s food security, which in turn is an integral part of national security and characterizes the country\`s economic stability and political independence, as well as the state\`s ability to ensure food security. “Increasing employment opportunities in the agricultural sector and improving infrastructure, in addition to preventing internal migration, also contributes to the development of agriculture” [Bagirov, Humbatov, Efendiyev, Mehdiyeva & Sultanova, 2022, p. 67] In general, the agricultural sector is always more exposed to the influence of risk factors and, at the same time, is a key participant in the implementation of the country\`s food security goals and programs. “The development of ecologically clean agriculture in Azerbaijan depends on improving the institutional base, providing state support, and raising awareness among producers and consumers” [Aliyev, Mammadova, Hamidova, Dunyamaliyeva & Hurshudov, 2022, p. 92]. “The level of labor productivity largely depends on the value of fixed capital per worker, which indicates the crucial role of investments in agriculture” [Onegina, Megits, Antoshchenkova & Boblovskyi, 2020, p. 12]. “Increasing labor productivity in Azerbaijan is the most urgent problem, which depends on the speed of expanded reproduction in agriculture and meeting the population\`s demand for food products” [Sh. Guliyeva, Y. Sadigov, N. Guliyeva, L. Isayeva, Sh. Aliyeva 2021]. “The results obtained confirm the necessity and practicality of developing the agricultural industry in Azerbaijan at the modern stage based on an innovative scenario and taking into account the current level of development of the industry. At the same time, the main disruptive factor in developing an optimal innovative scenario for the development of the sector, as studies have shown, may be maintaining the quality of human capital and labor productivity at the same level” [Hajiyeva, N. G. 2021]. “Digital technologies and information-based innovations are playing an increasingly central role in the transformation of agri-food systems, including processing and value-added stages” [Fleming, A., Jakku, E., Fielke S., Taylor, B.M., Lacey, J., Terhorst, A., & Stitzlein, C. 2021] One of the important points affecting the development of the agro-processing industry in the modern period is the existing integration relations between agricultural producers and processing industrial enterprises. “A unified approach is necessary to fully realize the transformation potential of agricultural processing” [M.M. Urugo et al. 2024]. “Integration relations are a process that reflects the deepening of productive forces and production relations and is interconnected with them, and at the same time is a factor that affects the final results of production” [Guliyev 2013]. Azerbaijan should become a member of the World Trade Organization, and this membership will be a very powerful impetus for the integration of the national economy into the global world and the liberalization of trade, the country\`s economy in general, including the development of the agro-processing sector. At the same time, the creation of regional and sectoral clusters is one of the most important tools for the development of agriculture and agro-processing in the country. Therefore, there is a need to develop and implement state programs related to the development of clusters at the state level [Sadigov Y.M. abstract 2024]. In order to expand the competitive agricultural processing industry and increase production along the value chain, it is necessary to ensure easy access to relevant resources, including affordable financial resources, for producers, and to accelerate work to further improve market infrastructure and the agrarian business environment [Decree of the President of the Republic of Azerbaijan 2021]. Methodology This study employs a quantitative analytical framework to investigate the macroeconomic and structural factors influencing the production volume of agro-processing products in Azerbaijan. The approach integrates secondary statistical data with primary field observations to provide both numerical evidence and contextual insights. The analysis draws upon two types of data. First, time-series data for the period 2008–2022 were collected from the official databases of the State Statistical Committee and the Ministry of Agriculture of the Republic of Azerbaijan. These data provided the basis for macroeconomic trend analysis and model estimation. Second, primary data were gathered through a structured survey conducted in 2023 among 34 sheep-farming enterprises located in the Ismayilli and Shamakhi districts. These regions were chosen due to their active role in wool production and the prevalence of unprocessed wool loss due to market inaccessibility. The survey addressed production levels, market linkages, and constraints faced by farmers in the post-harvest stage. Most respondents reported an inability to sell wool due to the absence of buyers and processing infrastructure, leading to waste and economic loss. The dependent variable in the regression model is the overall value of processed agricultural output. Independent variables include selected macroeconomic indicators reflecting capital investment, production scale, infrastructural capacity, and household income in the agricultural sector. These were chosen based on theoretical relevance and data availability. To address multicollinearity among variables, Principal Component Analysis (PCA) was applied, and the resulting component was used in a log-log linear regression model. This allowed for dimensionality reduction while preserving explanatory power. The model was estimated using EViews 10 and MATLAB 2021. A series of diagnostic tests were performed, including the Jarque–Bera test for normality, the Breusch–Godfrey LM test for autocorrelation, and the Breusch–Pagan–Godfrey test for heteroscedasticity. Structural stability was assessed using the Chow test and CUSUM plot, particularly in relation to the which had significant for the agricultural sector. The of production in the country\`s agro-processing sector is by a number of key factors. These factors are related to economic, social and technological factors and the sustainable development and of the efficiency of the sector. efficiency into business business risk and for business due to from and & As in of the economy, efficiency is one of the most important factors in the agro-processing sector. high efficiency in this sector has a impact on increasing production, production and In order to increase efficiency in the agro-processing sector in should be to the main of modern technologies and of the raw of of financial and investment opportunities potential is as with investment, in other words, the same at in the and forward the need for economic to goals as a in of The efficiency of operating in the agro-processing sector can be assessed by several on the indicators can be The volume of products processed in the agro-processing The of the part of the volume of products produced in agriculture that to The volume of income in the agro-processing The of the agro-processing sector in from agro-processing in the agro-processing sector and the of those in the These indicators more fully the current state of the agro-processing sector in the country. of existing raw materials and products produced in the agricultural sector is one of the main of the agro-processing industry, and the processing of these products are considered one of the most important efficiency indicators of agro-processing enterprises. of in Azerbaijan in the global world are to process the raw materials and products they and sell products, not raw to other This approach to increase economic more income for local producers, and strengthen the country\`s raw materials is one of the main of underdeveloped economies. 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