Contract farming as part of a multi-instrument inclusive business structure : a theoretical analysis

Abstract

Contract farming (CF) agreements are presently being restructured to form part of more complex Inclusive Business (IB) set-ups. Additional instruments, alongside CF, are implemented to overcome the challenges of CF and to adapt to the policy environment in which the different stakeholders operate. This paper develops a theoretical framework that gives insight into how these complex entities are structured and operate in a developing country context. This theoretical analysis takes a holistic approach by adopting elements of existing theories to form a new critical research paradigm: (i) Resource Dependence Theory to incorporate the wider operating environment in which the two cases operate, (ii) Transaction Cost Economics to explain the internal efficiency of the different models, and (iii) Agency Theory to account for the safeguard mechanisms. This new framework is then tested on two complex IBs that aim to integrate smallholder farmers into the commercial value chain, but which have each implemented a different institutional set-up developed around CF arrangements. It finds that a high dependence by the offtaker in the first case study stimulates a higher level of commitment and investment by this stakeholder in the contract arrangement. In turn, this increases the asset specificity aspect, which then requires safeguards to ensure the smallholders adhere to the contractual agreement. A higher dependency in this particular study also resulted in a higher number of smallholders being engaged in the contract, requiring mechanisms to efficiently monitor and coordinate them.