Academic journal article International Journal of Management

The Supply of Raw Materials to Agribusinesses in Brazil: Development of a Conceptual Model

Academic journal article International Journal of Management

The Supply of Raw Materials to Agribusinesses in Brazil: Development of a Conceptual Model

Article excerpt

Organization of raw material supply chains has a major role in reducing the effects of production seasonality and improves regularity of supply, quality and price. Companies must find institutional arrangements that ensure a supply with as much regularity as possible. The research starts with the hypothesis that Transaction Cost Economy does not explain transactions with informal warranties. The research assesses industries with different governance systems and explains the reasons for the choices made. Has been used a model that combines formal and informal institutions with the model of Williamson. Institutions serve as warrantees for adopted governances. The information was obtained from case studies. Two levels of specific assets have been identified, depending on the degree of perception of the actors. When unnoticed, the existence of specific assets leads to the adoption of transactions in the spot market. When participants perceive specific assets, there is difficulty finding the necessary guarantees. Formal contractual safeguards only work with larger producers and informal guarantees are difficult for companies transacting with many producers. The adopted solutions are transactions in the spot market and vertical integration. Following our model, this kind of governance represents an inefficient solution, explained by the malfunctioning of formal and informal institutions.

Introduction

The Brazilian agribusiness accounts for about 30% of national GDP and is responsible for just over a third of national exports and jobs. Of the total of Brazilian agribusiness, a third comes from small family farms (Brazilian Agrarian Development Ministry - MDA, 2006).

Working with agricultural products has always represented a major challenge for food primary processing. The seasonality of production, perishability of products, changes in the quality of raw materials and sensitivity to climate instabilities are difficult to administer. On the other hand, consumers need regularity of supply, quality and price. Those realities are difficult to conciliate and represent a challenge for many agribusiness companies.

To ensure the stability of their productions, companies must find institutional arrangements that ensure a supply with as much regularity as is possible. The Transaction Cost Economy (TCE), developed by Williamson (1985,1996) from the article of Coase (1937), presents a methodological tool to understanding these choices. On one side is the spot market, based on prices and marked by the absence of ongoing relationships between actors. At the other extreme we have the vertical integration, which facilitates coordination and minimizes uncertainty in the transaction. Between spot market and vertical integration are hybrid forms, in which cooperation is built by the mutual interest of those involved in economic exchanges, constituting relations of medium or long term, benefiting both parties.

Although covering formal and informal contractual relations, TCE does not explain why, in many countries, relations between companies and small family farmers are difficult. For the Food and Agriculture Organization - FAO (2009a), most organizations of small producers in the world do not work satisfactorily. The FAO warned that contracts are more common with large than with small producers. The latter prefer informal arrangements where the existence of social capital has a major role. Small producers are unlikely to engage in contractual relations, preferring the spot market, with no compromise between sellers and buyers (FAO, 2009b).

The role of informal relationships, based on social capital and trust, is frequently reported by economic sociology, but is only superficially examined by TCE. Even when Ménard (2004) treats social networks as part of the hybrid institutional arrangements, TCE has difficulties in explaining some forms of hybrid transactions based on the existence of trust. TCE also has some difficulties in explaining the use of the spot market, while transaction characteristics indicate the need for relationships with higher levels of guarantees, such as contractual relations and integration, in the case of cassava (Vilpoux, 2011) and milk supply. …

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