7 th Annual Conference AAWE, Stellenbosch, Jun 2013

Transcription

1 The Impact of the Legal System and Incomplete Contracts on Grape Sourcing Strategies: A Comparative Analysis of the South African and New Zealand Wine Industries * Corresponding Author Monnane, M. Monnane, Faculty of Commerce, Lincoln University, P.O. Box 85084, Lincoln 7647, Canterbury, New Zealand, , monnane.monnane@lincolnuni.ac.nz *Mark M.J. Wilson, Department of Management, Marketing and Law, Faculty of Commerce, Lincoln University, ddi, mark.wilson@lincoln.ac.nz Ian MacDonald, Department of Accounting, Economics & Finance, Faculty of Commerce, Lincoln University, ddi, ian.macdonald@lincoln.ac.nz Khalid Alsulaiman, Faculty of Commerce, Lincoln University, ddi, alsulaiman7@hotmail.com Abstract A number of theoretical perspectives have been advanced in the literature to explain how governance structures in buyer/seller relationships are determined (Gwynne, 2008; Williamson, 1979). One of the primary perspectives is the Transaction Cost Economics (TCE) theory of Williamson (1981, 1991). This theory assumes that exchange partners act with bounded rationality and tend to behave opportunistically. These tendencies are tied to three characteristics of the exchange; asset specificity, market uncertainty and frequency of the exchange (see Williamson, 1979, 1985, 2008 for tenets of TCE). Indeed, due to bounded rationality most contracts are said to be incomplete (Williamson, 1971). Applying the principles of TCE to the wine industry, vertical integration between grape growers and wineries would be expected to be a prevalent practice within the wine industry. However, findings from previous research indicate that contracts are still widely used to coordinate exchange relationships (Bogetoft & Olesen, 2002; D'Silva, Uli, & Samah, 2009). This raises the Monnane, Wilson, MacDonald and Alsulaiman 1

2 question of why contracts are still prevalent within wine supply chains while these chains are likely to be characterised by high asset specificity and high uncertainty. We argue that the effectiveness of the state s legal system could be the primary explanation for the ubiquitous use of contracts within the wine industry (Kahkonen & Meagher, 1997). Accordingly, our study seeks to investigate the relationship between the effectiveness of the state s legal system and governance structures while controlling for other factors such as trust (relational exchange theory), monitoring, incentives (Agency theory), item criticality, firm size and firm age. To that end, we focus our investigation on the wine industry of two countries; New Zealand and South Africa due to the disparity between the effectiveness of their respective legal systems as identified in the World Bank report (World Bank, 2010). We investigate the following hypotheses: H 1 H 2 H 3 The effectiveness of legal system has a positive effect on the use of contracts when controlling for incentives, monitoring, trust, firm size, firm age, and item criticality. The effectiveness of legal system has a positive effect on the use of spot markets when controlling for incentives, monitoring, trust, firm size, firm age, and item criticality. The effectiveness of legal system has a negative effect on vertical integration when controlling for incentives, monitoring, firm size, firm age, and item criticality. Method With the support of SAWIS and NZWINE, a mail survey was sent to the population of wineries in South Africa (585) and New Zealand (683 in total, but only 580 contacts provided). A second wave three weeks later yielded at total sample of 111 (18.9% response rate) South African and 116 (20% response rate) New Zealand questionnaires. The usual regression assumptions and non-response bias were tested and satisfied (Hair, Black, Babin & Anderson, 2010). The data were analysed using multiple regression employing ten variables (three outcome variables and seven predictor/control variables). All measures were adopted from previous studies and modified where necessary. Cronbach s alpha were derived for all the constructs and supplemented by item-to-total correlation scores. All scores ranged between and and were above the acceptable level of Results and Hypotheses Testing The following results were obtained. Monnane, Wilson, MacDonald and Alsulaiman 2

3 Table1: Descriptive Data for Independent Variables NZ# SA# t Sig. difference Std. error t-test for equality of means (95% Confidence Interval of the Difference) Trust Monitoring Incentives * Item Criticality Legal System ** Size ** *p < 0.001; **p < 0.05; # NZ - New Zealand and SA - South Africa Table 2: Descriptive Data for the Dependent Variables and Sources of Grapes South Africa New Zealand Coordination Contribution Contribution Std Dev. Std. Dev. strategy to total grapes to total grapes Spot Market Vertical Integration Contract Total Total We constructed six multiple regression models (country pairing) to test our hypotheses of the efficacy of the legal system over the three major governance strategies used by wineries to source their grapes. We compare the strategy/country results in Table 3. Table 3: Summary of Model fit Statistics Grape Sourcing Strategies South Africa n = 111 New Zealand n =116 Spot Vertical Spot Vertical Contracts Contracts Market Integration Market Integration Model β t value R F value 3.733* 7.087* 8.017* 8.590* 8.714* 7.318* *p < 0.01; **p < 0.05; (All regression results tables will be supplied in the full paper) Monnane, Wilson, MacDonald and Alsulaiman 3

4 Discussion All models demonstrated sufficient reliability, although the R 2 value for the South African spot market was low indicating that some latent variable was influencing the models predictability. We found support for contracting (H 1 ) in the South African and New Zealand data but with different predictor variables in each country. Similarly, we found support for H 2 in that the legal system encourages spot market transacting in both countries. The results for H 3 show that the legal system has a negative and significant (p < 0.05) correlation with vertical control in both South Africa and New Zealand and is therefore supported. Hence, we find support for the argument that contracting is encouraged and complemented by trust, incentives, monitoring and the legal system. This provides insights into why contracts are still wildly used despite their obvious vulnerability to opportunism in weak legal systems. These results highlight the key role of the legal system in governance decisions, an area often overlooked in literature. Key Words Wine industry, grape sourcing strategies, incomplete contracts, transaction costs, multiple regression References Bogetoft, P., & Olesen, H. B. (2002). Ten rules of thumb in contract design: lessons from Danish agriculture. European Review of Agricultural Economics, 29(2), 185. D'Silva, J. L., Uli, J., & Samah, B. A. (2009). A Review of Contract Farming and Factors that Impinge Youths Acceptance to Contract Farming. European Journal of Social Sciences, 11(2), Gwynne, R. N. (2006). Export - Orientation and Enterprise Development: A Comparison of New Zealand and Chilean Wine Production. Tijdschrift voor Economische en Sociale Geografie, 97(2), Hair, J., F, Jr., Black, W., C., Babin, B. J., & Anderson, R., E. (2010). Multivariate Data Analysis (7 ed.): Upper Saddle River, New Jersey: Prentice Hall. Kahkonen, S., & Meagher, P. (1997). Opportunism Knocks? Legal Institutions, Contracting and Economic Performance in Africa. IRIS Center/Department of Economics, University of Maryland, College Park. Williamson, O. E. (1971). The Vertical Integration of Production: Market Failure Considerations. American Economic Review, 6(2), Monnane, Wilson, MacDonald and Alsulaiman 4

5 Williamson, O. E. (1979). Transaction Cost Economics: The governance of Contractual Relations. Journal of Law and Economics, 22(2), Williamson, O. E. (1981). The economics of organization: The transaction cost approach.. American Journal of Sociology, 87, Williamson, O. E. (1985). The Economic Institutions of Capitalism: Free Press, New York. Williamson, O. E. (1991). Comparative economic organization: the analysis of discrete structural alternatives. Administrative Science Quarterly, 36(2), Williamson, O. E. (2008). Outsourcing: Transaction Cost Economics and Supply Chain Management. Journal of Supply Chain Management, 44(2), World Bank. (2010). Doing Business in Washington and New York: The World Bank and Oxford University Press. Monnane, Wilson, MacDonald and Alsulaiman 5