Relational Contracts and Smallholder Farmers’ Entry, Stay and Exit, in Kenyan Fresh Fruits and Vegetables Export Value Chain

Abstract

Buyer-driven governance systems and the related value chain entry and stay barriers are known to have led to smallholder farmers exiting the Kenyan fresh fruits and vegetables export value chain. This paper addresses two gaps in this literature. First, the paper addresses the question of how the fresh fruits and vegetable export smallholder farmers have managed to secure their stay in this value chain known for its high entry barriers. Second, the paper addresses the question of what happens to the smallholders known to have exited the value chain. To explore the two gaps, transaction costs theory was applied. The results show that smallholders entry and stay in the value chain was underpinned by relational contract enforcement mechanism of supply reliability. Second, smallholders were found to occasionally exit and re-enter the value chain, depending on the prevailing risks. In conclusion, the paper argues that contemporary African value chain scholarship should consider the analysis of relational contracts and their enforcement mechanism as well as the totality of smallholders’ farming, in order to understand the motives behind smallholder value chain entry and stay decisions.

Acknowledgements

The author is grateful to the two anonymous reviewers who provided excellent comments that greatly assisted in shaping my arguments. I would also thank David Wield, Raphael Kaplinsky Peter Robbins and Les Leidvow for their comments which greatly improved the original manuscript. Any other error is attributed to the author. Funding for fieldwork was generously supported by The Open University PhD Fieldwork Grant.

Disclosure statement

No potential conflict of interest was reported by the author.

Supplementary material

Supplementary Materials are available for this article which can be accessed via the online version of this journal available at https://doi.org/10.1080/00220388.2019.1618451.

Notes

1. Gereffi (1994) then framed governance to Global Commodity Chains (GCC) and in later scholarship, the term transitioned to Global Value Chain (GVC) as explicated by Ponte and Sturgeon (2014).

2. The difference between the value of an asset in its best use and in its next-best use (Joskow, 2008, p. 6; Martinez, 2002).

3. Concerned with the behaviour of parties in a transaction which impacts on how one party is perceived; hence, additional costs may arise related to the need to screen ‘bad’ actors.

4. Vertical integration is internal governance involving a firm complete ownership of successive production stages while vertical coordination refers to the synchronization of all the successive stages of production and marketing, with respect to quantity, quality, and timing of a product (Martinez, 2002, p. 2).

5. See Appendix 1 for detailed study methodology.

6. Large and small exporters were classified based on HCD categorisation. Small exporters were companies exporting less than three tonnes of produce per week while large exporters, exported over three tonnes of FFV per week.

7. A state of the market where a small number of buyers exists for a product supplied by many sellers.

8. We use the term node to simply differentiate the two points of contracting in the value chain.

9. HCD is the Kenyan state agency responsible for overall regulation of the horticultural sector.

10. See Macchiavello and Morjaria (2015b) for a detailed analysis of simple written contracts being a document of expectations.

11. See Macchiavello (2010) for arguments on this.

12. An exporter was required to supply a retailer with more than eight different produce at the same time. The produce were grown in different climatic zones in Kenya. Therefore, it was less costly for the exporters to contract smallholders in different climatic zones to grow these crops than do it themselves.

13. See Wolz and Kirsch (1999) for categorisation of different types of contract farming based on the degree of buyer and seller control over decision-making.

14. Specific characteristics of a good that makes it require specialised handling, production and marketing system (Hobbs & Young, 1999).

15. Consider Individual Farmers 1 and 3 in the study contracted to Large Exporter A. Farmer 1 has just been recruited by Exporter A, while Farmer 3 has been in the value chain for the past six years. Thereby, Farmer 1 knowledge of FFV production is only through training while Farmer 3 has gained skills through training and learning by doing. The optimal outcome for Exporter A is to contract Farmer 3 because he/she requires less training which lowers training costs, while Farmer 1 needs increased training, hence higher training costs.

16. Adopted and modified for the study from Landa (1981) who used concentric circles to represent ethnic-based trading networks.

17. The smallholders engaged in mixed farming, simultaneously producing export and non-export crops.

18. See Fafchamps (2004) and Fafchamps and Minten (1999, 2001).

Additional information

Funding

This work was supported by the Open University Doctoral Fieldwork Grant [N/A].