Biosecurity institutions and the choice of contracts in international fruit supply chains

Abstract

Biosecurity regulations and standards govern international agricultural inter-firm transactions. Drawing mainly on new institutional economics, our study offers insights into the institutional factors, at both the macro and meso levels, that influence the choice of inter-firm contracts for Chilean apple exports. First and foremost, it examines the influence of the Sanitary and Phytosanitary (SPS) provisions included in trade agreements signed by Chile with its trade counterparts on the choice of alternative contracts displaying different degrees of completeness. It also focuses on the institutions in the importing countries, the legal institutions enforcing contracts, the efficiency of logistics and the effect of hidden informal rules such as corruption, on the choice between free consignment, minimum guaranteed and sale contracts. We also explore the private institutions, primarily linked to direct imports by supermarkets. The results of our econometric analysis show that less complete contracts, i.e. free consignment and minimum guaranteed arrangements, are chosen when exporting to countries with safe business environments and higher number of SPS provision in international trade agreements. On the contrary, when exporting to non-reliable countries, exporters tend to protect themselves through more complete contracts, i.e. sale contracts. We found evidence that direct exports to supermarkets are more prone to occur under sale contracts which suggest the dual function of contracts, both as a safeguard and as a coordination tool to adopt specific customers' requirements.