Farm resources, transaction costs and forward integration in agriculture: Evidence from French wine producers

Abstract

This research aims to understand why French wine producers venture into direct sale to customers instead of selling bulk wine to wine companies. The empirical tests on the French Farm Census confirm the value of both Resource-Based Perspective and Transaction Cost Economics in understanding organizational choices in agriculture and food markets. Because asset specificity in wine trade is low on average, large wine producers have an advantage over smaller ones and so are more likely to venture into direct sale of generic wines. By contrast smaller wine producers are more likely to rely on the bulk wine market, which is less risky for them. In addition our model helps us to understand the effect of the State-sponsored certification of grape and wine quality, the Protected Designation of Origin system. All other things being equal, producers with vineyards of high reputation (PDO) are also more likely to bottle and sell their wines; we guess this is because they wish to capture the value of the PDO reputation, the collective brand name capital owned by the farmers. Finally, saving on transaction cost is only one side of the coin: the most educated wine producers can profitably reinvest their knowledge and capabilities into new activities. These choices have important consequence on the French Wine Supply Chain governance.