Public Facilitation of Small Farmer Access to International Food Marketing Channels: An Empirical Analysis of the USDA Market Assistance Program in Armenia

With the continued globalization, rapid channel consolidation, increasing technology, capital, food safety and private grades and standards requirements, many small scale agricultural and horticultural producers from transitional and developing countries are rapidly becoming excluded from international agri-food marketing system. Consequently, governments and international agencies alike are reevaluating the structure, form, and delivery of their assistance programs as they search to identify new delivery mechanisms that can overcome the weaknesses that their traditional programs face within this new business environment. Their challenge is to design programs that facilitate the establishment of economically viable and sustainable market relationships and business models between small-scale producers and the international food marketing system that provide these financially distress producers access to the technological know-how, market knowledge and access, and financial and productive resources required to successively compete. Recent Central and Eastern European (CEE) experiences indicate that foreign direct investment and the entry of multinational firms have successfully facilitated small farmers access to international marketing channels. By entering markets with sufficient capital to ensure contract enforcement and support investment, multinational firms can overcome the pervasive hold-up and underinvestment problems plaguing the sector thereby stimulating investment and growth in agricultural production (Gow & Swinnen, 1998; 2001; Walkenhorst, 2000; Dries & Swinnen, 2004). For numerous reasons access to sufficient foreign direct investment or multinational firms may not be an option for many countries. The obvious question therefore becomes, can an alternative third-party facilitation mechanism for stimulating agriculture be identified apart from the private solutions found in Central and East Europe? Glover and Kusterer (1990), Porter and Philips-Howard (1997), Coulter et al (1999), Eaton and Shepherd (2001), and Simmons (2001) allude to the benefits of public agencies in facilitating firm farmer relationships. However as of now the literature has not identified nor extracted the critical processes and factors required in the design, development and establishment of long-run economically viable and sustainable business models that facilitate small producers' access to international food markets. In this research we develop a theoretical model explaining the critical processes and factors involved in the public facilitation of the establishment of economically sustainable marketing relationships between small producers and agroprocessors in the presence of financial distress and absence of effective enforcement mechanisms. The USDA Market Assistance Program (MAP) in Armenia is used to empirically test the theoretical model as it provides a natural experiment. Aremina's recovery is similar to those observed in other CEE countries; however Armenia's agricultural sector has not experienced the recovery found elsewhere. A key constraining factor has been the lack of foreign direct investment initiated solutions so successfully employed elsewhere (World Bank, 1999; 2002). Without the presence of private solutions that can create self-enforcing relationships and encourage relationship specific investment, the Armenian agricultural sector has remained in a sub optimal equilibrium characterized by deep financial distress and a general lack of investment. The only sub-sectors that have seen growth any growth have had MAP facilitation support. Thus what is unique is that the MAP project appears to provide a public solution rather than a private solution to the problem, as in all the previous research (Gow & Swinnen, 1998; 2001; Foster, 1999; Gow et al, 2000; Walkenhorst, 2000; Dries & Swinnen, 2004; Cocks & Gow, 2003). In order to examine the phenomena of establishment and development of sustainable inter-organizational marketing relationships within the context of Armenian agriculture, the USDA MAP project, and the goat industry, we have used mixed methodological approach combining qualitative and quantitative data collection. Approximately 100 semi-structured interviews were conducted with farmers, industry representatives, local experts, and USDA MAP personnel. In additional, an extensive enumerated survey was implemented questioning 2000 farmers in five sectors over 2003 and 2004. Based upon the extensive interviews 12 different business models and facilitation processes used by the USDA MAP were identified and a suitable stratified survey frame was designed to test the differences between these models. The theoretical model and empirical results indicate that the third party public facilitator, USDA MAP, is critical in facilitating the initial development of the channel and identifying a value proposition in a downstream market. However, economic sustainability requires that the public agency remain an arms-length third party facilitator, rather than being the leader in the development of the channel and thus an integral cog in the channel. The actual development of the marketing channel should be led by an entrepreneur who possesses both the ability to develop the marketing channel and who is trusted by the local community. By leading the development of the channel the private enforcement capital that is created through the development of the channel is created between the entrepreneur and the farmers. Over time this widens the self enforcing range of the relationship, therefore allowing greater shifts in market conditions and decreasing the risk of opportunistic behavior (Gow et al, 2000). By holding the trust and respect of the community the entrepreneur inherently holds private enforcement capital with the rest of the community equivalent to the present value of their reputation or trust individually and collectively with the community (Oliver & Gow, 2002). Additionally, the expectation of a value proposition of a downstream market creates the expectation of private enforcement capital between farmers the entrepreneur through the present value of future returns that the entrepreneur could earn from the value proposition (Gow et al, 2000). Thus the combination of the present value of the entrepreneur's reputation with the farmers in the short term combined with the longer term expectation of future returns through the value proposition and creates sufficient private enforcement capital for the immediate development of a self-enforcing relationship with the farmers.