Analysis of contract choice in raw material procurement of agribusiness firms: Case study in the northern region of Vietnam
The University of Tokyo Dang Thi Kim Hoa*
The University of Tokyo Akira Kiminami
The University of Tokyo Hironori Yagi
1. Introduction
In the marketing literature, relationships among food processing firms, exporter with supplier of
raw materials are very important. Many previous researches evidenced about the roles of good
relationship lead firm achieve the good business performance as reducing transaction cost, getting
up the stable and quality resources which lead to increase of competitiveness of firm base on meetthe requirement of the customers [18]. The relationship is characterized by increased trust, better
understanding each other’s problems and needs. When face with the choice of which supplier topartner with, one of the key factors considered by buyer is seller’s willingness to make transactionspecific investment [9].
In transaction cost economics theory, switching costs, which includes cost of starting added
into sunk costs after terminating the relationship, are influenced by trust, resource
specificity and satisfaction. Long-term (contractual) sustainable relationships become more
likely when uncertainty regarding product quality is high, products are rather differentiated,the degree of asset specificity is high (low of potential partners) and switching costs are
considerable [19].
In the evaluating report of Vietnamese Ministry of Agricultural and Rural Development in2010 about after ten year of implementing the Decision number TTg/2002 called “policies toencourage the contractual sale of commodity farm produce” which are create the legal
environment for encouraging and promoting agricultural production by contract farming
concluded that the this policies got the limited on achieving the goals of linking the farmers
and contractors. For example, the existence of strong conflicts among the farmers andagribusiness firms; farmers do not commit to provide the agricultural products as contract
condition, which lead firms are still in very high of risks in inputs and farmers’ outputs,
which formed by the opportunism behaviors of both parties. Looking at the business
relationship we suppose that, farmers and agribusiness firms are lacking a good relationshipbased on trust building and transaction-specific investment. This study attempts: 1) To
evaluate the trust situation and transaction-specific investment of agribusiness firms on
their partners in vegetable marketing chain; 2) To identify the influence of trust andtransaction-specific investment on contract governance as well as the business relationshipof farmers and agribusiness firms.
2. Relationship satisfaction theory

Relationship quality, trust and relationship satisfaction

Satisfaction: The feeling of the contentment and gratification that arises when needs ordesires have been fulfilled. Satisfaction can be understood as a positive psychological state
and response to the results of an evaluation process. Satisfaction is indicated by expectation
which component including: an affective social emotional and a cognitive economic-rational
one [6]. The social emotional component refers to how business partners emotionally perceive
their expectation have been met by evaluating personal interaction and behavior. Economic
rational satisfaction requires a specific level of knowledge about prices and products toassess if the economic outcomes meet one’s own financial, economical expectation.
Trust: The interpersonal reliance gained from past experience which requires a previous
engagement on a person’s account, and recognition and acceptance that risk exists [10]. It
means, trust is a rational, experience-based concept, which is created, reinforced or
decreased by bilateral, relational activities by series of encounters. Trust is can be very
important prerequisite for commercial exchange in business context. It promotes partners
keep promise or it increases the asymmetries between producer and consumers. If business
partner can trust each other, contractual arrangement may be reduced or avoided, thereby
implying lower costs [3]. Transaction cost economics suggests that, trust can lower
opportunistic behavior and hence exchange and agency costs. Trust relationships relates tothe belief in the ability of a business partner to fulfill his/her business commitments andthus to be able to obtain the expected reward.
Transaction- Specific investment: Transaction specific investment refers to sellers’ and buyers’
perception of the extent to which an investment is made specifically to facilitate the transaction withselected counterpart. Specific investment is very important in achieving closeness in buyer-seller
relationships. The decision to create specific transactional asset is major focus of transaction costeconomic [31]. In buyer – seller relationships, specific investment are two dimension that they arephysical or human [17]. Physician transaction specific asset improve production and handlingprocedures and therefore lead to a higher level of productivity and efficiency. By making relationshipspecific investment, the firm creates an incentive to maintain the relationship. Engaging inopportunistic behavior and thereby risking the dissolution of the relationship is contrary to the selfinterest of a channel member, for if the opportunism is detected and the relationship terminated, theinvestment may not have generated adequate returns [9].
Contract and Specific Investment: Contracts are considered as hybrid form of coordination. Contracts
are the preferred means of coordination under conditions of high risk and uncertainty. Transaction
specific investment poses a contractual hazard for both buyers and sellers. An opportunistic exchange
partner can exploit such assets because they are not re-deployable or at least will have reduced value
in an alternative exchange relationship. Williamson [18] argued that in transactions with more onesided, specific investment, the partner need more formal governance mechanisms, due to theincreased dependency of the investing partner level of specific investments, detailed transaction
conditions should be negotiated and agreed upon to reduce risk and uncertainty for both exchange
partners. Thus, there may be positive relationship between transaction specific investment andcontract governance in business practice.
Trust- Relationship satisfaction: Relationship satisfaction is an essential element of business success[11]. Satisfied business relationships may be influenced by different factors. The marketing literaturesuggests a positive relationship between trust and satisfaction [1] [4]. When one party trust the other,
the relationship is likely to emerge. Trust enhances effective communication and information sharing[4] and enables partners to manage risk and opportunism in transactions [12], thus reducing
transaction costs. Trust encourages long-term orientation and the propensity to stay in a relationship[15]. Buyers who trust their exchange counterparts exhibit more integrative bargaining strategies,
which lead to mutual benefits. Moreover, trust helps to solve complicated realities quickly andeconomically [15].
Contract-relationship satisfaction: According to transaction cost theory, the manager’s task is to craft
governance arrangements at minimal cost to ensure the delivery of the desired products. Therefore, therole of contracts in business relationships has clear managerial implications. Contracts specify promises
obligations and processes for dispute resolution for both partners. Long-term contract are also explicitly
drafted with a provision to promote the longevity of the exchange [14]. If sellers are not able to deliver
desired products to buyers in accordance with the contracts, then the buyer-seller relationship will mostprobably be terminated. As information spreads quickly, one farmer fail to be trusted by one or moremembers of the business network, they may lose transaction opportunities with other partners. Thus,
with a contractual arrangement, farmers have more incentives and obligations to comply with buyers’
requirements regarding product quality and delivery conditions, and thus of creating a satisfactorybusiness relationship with buyers.
Hypothesizes: Based on the above of literature review, we propose the following
hypothesizes:

H1: Scale of firm has positive influence on transaction specific investment, contract governance andinterpersonal trust
H2: Type of raw material provided by suppliers has directly positive influence on transaction specificinvestment, contract governance and interpersonal trust
H3: Business activities of firms has positive influence on transaction specific investment, contract
governance and interpersonal trust
H4: Trust has influence on the contract governance and positive impact on relationship satisfaction
H5: Transaction-Specific Investment has influence on the contract governance and relationshipsatisfaction
H6: Contract governance has influenced on the relationship satisfaction

ScaleTransaction-SpecificInvestment

Contract
Governance

Products

Relationship
Satisfaction

Business
Interpersonal Trust

Figure 1: Conceptual model
3. Methodologies
3.1 Instrument of measurement
Type of products: Indicated by the type of the raw materials that firms buy from the suppliers toprovide for processing or trading activities. In this research, we categorized type of products in two
groups. The first one is specific products which are provided for processing industry for export only.
These products are assumed that it is not easy to buy at the spot market for example Baby Cucumber,
Cherry Tomato, Tomato, and Baby Corn. The indicators will be specific group is 1 and other is 2.
Scale: Indicator of scale variable is presented by the number of labor, volume of sale orcapital of firms. However, in this study, we use purchasing volume of raw material that firms
buy from suppliers and it is categorized at 3 levels: large (1); medium (2) and small (3).
Business variable shows the activities of firms that is trading or processing or both. However,the feature of firms do both of processing and trading will be considered as processing firms
in this study, the two group of firms will be categorized: processing firms (1) and trading
firms(2).
Interpersonal trust is indicated by reputation, fairness, and trust worthiness. Each of thesewill be rated by the interviewee from 1 (strong agree) to 5 (not at all agree).
Transaction-specific investment is refereed from Heide and John [8]. Transaction specificinvestment includes human asset and physician asset that indicated by time, money …and
this also is rated by the interviewees from 1 (strong agree) to 5 (not at all agree).
Relationship satisfaction [5]: indicated by satisfy of price, satisfy of quality, satisfy ofquantity, satisfy collecting time and satisfy of collecting place. Finally, these features arealso rated by the interviewees from 1 (strong agree) to 5 (not at all agree).
Contract governance: The transaction of the firms with suppliers usually through the written
contract, verbal contract and spot market. In this study we also use this structure as 1 iswritten contract (written and verbal contract), 2 as verbal contract and 3 as spot market.
3.2 Data collection
After having interviews with the representative of Vietnamese Vegetable and Fruit Cooperation, we
have basic information about the vegetable and fruit processing and trading companies in the Northof Vietnam. Based on that information and provided secondary data, a survey have been conductedby interviewing50 firms’ representatives in 4 provinces in the North Vietnam including: Hung Yen,
Hai Duong, Ha Noi, Bac Giang in early of 2012. The questionnaire had been adjusted after 2
surveyed tests. We interviewed 50 agribusiness firm’s managers face to face and have 50 respondents.
The suppliers of firms are categorized by regular and none-regular due to the multiply of raw
material suppliers.
3.3 Data analysis
To test the hypothesized relationship in our models we used a SEM (Structure Equation
Model). By this approach, we can access the magnitude and significance of the underlying
causal relationship between our studying variables. For an assessment of how well a specified
SEM fits the collected data, the following criteria are commonly used (Shook et al., 2004): 1) the chisquare index; 2) the normed fit index (NFI); 3) Comparative Fit Index (CFI); 4) Root Mean Square Error

of Approximation (RMSEA). The chi-square tests the hypothesis whether an unconstrained specified
model fits the covariance/correlation matrix as well as the given data. The Chi-square fit test (CMIN/df)
adjusts the chi-square index for the degree of freedom. Values as large as five are accepted as adequate
fit, but more conservative thresholds are two or three. A non-significant 2, NFI greater than 0.65, CFI
and TLI greater than 0.90; RMSEA less than 0.08 indicate a good fit of a model.
Before testing model, the reality test with latent variables is conducted by using Cronbach
Alpha. According to Nunnally and Burnstein [14], if Cronbach Alpha is bigger than 0.6 thelatent variable is valid. Due to the limitation of sample which is considered to be sensitive
with SEM, we used ANOVA analysis to analyze the significant relationship of some observed
variables as “Type of product”, “Scale”, “Business” and “Contract Governance”. The variables
are excluded when it has not any significant difference in relationship with other variables.
ANOVA analysis results showed that, transaction specific investment, trust and relationshipsatisfaction are not much different within business and scale variables. Mostly instruments are notsignificant different in term of scale and few are significant with business observe.
We can say that, business and scale have week relationship with instrument of latentvariables. Consequently, they are excluded in the SEM. In the next step, we drop contract
and product as observed variables for testing empirical model.
4 Result and discussion
4.1 Descriptive statistics
In this study, it is necessary to validate the measurement of model due to using construct oflatent variables. Content validity was validated by ensuring consistency between themeasurement items and the extant literature. A popular tool is used to test the validity of
instrument is Cronbach alpha. In this study, Cronbach alpha (showed in table 1) range from
0.803 to 0.862 for the entire construct, indicating highly internal consistency. It is concluded
that the research instrument is used in study was valid and reliable.
Table 1: Regular suppliers: Summary statistics and Reality analysis of instruments (N=50)
Transaction
specific
Investment
Interpersonal
Trust
Relationship
Satisfaction

Indicator

Min.

Max.

Mean

Std. Dev

TSI1
TSI2
TSI3
TSI4
Trust1
Trust2Trust3
Satis1
Satis2
Satis3
Satis4
Satis5

1
1
1
2
1
1
1
1
1
1
1
1

4
4
4
5
3
3
3
4
3
3
3
4

1.68
2.20
2.52
3.30
1.84
1.92
1.86
1.98
2.04
2.06
2.08
2.08

0.653
0.606
0.707
0.814
0.618
0.634
0.639
0.654
0.856
0.867
0.665
0.634

Cronbach
alpha
0.850

0.803
0.862

Item-to total
correlation
0.849
0.772
0.802
0.811
0.731
0.719
0.743
0.860
0.825
0.832
0.817
0.822

4.2 Testing the model
Verifying the result of model
The relationship among the variables estimated reflect quite good correlation structure in thecollected dataset among all estimated SEMs in table indicate a good fit of model, the statistics (χ2/df)
of 1.37 (P =0.05), TLI and CFI are all above 090, NFI is 0.838 larger than 0.60 and RMSEA = 0.080.
Almost of these fit indices are acceptable according to Shook et al., (2004), suggesting that the overallmodel provides a good fit with data. As the results estimated relationship SEMs is showed intable 2 and figure 2. In this study, type of product is very important in creating andremaining the relationship between firms and suppliers. The standard regression weight
coefficient of product type with transaction specific investment and contract governance is0.39 and 0.33 respectively with significant at 1% (p<0.01).
The causal relationship among specific investment transaction and contract governance is statisticallysignificant and positive. This means that the hypothesis 5 is confirmed (with path coefficient is 0.29, p<0.1%).
Then in the business relationship among firm and raw material supplier, the shipment from spot market
transaction to verbal or written contract when transaction specific investment increases. The results also reveal

a high correlation between the transaction specific investment and interpersonal trust showed by the positiveand statistically significant coefficient (path coefficient is 0.56, p<0.01).
The more transaction specific investment poses, the more inter-personal trust rises and viceversa. The important hypothesis of the relationship between interpersonal trust with
contract governance and relationship satisfaction is confirmed with path coefficient is 0.32
and 0.62 respectively (p<0.05). Similarly, contract governance has significantly positive
influence on relationship satisfaction. This means that, when contract governance move fromfree transaction to verbal contract and written contract, it brings more satisfaction of therepresentative of the firms.
Table 2: Path coefficients and significant levels
Path
Products‐
Transaction Specific Investment‐
Interpersonal Trust‐Contract GovernanceTransaction Specific Investment to‐Contract Governance‐
Relationship Satisfaction‐
Interpersonal TrustInterpersonal Trust to‐Contract Governance‐
Relationship Satisfaction
Contract Governance to‐Relationship Satisfaction

Path Coefficients

P value

0.39
0.20
0.33

0.007***
0.160
0.004***

0.28
0.05
0.56

0.097*
0.811
0.000***

0.32
0.62

0.028**
0.047**

0.36

0.024*****; **; * Significant at 1%; 5% and 10% level respectively

Transaction SpecificInvestment

0.39*

0.39***

0.33***

0.56**

Products

0.05

0.20

Contract Governance0.36**

Relationship
Satisfaction

0.32**
Inter-personal
Trust

0.62*
***; **; * Significant at 1%; 5% and 10% level respectively

Figure 2: Path diagram of estimated model
Discussion
In this study, we contribute to theory of firms-supplier relationship in agri-food chain by aconfirmation of positive relationship of product type to investment specific investment and contract
governance, the positive influence of transaction specific investment and inter-personal trust incontract governance as well as the impact of contract and personal trust to the relationshipsatisfaction.
As hypothesis, specific product type is positive influenced on the contract and transaction
specific investment. This finding is consistent with the theories proposed by some previous
researchers[16] [18] [19]. In fruit and vegetable processing or exporting sector, the products
requites specific characteristics somehow is not available in free market. Then, partners
including farmers and firms are under high risk and uncertainty when they produce specificproducts without contract. Moreover, control of food quality and traceability less costly in thecoordination chain than in spot market. In this context, out sourcing is the best option of thefirms to create the stable raw material sources through making contract and long term
relationship with suppliers. On the other hand, due to the request of specific and highquality product, it is needed to enhance for cooperation and communication between thefirms and suppliers on technical guide. Consequently, the transaction investment in buyersupplier relationship increases.
In this study, the most important factor influence on satisfaction relationship of firms isinterpersonal trust. This result has been found by the theorist in the inter-organizations
agri-food who said that, trust is very important in creating the long-term relationship among
partners [21]. Our result demonstrates that, trust is not only positive influenced on contract
which has also a strong positive significant relationship satisfaction but also directly strong
effect on relationship satisfaction. In the context of business network created by firms andfarmer, trust plays as important factor to reduce the opportunism, that can help firms reduce
contract reinforcement costs. Consequently, the more satisfaction of both parties is enhanced
as well as a long-term relationship is proposed which is ensured by relationship satisfactionof both parties.
5. Conclusion
Most of processed vegetable in Vietnam is exported to the European Countries and Russia.
Type of the products is based on consumer’s demand. However, high risk, uncertainty andswitching cost in producing these products as raw materials promote exporting andprocessing firms go to inter-relationship through making contract with farmers.
Even though the transaction specific investment has not significant influence on therelationship satisfaction but it has strong relationship with contract as well as greatly
contributes to perform and improve trust. The exchange activities among firms and suppliers
provide the information for the best understanding of both parties are very important tocreate the trust which is evidenced to be most important factor on satisfaction remaining
long-term relationship. From finding of empirical evidence for all research hypothesizes, we
argue that, in relationship between the firms and supplier in providing fruit and vegetable as
raw materials, contract and trust play as important factors impact on the relationshipsatisfaction of vegetable trading and processing firms.
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