Market Imperfections and the Effectiveness of Subcontracting and Informal Institutions in Export Market Transactions in Ghana By OWUSU BOAMPONG A thesis submitted to The University of Birmingham for the Degree of DOCTOR OF PHILOSOPHY International Development Department College of Social Sciences The University of Birmingham December 2009 University of Birmingham Research Archive e-theses repository This unpublished thesis/dissertation is copyright of the author and/or third parties. The intellectual property rights of the author or third parties in respect of this work are as defined by The Copyright Designs and Patents Act 1988 or as modified by any successor legislation. Any use made of information contained in this thesis/dissertation must be in accordance with that legislation and must be properly acknowledged. Further distribution or reproduction in any format is prohibited without the permission of the copyright holder. ABSTRACT The study set out to explore how small exporting firms coordinate production functions and the extent to which the chosen path of institutional arrangements enable them to reduce market imperfections, access resources, meet export market requirements and succeed in the export market. The literature posits that in the absence of effective state institutions, informal and private institutional arrangements tend to govern market transactions. However, little is known about the effectiveness of these arrangements in supporting distant and expanding trade transactions, especially, in Africa. Using the Ghanaian craft export sector as a case, the study showed that the small-scale exporters rely predominantly on informal institutions and subcontracting ties in their export transactions. Yet these informal and subcontractual relations remain inadequate coordination mechanisms for engendering greater export success. Under conditions of market imperfections and endemic opportunism, the informal trade arrangements and loose arm’s length subcontracting relations only enable the small firms to achieve imperfect results even in modestly complex and expanding trade transactions. Notwithstanding, informal subcontractual ties potentially offer the platform for the small enterprises to succeed in the export market given improvements in the socio- cultural and the microeconomic environments. The emergence of “in-house contracting” in the industry is linked to the move by some of the exporters to reduce transaction costs and meet quality standards. By this arrangement, the entrepreneur has some level of control (albeit less rigid) necessary to reduce transaction costs, meet quality requirements, and flexibly adjust to fluctuations in export market demands. The in-house exporter maintains multiple informal and trust building relationships with segmented buyers and subcontractors to keep the production system operational. ACKNOWLEDGEMENT I am the unlikely candidate to embark on this PhD journey considering my humble social background but for some individuals and institutions whose immeasurable assistance played a part in the successful completion of this project. Their names need mentioning for appreciation. My foremost gratitude goes to my lead supervisor, Prof. Paul B. Jackson (Head of School of Government and Society), for his constructive comments, direction and advice that helped me to navigate through the PhD process. When my confidence was low, he provided me with one and when my destination was unclear he guided me to chart one. Thanks Paul! Dr. Philip Amis (Director of International Development Department) is worth remembering for his sharp questioning at panel meetings that helped to bring to the fore issues that sometimes escaped my attention. The organization of Research Students Seminars by the International Development Department (IDD) provided an important platform for me to make presentations on the various stages of my work to elicit comments and critique from staff members and colleague research students. Again, the grant received from IDD through its Research Student Bursary in no small way helped to finance part of my tuition fees, without which it would have been extremely difficult for me to start let alone to complete the PhD process. The next gratitude goes to my grandmother; Dora Sarpomaah. She never had formal education but saw the need to give me one in the absence of my dad (late). Out of her meagre resources as a farmer and a petty trader, she planted the seed and watered it for it to sprout and now it is growing. I share the frustrations and the joy of this achievement with her. Also worth acknowledging are my mother; Theresa Acquah and sisters (Dora, Ama Antwiwaah, Afriyie and Nana Asare) for their encouragement, prayers and love. I say thanks Nana for the support you provided throughout the writing-up process. My expression of appreciation would be incomplete without acknowledging all the small scale exporters and the other respondents who sacrificed their time to grant me the interviews. Also to Caroline Boateng of Daily Graphic (Ghana) is my heartfelt thanks for proofreading my draft thesis on such a short notice. TO GOD BE THE GLORY LIST OF ACRONYMS AFE Action for Enterprise AGI Association of Ghana Industries AMC Associated Merchandise Corporation ATAG Aid to Artisans, Ghana CIP Craft Initiative Programme DFID Department for International Development EDIF Enterprise Development Innovation Fund EPV Export Production Villages FAWAG Furniture and Wood products Association of Ghana GEPC Ghana Export Promotion Council GOG Government of Ghana GTZ Deutsche Gesellschaft Techishe Zusammenarbeit IDD International Development Department ITC International Trade Centre KNUST Kwame Nkrumah University of Science and Technology MOTI Ministry of Trade and Industry NAHE National Association of Handicraft Exporters NGO Non-Governmental Organization NTE Non-Traditional Exports PSI Presidential Special Initiatives SAP Structural Adjustment Programme SGS Sociѐtѐ Gѐnѐrale de Surveillance SSA Sub-Sahara Africa TFOC Trade Facilitation Office Canada UNCTAD United Nations Conference on Trade and Industry UNDP United Nations Development Programme USAID United States Agency for International Development WATH West African Trade Hub TABLE OF CONTENTS CHAPTER ONE: INTRODUCTION ................................................................................. 1 1.1 Background to the Research ......................................................................................... 1 1.2 Research Problem ......................................................................................................... 4 1.2.1 Research Objectives ............................................................................................... 8 1.2.2 Argument of the Study ........................................................................................... 8 1.3 Methodology ................................................................................................................. 9 1.4 Conclusion .................................................................................................................. 10 CHAPTER TWO:CONCEPTUAL FRAMEWORK ........................................................ 13 2.1. Introduction ................................................................................................................ 13 2.2 Transaction Costs and Market Failures ....................................................................... 16 2.2.1 Transaction Costs ................................................................................................. 16 2.2.2 Market Externalities ............................................................................................. 18 2.3 Institutions and their importance to economic activities ............................................ 19 2.3.1 What are Institutions? .......................................................................................... 21 2.3.2 Formal Institutions and Market Transactions ...................................................... 23 2.3.3 Informal (Private) Institutions and Market Transactions ..................................... 26 2.3.4 The limits of Informal Institutions ....................................................................... 31 2.3.5 What if Informal Institutions are Insufficient and Opportunism Pervasive? ....... 37 2.4 Sub-Contracting and Inside-Contracting Arrangements ............................................. 39 2.4.1 Trust and Subcontracting Relations ..................................................................... 41 2.4.2 From Putting-Out to Inside-Contracting .............................................................. 51 2.4.3 Inside-Contracting System: Controlling the Production Process to Mitigate Market Imperfections .................................................................................................... 55 2.5 The Global Value Chain Concept and International Trade ........................................ 62 2.6 African Informal Eonomy and Institutional Analysis ................................................. 84 CHAPTER THREE:THE RESEARCH METHODOLOGY ............................................ 89 3.1 Introduction ................................................................................................................. 89 3.2 Case Study Approach to Network Analysis ................................................................ 90 3.2.1 Validity and Reliability of Case Studies .............................................................. 91 3.2.2 Setting