A Study on the Vertical Coordination of Taiwan's Dairy Industry
Date Issued
2010
Date
2010
Author(s)
Lee, Pei-Yu
Abstract
Dairy farmers, processors, and distributors are the three kinds of firms in the supply chain in Taiwan’s dairy industry. There are interlocking vertical coordination problems among these three kinds of firms, dairy farmers on the production side, processors on the manufacturing side, and distributors on the sales side. Each obtains its resources from the other and the processors play the key role in the development of dairy industry. This thesis intends to use organizational economics theory to analyze the vertical coordination problems among these three kinds of firms. In particular, this thesis applies transaction cost economics to analyze the trading characteristics of raw milk and dairy products and the effects of transaction costs on the choice of governance structure between firms, and uses agency theory and property rights theory to analyze the effect of economic incentives on the stability of transactional relations among these three kinds of firms.
The empirical results of this thesis show that the current contractual relationship is the most appropriate form of vertical coordination between dairy farmers and processors, when both transaction costs and production factors are considered. Moreover, Government''s guidance policy is the most important factor in promoting the stability of this contractual relation. On the vertical coordination between dairy processors and distributors, dairy distributors become the stronger side considering asset specificity involved in this transactional relationship. Therefore, dairy processors need to integrate their distributors to avoid transactional risks and reduce transaction costs in spot market. However, integration of their distributors is impossible for Taiwan’s small and medium sized processors. Thus presently contractual transaction is still the commonly used mode of transaction in Taiwan. For this reason, contracts and their specification of economic incentives are important. Appropriate contracts make transaction relations stable which will in turn help enhance the performance of dairy processors.
A small to medium scale dairy processor, Taiwanese Farmers Dairy Processor (TFDP), is also studied in this thesis. Since its establishment in 1969, TFDP maintains a contractual relationship with its upper dairy farmers and this governance structure has been quite stable in both its production and marketing operation. In the vertical coordination with its lower distributors, TFDP adopts governance structures such as spot trading, contractual transaction, and hierarchical trading within its own organization. Contractual transaction accounts for 97 percent of TFDP sale and is the dominant form of its transaction with distributors. However, under the adverse influence of some organizational characteristics, human and environmental factors the execution of contract is rather inefficient. It seems that the economic Incentives of the contract were not effective in improving contract efficiency. Therefore, it deserves to investigate further the problems that TFDP faces nowadays with organizational economics theory so that constructive solutions could be proposed to the operators of TFDP.
Subjects
dairy processor
vertical coordination
transaction costs
transaction characteristics
SDGs
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