Governance of procurement relationships in the wine industry: The importance of trust and the legal system

Abstract

Purpose – The purpose of this study is to examine three governance structures (market, contract and vertical integration) that are commonly used to coordinate procurement relationships between grape growers and winemakers in the wine industry. This paper aims to adopt a multi-theoretical approach combining transaction cost and relational exchange theories to explore the influence that trust and a state’s legal system have on the choice of governance mechanism. The authors propose arguing that, in the absence of an efficient legal system, trust must exist between parties to facilitate the pervasive use of contracts.

Design/methodology/approach – The empirical results are derived from mail survey responses of 111 South African and 116 New Zealand wineries. These two countries were selected because of the variances in the efficiencies of their legal systems. Multiple regression models were used to investigate the importance that parties place on trust and the legal system when considering the use of incomplete contracts to govern supply chain relationships that are characterised by high asset specificity and high uncertainty.

Findings – It was found that contracts are frequently used to govern transactions in both countries, and that trust between parties is an effective substitute for an efficient legal system in governing contractual relations. Specifically, it was found that trust between parties is the major motivating factor for the use of contracts in South Africa, overcoming the weakness of the legal system, while reliance on the legal system to enforce contracts underpins the New Zealand industry.

Originality/value – This study offers a direct cross-country comparison drawn from a population study of two major wine-producing countries that has not been attempted before. In the three models, measures were included to capture the effectiveness of a state’s legal system to extend the governance literature.