This study was conducted by Andrea Harris, Murray Fulton, Brenda Stefanson and Don Lysyshyn and published in 1998. The objective was to determine the role that external agents and organizations play in fostering the development of agricultural industries. Industries develop in some situations and not in others. This research tested the hypothesis that industry development is more likely to occur when external agents &endash; namely governments, existing firms in related industries, and industry development groups &endash; provide services which encourage industry participants to co-ordinate their behavior and work together as a group to achieve development goals.
Case studies and a literature review indicated that the role of the external agent includes: (a) rallying together a critical mass of participants; (b) helping groups develop institutional arrangements which can address assurance and credible commitment issues; (c) identifying the problems and needs faced by group members; (d) developing strategies to address these problems or needs; and (e) mobilizing resources both from within and outside the groups. To be effective, an external agent requires: credibility and fair mindedness; a solid knowledge of the industry; the ability to link this knowledge with an appropriate institutional arrangement; and the ability to foster mutual trust and interdependence among participants.
Executive Summary
The Canadian agricultural sector has experienced a number of major changes in recent years, including significant market deregulation, a sharp decline in government support, the rapid introduction of new technologies, and marked shifts in the preferences and demographic make up of consumers. These changes represent new opportunities for agricultural industries to develop and thrive; at the same time they impose significant challenges to development initiatives within agriculture.
The objective of this study is to determine the role that external agents and organizations can play in fostering the development of agricultural industries. Industries develop in some situations and not in others. This research tests the hypothesis that industry development is more likely to occur when external agents provide services which encourage industry participants to co-ordinate their behavior and work together to achieve development goals. Among these services are education, facilitation and information provision. These services are critical because they: (a) allow industry participants to address market failures which result from information asymmetry and differing interests; and (b) enable industry participants to exploit economies of scale and complementarities inherent in many development activities.
External agents refer to organizations and agents (which represent organizations) who may be in a position to provide services critical to the development of an industry. External agents are not active players within the industry itself; that is, they are not involved in the production, marketing or processing activities of a particular agricultural product. External agents include, but are not limited to governments, existing firms in related industries, and industry development groups.
While governments have frequently been held responsible for industry development in the past, external factors, such as global trade liberalization, and internal pressures, such as greater fiscal responsibility, have shifted this responsibility. Industry players are having to seek out other sources of expertise to help in their development efforts. Alternative sources for such expertise include firms in related industries (banks and credit unions for example), private consultants, community development organizations, universities, and other research facilities. Although a single agent of such organizations may be in a position to help industries develop, we will use the term agents to refer to a group of individuals who, from outside the industry, are able to influence and facilitate change within an industry.
INDUSTRY DEVELOPMENT
Development occurs when an industry moves from simple commodity production and marketing to a much more complex constellation of well-defined markets, regulatory bodies, value-added activities, and ongoing product innovation. An important aspect of industry development is the expansion of the market for a particular product or group of products. At least three approaches to expanding the market exist: increasing the demand for the product; increasing the supply of the product; and reducing the marketing margins.
The first approach involves raising the demand for a product, usually through efforts such as product differentiation or advertising and promotion. Demand expansion is not always easy to accomplish. Free riding and other forms of opportunistic behaviour may occur between those involved in demand development. As well, if demand is enlarged but the industry is not able to fulfill that demand, customers may become discouraged and more hesitant to buy in the future.
A second approach to enlarging an industry is for the industry to invest in primary supply expansion. Activities such as research and development lead to increased efficiency, thus shifting the primary supply curve outwards. This approach to industry development has been used often in the past and may be the most commonly used of the three approaches. There are many examples where industry development has primarily consisted of production research. This emphasis on production research continues in many well established industries such as the grains, oilseeds and livestock sectors.
The third approach to industry development is to lower the marketing margins throughout the product chain. Marketing margins depend not only on the real costs of undertaking the activities that occur between the farm gate and the consumer, but also on the organizational relationships that exist between the participants involved in carrying out these activities. These organizational relationships influence the transactions costs that exist in the industry. Transaction costs are those costs of doing business with other parties that are in addition to the price of the good. Examples of transactions costs include the costs of designing, monitoring and enforcing the terms of contracts and marketing arrangements.
The discussion of transactions costs makes it clear that industry development is often dependent on the ability of industry players to change their existing patterns of economic exchange. Exchange occurs along two dimensions: (a) horizontally, along one level of the industrial chain; and (b) vertically, between different levels of the industrial chain. Examples of horizontal arrangements intended to foster industry development include: the formation of a producer association to share production information; an agreement between processors to standardize packaging; or the co-ordination of breeding stock amongst suppliers to monitor genetic improvements. Examples of vertical arrangements include the formation of a co-operative processing facility by producers or a long-term supply contract between a producer and an input supplier.
COORDINATION AND INDUSTRY DEVELOPMENT
The nature of the institutional arrangements that exist between industry participants is important because these institutional arrangements determine the degree of co-ordination that will exist in the industry. Co-ordination is vital because it determines the extent to which economies of scale and scope are exploited and the degree to which complementarities are recognized and utilized. For instance, as the discussion of industry development in the previous section highlights, demand expansion will be much more effective if it is co-ordinated with supply expansion, and vice-versa.
Standard neoclassical economics suggests economic agents will co-ordinate their actions and engage in industry development activities whenever the benefits from doing so outweigh the costs. Under this model, there is little room for external agents to facilitate industry development as this is handled most efficiently by the market. However, empirical evidence does not support this conclusion. There exist many real world examples where, regardless of the potential net gains, individuals and firms are not able to co-ordinate their activities to take advantage of the gains. Many examples also exist where external agents have played a critical role in industry development. Why does traditional neoclassical theory fail in these cases?
Contrary to the assumptions of neoclassical theory, the bulk of real-life economic behavior is characterized by uncertainty and by multiple interdependent agents with different long-run interests. Information is costly, and the information-processing capabilities of participants are limited. In this kind of a world, the institutional arrangements participants use to interact with one another and to co-ordinate their activities are critical components in understanding economic behavior, and hence, industry development.
Co-ordination is only important in situations where there are benefits to co-ordination &endash; that is, in situations where the actions of one party affect the benefits received by another party. The ability of industry participants to co-ordinate their behaviour under such circumstances will be hampered when information is costly to obtain and when the information-processing capabilities of participants are limited. In these types of situations, individual participants will be tempted to act strategically &endash; that is, to try and obtain a bigger share of the pie for themselves.
In most situations, this strategic behaviour reduces the size of the pie, either by discouraging other participants from completing transactions that are desirable from the standpoint of the industry (the hold-up problem) or by causing too little production of goods that are used by all industry participants (the free rider problem). This failure of independent participants to co-ordinate their actions is a form of market failure. The lack of co-ordination and the subsequent reduction in the size of the pie is a major reason why industry development does not occur or occurs at relatively low levels.
A number of views have been offered to explain how the actions of independent economic players can be co-ordinated under complex, uncertain conditions where the potential for market failure is high. The two standard views are: (1) centralization of activities, usually by the government or by organizations that are given special powers by the government; and (2) privatization or the specification of private property rights. Although policies based on privatization and centralization have been used extensively in agriculture as a way of overcoming market failure and the challenges associated with industry development, limitations to these approaches exist. The major weakness of privatization is that independent behaviour does not always give rise to outcomes that desirable from the perspective of either the agents themselves or the larger society. As was discussed above, strategic behaviour can result in free-rider problems and hold-up problems, both of which are examples of market failure. Market failure also includes non-competitive pricing by oligopolistic firms, and the provision of goods and services at less than optimal levels.
The same factors which result in market failures (i.e., asymmetric information, uncertainty, and complexity) can also cause government failure. The failure of government to behave appropriately is the major weakness of centralization. Government failure may occur because of imperfect knowledge or foresight, rigidities in regulations, myopic regulation, and political constraints. In addition, political pressures for greater fiscal restraint and greater trade liberalization are severely limiting the ability of governments to provide public services and intervene in agricultural markets.
An alternative perspective, which pays homage to both the role of the market and the state but stresses the role of the participants themselves, is that of self-organized institutional change. This approach highlights the ability of participants to organize themselves to achieve collective goals, in spite of the challenges. The notion that groups of participants can co-ordinate their actions to achieve common goals is based on real life observations that collective activities, such as the management of commonly-owned resources, do occur without the intervention of a central authority.
The development of participant-driven organizations is not the only way to address the challenges associated with industry development. Indeed, in many development situations policies based on either privatization or centralization may be the key to efficiently solving market failure. Each form of institutional change and associated policies has its own related costs and benefits. No one form works best in all situations &endash; in some situations one form may provide the solution to a problem of co-ordination, while a different approach may be required in another situation. It is up to policy makers and participants to evaluate the situation and determine appropriate solutions.
One type of situation in which participant-driven development may be the desirable option is where common pool resources (CPRs) are present. Like public goods, CPRs are resource systems from which it is difficult and/or costly to exclude the people who benefit from its use. Unlike public goods, however, one person's use of the CPR will negatively affect the benefits that others can obtain from the resource. Thus, management of the resource and co-ordination of access to the resource becomes vital.
An example of a CPR is a pool of funds collected through a check-off system and dedicated to market development activities. Such check-off systems typically face two recurring problems: how to get producers to contribute to the pool (since there is an incentive for people to free-ride on the contributions of others) and how to manage and govern the use of the pool (since the money used for one form of activity will not be available for another). Industry reputation is another example of a CPR. For an industry to build up a positive image, all participants must ensure they do not damage the industry's reputation; detrimental actions by even one person can have a significant impact on the entire industry.
THE ROLE OF EXTERNAL AGENTS IN PARTICIPANT-DRIVEN ORGANIZATIONS
There are a number of variables which can influence the degree to which industry participants will either co-ordinate their activities or engage in strategic or opportunistic behaviour. These variables include:
o the frequency with which participants interact with one another;
o the degree of uncertainty regarding future contingencies;
o the ability to make credible commitments and assurances regarding future behaviour;
o the existence of well-tailored governance structures; and
o the existence of a system which monitors behaviour after contracts and agreements are signed and which clearly defines penalties associated with breaching commitments.
These variables provide an insight into the ways in which external agents can foster industry development by reducing strategic behaviour. For example, external agents can help in the building of ongoing relationships. When contractual agreements or collective activities are perceived as being part of a longer ongoing relationship, factors such as reputation, social norms, and values are likely to influence behavioural decisions and the ability to make credible commitments will be enhanced. If exchanges between agents occur more frequently, the costs associated with developing institutional arrangements also decrease. Hence, a meaningful role for external agents in fostering industry development is to encourage and facilitate ongoing relationships among industry participants.
To this end, external agents can help by encouraging the development of networking opportunities (i.e., trade fairs, industry associations and other events) and communication tools (i.e., electronic bulletin boards, newsletters and industry directories). Activities which foster the creation of a critical mass within an industry (i.e., a group of highly motivated individuals enthusiastic about a development initiative) can become an important component in inspiring others to act collectively. Improved communication channels can also encourage enthusiasm for future projects by spreading the word regarding successful development initiatives in other industries.
Extensive information is often required to undertake development activities, especially if these activities involve more than one organization or individual. Information is also crucial in building governance structures which clearly define the roles and responsibilities of the participants involved in a particular development initiative. However, information is usually costly and asymmetric. Gathering and presenting appropriate information often requires technical expertise in certain areas (i.e., finance, commerce, law, organizational management). The ability for different participants to process information also varies. These factors can make it difficult for industry participants to engage in mutually beneficial activities and suggests that external agents can play a role in industry development by improving participants' access to credible information and technical expertise.
External agents can assist in providing information by either gathering (i.e., undertaking research and development) and disseminating it themselves or by providing funds to allow groups to do so themselves. Having external agents involved in improving access to credible market information can also help in deterring strategic or opportunistic behaviour. The accessibility of relevant scientific knowledge is especially important since some participants may not be familiar with this knowledge or may have difficulties understanding it due to different educational levels. Not all of the development initiatives proposed by certain industry groups or participants will be feasible or even relevant. External agents can encourage industry development by establishing funds to investigate the feasibility of different industry development activities. The search costs associated with accessing funding can be further reduced if distribution centres for such information are established.
The external agent may facilitate development activities by acting as a consultant to groups, building and/or reinforcing leadership within a group, and integrating the efforts of the group. For participant-driven development to occur, it is vital that the participants have control of the development process. External agents can help in this process by assisting in: (a) the identification of the problems and the needs of the group; (b) the development of strategies to address these problems or needs; and (c) the mobilization of resources both from within and outside the group. External agents must not only ensure that participants have the necessary information available to them; the agents must ensure that the participants understand the information and apply it to their situation. Participant-driven development is thus a learning process &endash; it involves training and problem solving.
A central component in achieving credible commitments, and hence collective action, is the development of a set of rules which clearly outline the responsibilities and privileges which come with a particular collective activity or association. In addition, the penalties imposed if those rules are not adhered to must be clearly outlined. The development of such rules requires a familiarity with the effect of different governance structures and agreements on the behaviour of participants and an understanding of how different components, such as monitoring, can be built into the governance structure. A facilitator can aid in this process by either providing such expertise to the group themselves or by co-ordinating the resources to access this expertise from other agents. For example, a facilitator familiar with participant-driven development can encourage groups to consider coupling private benefits with collective benefits to achieve a common goal. Industry groups which already provide members with private benefits often have the authority necessary to encourage the provision of collective goods. A skilled facilitator can also help participants incorporate a low cost mechanism for modifying rules, monitoring behaviour, enforcing rules and resolving conflicts within their institutional arrangements.
There is a risk involved when external agents work in developing participant-driven projects. The group may become dependent on the facilitator as a source of advice and may look to her to make the decisions. Once the facilitator has moved on, the project may fail because no one in the group has assumed the leadership role and the group has not learned to make decisions on its own.
CASE STUDIES
This study uses a number of case studies to examine the process of industry development. The case studies focus on specialty livestock (specifically wild boar and fallow deer), seed potatos, and New Generation Co-operatives. The case studies provide examples of privatization, centralization, and participant-driven development.
Examples of industry co-ordination based on privatization and the specification of private property rights include:
o the use of explicit contracts between Sask-Ida and the residents of Lucky Lake, Saskatchewan to secure production for Sask-Ida's seed potato marketing operations;
o the vertical integration of Saskatoon Specialty Meats to ensure the processing of high quality wild boar products; and
o the specification of delivery rights in New Generation Co-operatives (NGCs).
Examples of industry co-ordination based on the centralization of decision making include:
o the public provision of seed potato inspection services by the federal government to co-ordinate product quality;
o the use of mandatory levies on seed potato production to fund marketing activities; and
o the regulation of the fallow deer industry to co-ordinate production and marketing practices.
Examples of participant-driven institutional change include:
o the information dissemination services provided by the B.C. Fallow Deer Association;
o the establishment of potato production by Riverhurst Agricultural Products in Riverhurst Saskatchewan;
o the establishment of processing facilities by the members of NGCs in North Dakota;
o the co-ordination of production practices to ensure quality standards by Edmonton Potato Growers;
o the collective marketing activities of Pacific Northwest Venison Producers and Northern Velvet;
The examples of participant-driven institutional change within the case studies point to a broad range of roles played by external agents. The efforts of the B.C. Fallow Deer Association illustrate how external agents, specifically the provincial government, can facilitate participant-driven development activities by providing flexible funding and credible production and market information. The process of getting potato production established in Riverhurst, Saskatchewan illustrates the importance of an external agent as a facilitator; developing relationships among key participants, keeping communication lines open and defining the resources available to the community.
Perhaps the clearest example of the positive role that external agents can play in larger-scale industry development initiatives is illustrated by the development of New Generation Co-operatives in North Dakota. In this case a wide variety of external agents played a range of roles in fostering the development of a large number of agriculture-based industries. Representatives of various organizations have created an infrastructure which provides support for regional development initiatives and creates an environment conducive to collective action. This network includes various government agencies which provide flexible funding programs, sponsor forums for industry participants to meet and exchange ideas, and portray enthusiasm for local development initiatives. Financial institutions, in particular the co-operative banks, provide industry participants with business expertise and start-up capital. The rural utility co-operatives and co-operative associations fund the positions of a rural development and a co-operative development specialists. These specialists act as facilitators of collective action and work directly with industry groups to identify common needs and goals, develop strategies to meet these goals, and co-ordinate the resources available to undertake development strategies.
It is important to note participant-driven institutional change does not necessarily require that external agents play an active role in industry development. For example, Edmonton Potato Growers, Pacific Northwest Venison Producers, and Northern Velvet are all examples of collective organizations which developed without direct external aid of any sort. However, while direct help from external agents is not necessary for participant-driven institutional change, a recognition by external government authorities of the legitimacy of such an effort is essential. This point is clearly illustrated by the collapse of the industry development initiatives undertaken by Pacific Northwest Venison Producer. Therefore, while external agents, in particular the government, can have a positive affect on industry development, they can also be a barrier to development initiatives.
CHECK-POINTS FOR INDUSTRY DEVELOPMENT
The following points provide a check-list for determining when co-ordination is necessary for industry development and the situations in which external agents can play a meaningful role in fostering industry development.
o There are three main approaches to market expansion: increasing the demand for the product; increasing the supply of the product; and reducing the marketing margins. These activities are often complimentary &endash; that is, an expansion of one increases the effectiveness of the others. Industry development will be enhanced if these activities are co-ordinated.
o Many industry activities such as production, marketing, distribution, processing, financing, and management become less costly to undertake the greater the amount of the activity being undertaken. Co-ordination of these activities can thus foster industry development.
o When information is costly to obtain and when the information-processing capabilities of participants are limited, individual participants are often tempted to act strategically &endash; that is, to try and obtain a bigger share of the pie for themselves. In most situations, this strategic behaviour reduces the size of the pie. Co-ordinating activities &endash; or reducing strategic behaviour &endash; will improve industry development.
o The actions of industry participants can be co-ordinated through a number of institutional arrangements, including: (a) privatization; (b) centralization; and (c) participant-driven organizations. Each institutional arrangement has costs and benefits.
o Participant-driven organizations will be most effective when the industry contains common pool resources (CPRs).
o CPRs are resource systems from which it is difficult and/or costly to exclude the people who benefit from its use. One person's use of a CPR negatively affects the benefits that others obtain from the resource.
o Co-operation among industry participants is easier and less costly if forums for participant communication exist and if participants have access to reliable, relevant information and/or the technical expertise to gather such information.
o The longevity of contractual or collective agreements can be enhanced if a low-cost mechanism for monitoring behaviour and an arena for conflict resolution are available.
o Some form of credible commitment is often required to provide industry players with the assurances necessary to ensure participation. The existence of a critical mass can also have a positive influence on collective activities. An external agent can help in rallying together a critical mass of participants and can assist groups to develop institutional arrangements which create assurance and credibility.
o The role of the external agent as a facilitator of collective action involves assisting industry groups with: (a) the identification of the problems and the needs of the group; (b) the development of strategies to address these problems or needs; and (c) the mobilization of resources both from within and outside of the group.
o To be effective, an external agent acting as a facilitator requires: (a) credibility and fair mindedness; (b) a solid knowledge of the industry; (c) the ability to link this knowledge with an appropriate institutional arrangement; and (d) the ability to foster mutual trust and interdependence among participants.
o The services identified in this study as being beneficial to the development of industries can be provided by external agents other than the state. For example, firms in related industries can contribute to industry development initiatives by providing funding, technical expertise, and related experience. In fact such agencies and their agents can have an advantage over government agencies in that they can remain non-partisan, can act independently and may have access to a broader base of relevant information.
The entire study can be downloaded as a PDF file:
Working Together: The Role of External Agents in the Development of Agriculture-Based Industries Andrea Harris, Murray Fulton, Brenda Stefanson, and Don Lysyshyn, 1998.