A framework for assessing the exchange costs in the flax fibre supply chain

Abstract

Canada has been recognized as the largest exporter of flax seed in the world. Currently, very little flax straw is further processed, despite its potential as a value added product, with only about 7-10% of Canadian flax seed producers harvesting residual flax straw rather than burning the straw. A traditional use of flax straw has been for the production of fibre for the linen industry. Interest in flax fibre has been rekindled with the impetus to seek out bioproducts that replace non-renewal resources and provide value-added opportunities for agricultural producers. Flax fibre also has a range of potential uses in automotive parts, geotextiles, insulation material, etc. Despite this potential, the Canadian flax fibre sector remains largely underdeveloped, with fledgling supply chains and lack of investment in the necessary processing capacity. This paper develops a framework for analysing the relational exchanges at different stage of the supply chain to determine if the paucity in investment is the result of prohibitively high exchange costs. A number of distinct stages in the flax fibre supply chain can be identified: farmers producing flax seed and/or straw; processors who extract the natural fibre from the straw; and manufacturers who use the fibre in their products. The paper develops a framework that draws together insights from Transaction Cost Economics, Agency Theory and Bargaining Theory. The role of institutions in facilitating quality measurement and providing participants with information is also considered. The theoretical framework identifies asset specificity, agency measurement costs, bargaining power and under-developed institutions as key factors in the development of the flax fibre sector. From the theoretical framework, a set of propositions is developed that examine the anticipated effect of these factors on vertical coordination in the sector. The theoretical propositions are explored through a series of semi-structured interviews with parties at each stage of the supply chain (producers, fibre processors, final manufacturers), as well as with industry experts. Information from the interviews is used to identify the transaction characteristics and the institutional framework characterizing the flax fibre sector in Canada. This is analysed through a comparative case study approach with the flax fibre sector in Europe, and the wool fibre sector in New Zealand as an example of a fully developed and long-standing fibre sector. By also noting the different vertical coordination strategies that are present in these supply chains, a connection is drawn between the presence of certain transaction characteristics and the corresponding cost-minimizing exchange relationships. The case studies are used to investigate the propositions developed from the theoretical framework regarding the impact of transaction characteristics on the optimal vertical coordination strategy and the impediments to development and investment in the sector. The propositions developed in the framework are verified to a great extent by the comparative case study. The uncertainty in the exchange environment regarding the future direction of the flax fibre industry and the high measurement costs due to the absent quality and grading regime in the Canadian flax fibre set the two industries apart from each other. Both of these dimensions impact the exchange costs of a transaction and subsequently, the extent to which the parties are closely coordinated. The case studies verify that using a framework to analyze transactions provides additional insights because of the joint consideration of several features of the transaction.