Determinants of Choice of Institutional Marketing Arrangements by Small Poultry Businesses in Tanzania: Application of Transaction Cost Theory

Abstract

The transaction cost (TC) theory of the firm provides a conceptual model suitable for investigating the mechanism by which business firms evolve and grow. This paper uses poultry farm businesses (PFBs) in Tanzania as a vehicle of assessing relevance of the theory in explaining factors determining choice of institutional arrangement, for the purpose of identifying policy measures that can influence small business firms to opt for contractual businesses. A cross-sectional survey was conducted in two regions in the country covering 170 respondents. Logistic regression analysis indicate that the choice by business firms to opt for a particular institutional arrangement is determined by all the components of total transaction cost (TTC); as all were statistically significant (P < 0.05). It shows also that search and screening cost has greatest impact on choice of institutional arrangement (Wald = 8.745) followed by enforcement cost (Wald = 4.735) and negotiation cost (Wald = 4.735). It indicates in addition that, probability of PFBs to enter into contractual businesses falls with increase in Transaction Costs (TCs). Linear regression analysis shows, in addition that, search and screening cost has greatest elasticity to TTC (Beta = 0.596), followed by enforcement cost (Beta = 0.43) and negotiation cost (Beta =0.437). A theory based intervention should therefore, mainly be focused on reducing search and screening cost, followed by the other components of TTC.

Keywords: Transaction costs, poultry farm businesses, institutional arrangements