Results of the Hypotheses Tests

As stated above, five models were used to test the nine hypotheses. The testing process did not follow the numbering order of the hypotheses. Instead, hypotheses with a common dependent variable were grouped and tested through a single model. For example, hypotheses one used contracting as the dependent variable and was tested through the first model (labelled model 5.1). The first part of hypothesis two (H2b) and hypothesis three used spot

market as the dependent variable and were both tested through the second model (5.2). Hypotheses four, seven, eight and nine used vertical integration as the dependent variable and were collectively tested through the third model (5.3). The fourth (5.4) and fifth (5.5) models used monitoring and incentives as dependent variables and were used to test hypotheses five and six respectively.

Hypothesis One

This was the research‟s main hypothesis and it directly helped achieve the research‟s second objective of explaining why contracts are widely used even though they expose exchange relationships to opportunism. This hypothesis emanated from an observation during the literature review that although incomplete contracts associated with the TCE expose transactions to exchange hazards, they (contracts) are still widely used as a governance mechanism (Fraser, 2005). This has also been confirmed by the current research. It has been found that contractual use is the second most popular governance mode after vertical control in both South Africa and New Zealand. This is surprising, more so that there are other supposedly cheaper and less hazardous governance options such as transacting with trusted partners (relational exchange theory) and monitoring and providing incentives to trading partners to encourage their performance (agency theory). This research suggests that the continued use of incomplete contracts is partly due to the fact that they are in fact complimented by the exchange safeguards associated with relational norms such as trust as well as monitoring and incentives. The research extends the argument by proposing that, in addition, the legal system also gives assurances that recourse to the law provides added safeguards against trading partners‟ opportunistic behaviour. Contracting is therefore encouraged and complemented by trust, monitoring, incentives and the legal system. Hence,

H1: Monitoring, incentives, trust and the legal system encourage contracting.

In testing this hypothesis, the contracting governance mode was the dependent variable and the key independent variables were trust, monitoring, incentives, and the legal system. A positive relationship was expected between the dependent variable and the key independent

variables. Item crititicality, firm size and age were the control variables. The hypothesis was tested through model 5.1 below:

1 2 3 4

5 6 7 i

Contracting Trust Monitoring Incentives Legal

Itemcriticality FirmSize FirmAge

    

   

     

  

Equation 5-1: Contracting regression model

The regression results of the above model are presented in table 5.12 below. Table 5-12: Model 5.1 regression results

South Africa New Zealand

Variables  t Sig VIF Variables  t Sig VIF

Constant -3.795 -2.048 Constant -3.212 -2.360 Trust 0.748 1.869 0.064*** 1.302 Trust 0.280 1.883 0.062*** 1.195 Monitoring 0.271 2.368 0.020** 1.247 Monitoring 0.354 4.691 0.000* 1.081 Incentives 0.463 1.740 0.085*** 1.141 Incentives 0.411 2.616 0.010** 1.074 Legal 0.294 2.319 0.022** 1.175 Legal 0.631 1.815 0.072*** 1.156 Item criticality -0.313 -1.993 0.049** 1.043 Item criticality -0.042 -0.299 0.765 1.049 FirmSize 0.179 1.858 0.066*** 1.113 FirmSize 0.223 1.735 0.086*** 1.094 FirmAge 0.378 2.782 0.006** 1.067 FirmAge -0.075 -0.729 0.468 1.043 r2= 0.343. F = 7.087*. r2= 0.361. F = 8.714*

Significant at the *(p<0.001); ** p<0.05 and *** (p<0.010) levels.

Results: The two countries have significant F values (p < 0.05). This suggests that at least one of the independent variables explains variations in contracting as a governance mode. This gives affirmation that the regression coefficient of determination (r2) is not zero. It is therefore not surprising that the r2for South Africa is 0.343 and for New Zealand is 0.361. This implies that the model explains 34.3 percent and 36.1 percent of variation in contracting in South Africa and New Zealand respectively. The beta coefficients for the key independent variables of trust, monitoring, incentives and the legal system take the expected positive sign for both countries. The p-values for trust and incentives are significant at (p < 0.10) and those of monitoring and the legal system are significant at the (p < 0.05) level for South Africa. Hypothesis one was therefore supported by the South African data. The control variables of firm size (p < 0.10) and age (p < 0.05) had a positive and significant (p < 0.05) relationship with contracting, while item criticality had a negative and significant relationship with contracting.

With the New Zealand data, the p-values for monitoring and incentives are significant at the (p < 0.01) and (p < 0.05) levels respectively. The trust and the legal system variables are significant at the (p < 0.10) level. This shows that hypothesis one is also supported by the

New Zealand data. As for the control variables, firm size is positively correlated with contracting and is significant at (p < 0.10). Item criticality and firm age have a negative but insignificant relationship with contracting.

Since the hypothesis is supported for both countries, there is strong support for the argument that contracting is encouraged and complemented by trust, incentives, monitoring and the legal system. This provides insights into why contracts are widely used despite their obvious limitations of exposing transactions to opportunism. This research argues that because of the positive correlation between contracting (dependent variable) and the independent variables of trust (relational exchange theory), monitoring and incentives (agency theory) and the contract enforcement mechanism provided by the legal system, the independent variables complement contracting in protecting exchange relationships against opportunism. While no other study was found to have simultaneously tested the relationship between contracting and the above exchange protection frameworks, the results are in line with various studies that have tested the contractual relationships that used the different exchange protection frameworks or used a narrower theoretical perspective.

For example, Logan (2000) used agency theory to try to answer two pertinent questions of what can the transport user do to encourage quality service and fair treatment by the transport provider and, what can the provider do to satisfy the demands of the user without compromising it‟s own goals? She concludes that both the behaviour based (monitoring) and outcome based (incentives) contracts should be used since the former favours the service provider and the latter favours the service user. Poppo & Zenger (2002) found a positive relationship between contracting and relational governance (trust) within the information services exchanges. Managers were found to couple customised contracts with high levels of relational governance. A related study on the strategic relationships between French firms by Beave & Saussier (2010) found that contracts could serve as a framework for guiding the course of cooperation and cooperation helps firms overcome the adaptive limits of contracts. The latter studies not only show the successful use of contracts by firms to protect exchange relationships but also show that different exchange protection mechanisms can be used in a complementary manner, such as formal contracts being used to develop and nurture cooperation and cooperation helping firms resolve any contractual disputes. Further, Mina (2006) investigated the importance of contract enforcement in international lending and found that improvement in contract enforcement seemed to increase the level of the country‟s

lending ability as this gave the creditors some assurance that the lending contract would most likely be honoured within an improved legal framework.

These studies suggest that aspects of agency and relational exchange theory as well the legal system provide exchange protection, and that these frameworks complement each other in protecting exchange relationships. Incomplete contracts may therefore be widely used without the expected transaction hazards because they are partly protected by trust, monitoring and the legal system.

Hypothesis Two and Three

Hypothesis two and three used the spot market as the dependent variable. They were essentially concerned with factors that influence variations in the spot market governance mode. The second hypothesis was based on the premise that, as suggested by hypothesis one, the legal system protects exchange relationships against opportunism. It gives assurances that spot market players that act opportunistically would be prosecuted. Thus, it encourages spot market transactions as it acts as a guarantor of exchange performance. The spot market here does not envisage discrete transactions where each party is certain never to meet the other party (Macneal, 1978), but rather arms length exchanges without any close relationship or joint commitment (Lambert et al., 1996) but with possibilities for repeated transactions (Webster, 1992). Hence;

H_2a: The legal system encourages spot market transacting.

This research is of the view that a strong legal system protects exchange relationships better than a weak legal system. For this reason, the stronger New Zealand legal system (World Bank, 2008) is expected to provide better protection to exchange relationships than the weaker South African legal system. Hence,

H2b: A stronger legal system (New Zealand) better protects exchange relationships than a

weaker (South African) legal system.

Hypothesis three was influenced by the fact that spot market actors generally have arms length relationships in which trust plays little or no role in facilitating exchange between partners (Lambert et al., 1996). On the other hand, monitoring and incentives assume a continuous relationship in which performance is continually evaluated and punishments and rewards applied by participants when the need arises. Since arms length transactions do not

allow for planned incessant interaction between the parties, monitoring and incentives are not expected to have any meaningful exchange protection qualities for spot market/arms length transactions. They are therefore expected to provide exchange protection in contractual arrangements and offer no or little protection to the spot market transactions. This again discourages spot market transacting. Hence,

H₃: Trust, monitoring and incentives discourage spot market transacting.

In testing H_2athe spot market governance mode was the dependent variable and the legal system was the independent or explanatory variable. A positive relationship was expected between the two countries‟ legal systems and the spot market. The spot market was still the dependent variable in the test for H₃. The independent variables were trust, monitoring and incentives. A negative relationship was expected between the spot market and the independent variables. Model 5.2 below was used to test H_2aand H₃. Item criticality, firm size and age were the control variables.

1 2 3 4

5 6 7 i

SpotMarket Trust Monitoring Incentives Legal ItemCriticality FirmSize FirmAge

    

   

     

  

Equation 5-2: Spot market resgression model

The results of testing model 5.2 are presented in table 5.13 below. Table 5-13: Model 5.2 regression results

South Africa New Zealand

Variables  t Sig VIF Variables  t Sig VIF

Constant -0.021 -0.030 Constant -0.504 -1.002 0.319 Trust 0.297 1.967 0.052*** 1.302 Trust 0.307 5.600 0.000* 1.195 Monitoring 0.014 0.317 0.752 1.247 Monitoring -0.014 -0.488 0.626 1.081 Incentives -0.49 -0.491 0.625 1.141 Incentives -0.151 -2.604 0.011** 1.074 Legal 0.175 3.647 0.000* 1.175 Legal 0.231 1.801 0.074*** 1.156 Item criticality -0.087 -1.464 0.146 1.043 Item criticality 0.011 0.217 0.829 1.049 Size -0.012 -0.329 0.743 1.113 Size 0.131 2.752 0.007** 1.094 Age-Co 0.001 0.011 0.991 1.067 Age-Co 0.025 0.658 0.512 1.043 r2= 0.202. F = 3.733* r2= 0.358. F = 8.590*

Significant at the *(p<0.001); ** p<0.05 and *** (p<0.010) levels.

Results: The F statistic is significant (p < 0.01) for the two countries. Hence the model explains some variation in the spot market transacting decisions. The r2for South Africa

suggests that 20.2 percent of the variation in the South African spot market mode is explained by the model. The statistic stands at 0.358 for New Zealand, which suggests that 35.8 percent of the variation in the spot market transacting is explained by the model.

The beta coefficients for the legal system are positive and significant for South Africa (p < 0.001) and New Zealand (p < 0.10), a suggestion that indeed the legal system encourages spot market transacting in both countries. H_2a is therefore supported in both South Africa and New Zealand. H_2b purports a strong legal system as a better protector of exchange relationships than a weak legal system. This hypothesis was tested through the Independent- Samples t-test approach. However, before reporting the results of the Independent samples t- test, results of hypothesis three are first reported because this hypothesis was tested through the model that was used to test H_2a. That is, the model that used the spot market as its dependent variable.

The results for hypothesis three show that for South Africa, the beta coefficients for trust and monitoring take the unexpected positive signs. However, only trust is significant at the (p < 0.10) level but as noted above, it is in the wrong direction. The incentive variable takes the expected negative sign but is insignificant. Hypothesis three is therefore not supported by the South African data. The positive and significant trust variable raises important issues that will be discussed shortly. In New Zealand, the incentives variable takes the expected negative sign and is significant (p < 0.05). Monitoring takes the expected negative sign but is insignificant. Similar to the South African data, trust takes the unexpected positive sign and is significant (p < 0.01). The hypothesis is therefore partially supported for New Zealand. The trust variable follows the South African case and takes a positive (wrong direction) and significant sign. The significance of the unexpected relationship between trust and the spot market in both countries implies that the results did not occur by chance and thus warrant an explanation. A look at the organisational structures of the wine industries in the two countries may shed light on the behaviour of the spot market-trust relationship in the two countries. In both countries, wineries and growers are members of their respective national winery associations and these associations have some control on the behaviour of members (NZWINE, 2009; SAWIS, 2009). Since the wineries and growers are members of the same organisation, and in line with Lambert et al., (1996), it may be inappropriate to classify non-contracted but externally sourced grapes as strictly “spot market sourced”. This is because these grapes are essentially sourced from growers that are within the inner circle of wineries, and may therefore be known

to the wineries. Under such circumstances, it may not mean that the wineries go to the conventional spot market to source extra grapes, but rather acquire grapes from growers that the wineries‟ did not have an active supply contract with but still known to the wineries. There is also a high likelihood that they would have purchased from them before.

Further, one of the main objectives of the umbrella wine organisations is to drive and promote quality within the two countries‟ wine industries. For example, the NZ WINE annual report of (2009) notes that New Zealand wine is marketed as a national brand and states in clear terms that “protecting and promoting that brand is essential for each individual grower and winery and for the industry as whole and for the national organisation” (p. 6). Likewise, according to the South African Wine and Brandy Company (SAWB) (2003), the core of the South African wine industry marketing strategy is to promote the South African wine as a national brand called „Brand South Africa‟ and every member is expected to play a part in making this strategy a success. Therefore, mutual membership of the wider organisation seems to suggest informally agreeing to produce a certain level of quality, the level that is acceptable to the national organisation, the same way contracting parties would agree to maintain certain quality levels. Membership of the same organisation by wineries and growers therefore points to a silent but effective unwritten contractual agreement.

Hence, the existence of national organisations in each country seem to suggest that the spot market in both countries is not a typical spot market that is characterised by one off interactions without any expectations of future interactions. It seems it functions like a contractual agreement of some sort where the contract is represented by the collective belonging of the firms to the wider industry organisation. Thus, since spot market transactions may represent some form of a pseudo contractual relationship that is enforced by collective belonging to the organisation, then the unexpected positive relationship between the spot market (pseudo contract) and trust would be in line and supportive of hypothesis one where the results showed a significant positive relationship between contracting and trust. That is, while the relationship between spot market and trust was unexpected, it may well have been supportive of this research‟s main theoretical stand point that contracts are supported by other exchange frameworks including relational norms. In addition, growers in both countries have no alternative market for their grapes. They are captive to the wineries, especially the big ones that dictate or determine grape prices. Growers are therefore forced to tore the wineries‟ line and this may be seen by wineries as the existence of trusting relationships between growers and wineries. A discussion with growers may portray a different picture.

This argument is in line with the transaction governance literature. Webster (1992) observes that pure spot market transactions are rare, and that their importance as the beginning of the transaction continuum is for theoretical rather than practical reasons. What is observed in the real world is arms-length transactions (Lambert et al., 1996) or repeated transactions (Webster, 1992), where exchange partners may engage in single or repeated transactions but without any meaningful ongoing relationship between them. Such relationships have rudimentary levels of credibility and may therefore not be treated as purely spot market relationships. This may therefore explain the positive and significant relationship between spot market (arms-length) transactions and trust. Thus, the fact that wineries belong to the same wider organisation may act as a pseudo contractual relationship and hence the positive relationship with trust. This suggests that, as with hypothesis one, trust encourages the contractual relationships, which in this case are pseudo contractual relationships represented by mutual membership of the same national organisation by wineries and growers. This therefore provides further support to hypothesis one that contractual performance is encouraged by other exchange protection frameworks.

Returning to H_2b, this hypothesis argues that a strong legal system better protects exchange relationships than a weak legal system. This hypothesis was tested through the Independent- Samples t-test technique. This technique is useful when a researcher wants to compare the mean scores of two different groups. In this case, the research compared the mean score of the legal system variable in South Africa with that of New Zealand. The key objective was to establish whether the mean score of the New Zealand legal system is significantly higher than the mean score of the South African legal system. The results are presented in table 5.14 below.

Table 5-14: Independent t-test for the equality of means – the legal system

Mean #NZ Mean #SA t Sig (2-tailed) Mean difference Std Error

t - test for equality of means (95% Confidence Interval of the Difference)

Lower Upper

3.168 3.004 2.148 0.017* 0.164 0.076 0.014 0.315

#NZ - New Zealand; SA - South Africa, Significant at the (p < 0.05) level.

The results show that the mean score for New Zealand (3.168) is 0.164 larger than that of South Africa (3.004), an indication that the New Zealand legal system was perceived to offer better protection to exchange relationships than that of South Africa. This result is statistically significant (p < 0.05), which shows that the difference in opinions about the performance of the legal systems in both countries did not occur by chance. This shows that the New Zealand

legal system better protects exchange relationships than the South African legal system. H_2bwas therefore supported.

Hypotheses Four, Seven, Eight and Nine

Hypotheses four, seven and eight had vertical control as the dependent variable. They helped the research explore the causes of variations within the vertical integration governance mode.