Make or buy: the case of harvesting mechanization in coffee crop in Brazil

Abstract

This paper investigates the make-or-buy choice on the harvesting mechanization transaction in Brazilian coffee production. It empirically tests this organization choice following the transaction attributes of asset specificity, uncertainty and path dependence. Using a two-stage probit model conditioned by credit availability in a sample of 105 coffee growers in Brazil, our study evidences that the governance decision follows the efficient alignment argument of the Transaction Cost Economics. The research contributes to the understanding of institutional arrangements in place at coffee grower perspective. An additional descriptive field investigation presented the existence of three different types of arrangement as a solution for coffee harvesting mechanization: total vertical integration (make), outsourcing contracts (buy) and tapped vertical integration. Those results demonstrate a shift from a spot transaction pattern to more sophisticated contractual tools. We present managerial implications by illustrating the determinants of each decision, either make or buy, in the harvesting mechanization transaction in coffee production which can provide support to efficient strategies elaboration by farmers or service providers.