Evaluation of a Hybrid Seed Contract Between Smallholders and an MNC in East Java, Indonesia

Three hundred smallholders near Malang in East Java were surveyed of whom 150 wereparticipating in a hybrid seed contract with Pioneer Hybrid International Inc, an AmericanMNC that has been contracting in the area since 1986. The objectives of the study were todetermine whether the contract improved the welfare of those who participated and, ifparticipation did improve welfare, to evaluate why this contract, in contrast to many otherfarm contracts in developing countries, is successful. A transaction cost framework was usedto specify a framework for probit analysis of contract participation and regression analysisused to measure the contribution made by contract participation to gross margins. Theempirical results suggest (i) contract selection was by Pioneer and not through self-selection,(ii) the contract is likely to favour larger farmers and (iii) the Pioneer contract improvedreturns to farm capital and hence was likely to be welfare improving for contractors. Thesuccess of the contract over many years was attributed to the nature of the contractingprocess which was between Pioneer and grower groups and not at the individual smallholderlevel.