Market imperfections and the effectiveness of subcontracting and informal institutions in export market transactions in Ghana

The study set out to explore how small exporting firms coordinate production functions and the extent to which the chosen path of institutional arrangements enable them to reduce market imperfections, access resources, meet export market requirements and succeed in the export market. The literature posits that in the absence of effective state institutions, informal and private institutional arrangements tend to govern market transactions. However, little is known about the effectiveness of these arrangements in supporting distant and expanding trade transactions, especially, in Africa. Using the Ghanaian craft export sector as a case, the study showed that the small-scale exporters rely predominantly on informal institutions and subcontracting ties in their export transactions. Yet these informal and subcontractual relations remain inadequate coordination mechanisms for engendering greater export success. Under conditions of market imperfections and endemic opportunism, the informal trade arrangements and loose arm’s length subcontracting relations only enable the small firms to achieve imperfect results even in modestly complex and expanding trade transactions. Notwithstanding, informal subcontractual ties potentially offer the platform for the small enterprises to succeed in the export market given improvements in the socio-cultural and the microeconomic environments. The emergence of “in-house contracting” in the industry is linked to the move by some of the exporters to reduce transaction costs and meet quality standards. By this arrangement, the entrepreneur has some level of control (albeit less rigid) necessary to reduce transaction costs, meet quality requirements, and flexibly adjust to fluctuations in export market demands. The in-house exporter maintains multiple informal and trust building relationships with segmented buyers and subcontractors to keep the production system operational.