Trust, Spicy Exports and Local Economic Development

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Trust, Spicy Exports and Local Economic Development

The case of Spicy Exports, Indonesia

By

Alex van Genderen

Student number: 2589915

Faculty of Economics & Business

Supervisor: Dr. B.J.W. Pennink

Referent: Mr. Drs. H.A. Ritsema

Thesis paper for MSc IB&M

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Acknowledgements

The writing of this Master thesis has been such a great experience and I need to give my thanks to many people that have made it possible. First of all, Bartjan Pennink from the University of Groningen has been a big support with bringing in a seemingly unlimited amount of ideas to make sure a master thesis could be written in Indonesia. Furthermore, he assisted throughout the process by always being available and giving advice. The same goes for the many good people working at Spicy Exports. Everyone in the company has done a great job taking care of me and made this trip an above expected experience. The sustainability manager was always ready to help out, think along and constantly showing care, let alone preparing all of the necessary requirements and contact details for performing my research. Furthermore, the chief of purchasing has been a great help and good sport for continuously sparring with me on the topic. Further thanks to the co-owner and everyone else at Spicy Exports for the warm welcome. In addition I want to say thanks to my translator. He was a great translator, guide and a good friend which made the fieldwork a unique insightful experience. Lastly, thanks to all of the interviewees whom were all very welcoming and open towards my research. Alex van Genderen

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Abstract

Local economic development requires the different actors on a local level to interact effectively and utilizing the local capacity sustainably (Pennink, 2014). Efficient local economic development can’t be reached without the involvement of outside actors (Pennink, 2014). This research looks into an agricultural exporter in Indonesia that sources cinnamon from Sumatra: Spicy Exports. More specifically, it investigates how to strengthen the linkages between Spicy Exports and their suppliers by building trust. Currently, the relationship is characterized by arms-length transactions and high opportunistic behavior. Using grounded theory, a model for building trust is developed from the data gathered throughout the research. Next to a review of literature on the concepts trust, empowerment and value chains, empirical evidence is gathered through interviews, questionnaires and observations from the different actors involved in the supply chain of Spicy Exports and from Spicy Exports personnel.

Key words: Reinforcing cycles of trust, supply chain, value chain, trust, opportunistic behavior,

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Executive Recommendation for Spicy Exports

The goals for Spicy Exports to create replantation and empowerment of the local community, and the dependency on the current system of sourcing through chief collectors necessitate an improved collaboration between the actors involved. Currently, efforts towards these goals are slow and painful because of a lack of trust and high perceived opportunism between Spicy Exports and its suppliers. In order for Spicy Exports to succeed in its goals and create ‘ownership’ of the replantation efforts for future supply it needs to implement projects that create replantation and empowerment which subsequently will lead to an increase in loyalty to sell the replanted trees to Spicy Exports. Implementing these projects requires a relationship with the suppliers that are based on trust and low opportunism in order for the actors involved to act to mutual benefit.

With the aim of strengthening the supply chain, this research used grounded theory to develop a model for explicitly developing trust with the suppliers. The reinforcing cycles of trust provide an explicit way for Spicy Exports to build and maintain trust through a future oriented strategy that continuously employs the different determinants of trust that differ in amount and type of input through different stages in time. There are three stages in the trust relationship and Spicy Exports needs to be aware in which stage it is and act accordingly. Within each stage, the trust determinants need to be continuously fulfilled depending on the stage of the relationship. The trust determinants are social embeddedness, information sharing routines and asset specific investments. The commitment stage is where the relationship is based on arms-length transactions and on high opportunistic behavior. The output of trust towards the supplier in this stage is then promissory based trust. The execution stage is where the promissory trust is used for the implementation of the value adding activities like NFC (Nature, Future, Culture) standard and FFL (Fair for Life) certification. The core of trust building will here shift from promissory to more competence based trust. In order to build competence based trust, the interlinking trust determinants need to be continuously taken into account to make sure that it shows competent behavior towards the supplier. In the relational rent stage, because of the low opportunistic behavior and likeliness of acting in mutual interest in this stage, it is allowed to share highly vulnerable and sensitive information. Due to the high amount of knowledge sharing in this stage, it is possible to uncover opportunities for relational rents to solve issues with e.g. liquidity, quantity and price. At this stage, the trust relationship leads to value adding activities that could not be reached alone and thus generates competitive advantage. When implemented correctly, it creates a sustainable value chain that allows Spicy Exports to reach its goals.

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List of Figures

Figure 1: Multi-level, multi-actor model for local economic development Figure 2: Preliminary conceptual framework

Figure 3: Process model of trust building in international joint ventures Figure 4: The conceptual model with relations and directions

Figure 5: Current supply chain of Spicy Exports in Sumatra

Figure 6: Estimation of the monetary gains of the suppliers of cinnamon at Spicy Exports Figure 7: Awareness of sustainable food production

Figure 8: Willingness to pay extra for local and sustainable ingredients Figure 9: Reinforcing cycles of trust

Figure 10: Contributions to the Multi-level, multi-actor model for local economic development

List of Appendices

Appendix A: Timetable of eventual research at Spicy Exports Appendix B: List of interviewees and questionnaire results Appendix C: Themes

Appendix D: Interview

Appendix E: Questionnaire English Appendix F: Questionnaire Indonesian Appendix G: List of contacts in Sumatra Appendix H: Additional figures

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Introduction: Spicy Exports and Local Economic Development

Indonesia ranks 16th on the world economy in terms of GDP, it ranks higher than the Netherlands (17th) (Worldbank, 2014). It is wealthy in population size and natural resources, and is growing fast. This is because of its increase in domestic consumption and increase in productivity (Mckinsey, 2012). However, the institutional quality of Indonesia is ineffective because it has little investment freedom, it lacks property rights protection, labor is repressed and there is little freedom from corruption (heritage, 2015). In addition, poverty rates are high and about 70% of the Indonesians live in rural areas where they make a living on agriculture with little opportunities to tap into the economic growth process (ruralpovertyportal, 2010). The Kerinci region in West-Sumatra is one of the regions that is lacking behind in Indonesia. It mainly lives of agriculture and poverty levels are high, nonetheless the region has natural growth of high quality spices like cinnamon. It produces most of the cinnamon for Indonesia and Indonesia produces 46.7% of the world cinnamon (FAOSTAT data, 2012).

Spicy Exports

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harvesters and Spicy Exports does not know how to properly reach them and what’s more to get them motivated to replant what they cut down. This is especially challenging because many of the harvesters, whom are the poor actors involved, only have small pieces of land and only plant crops which give return in the short term to fulfill their daily needs, while cinnamon needs a decade to grow. Another issue to be investigated for them follows from the first goal. Spicy Exports has started CSR (Corporate Social Responsibility) programs (originally derived from the wish to replant) to improve the quality of the cinnamon and working conditions of the poor actors involved. For this they want to know whether they are on the right track with their current initiatives. Literature on CSR (Porter and Kramer, 2006 & Sinckovics et al., 2014) argued that if a business wants to achieve success in CSR, it needs projects that help both the business and society and it needs to stick close to its core competencies in choosing and implementing the project.

Summing up, they have a need for replantation and the subsequent need for ownership of those replantation efforts while being dependent on the chief collectors. Furthermore they want direction advice on their CSR projects to empower the poor actors involved and whether this helps for the replantation goal. On the basis of the outlined situation, they need to move away from a transactional relationship towards a more sustainable relationship with their suppliers which fulfill their needs. Therefore, their question in this research is: “How to include the suppliers in the formation of a

sustainable supply chain to fulfill their replantation goal and to empower the poor actors involved”.

Local economic development

Modern economic growth theory agrees that economic growth in developing countries not only needs to marshal capital accumulation but it also needs to foster entrepreneurship, innovation, risk-taking and learning (Nelson & Pack, 1999). Focusing on capital accumulation, through foreign financing, will not give its desired fruits, because many developing countries are not savings-constraint, but investment-constraint (Rodrik & Subramanian, 2008). Therefore, in order to be able to achieve economic growth, a developing country or a region has to focus on creating opportunities for investment. Policy makers, since the Washington consensus from 1980’s, have been promoting economic development, by emphasizing on industrial policies, economic stability and development of a domestic market. However this alone has not given the desired returns in terms of unemployment reduction (Rodrik, 2004). With high levels of poverty and unemployment, there is a need for local economic development to create the opportunities needed for growth and empowerment.

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economic development is effective, the involved actors in any investment opportunity have to work closely together to increase the amount and the effectiveness of the opportunities (Pennink, 2014). In line with modern economic theory is the Multi-level, Multi-actor Model for local economic development from Pennink (2014), derived from the regional endogenous growth model of Stimson, Stough and Salazar (2009) and can be seen in figure 1.

Figure 1: Multi-level, Multi-actor Model for local economic development. Source: Pennink (2014)

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intervening variables in the middle i.e. the dynamic interrelationships of institutions, entrepreneurship, leadership and outside actors, need to utilize the local capacity in a sustainable manner and collaborate effectively in order to come to local economic development.

The theoretical contribution of the Spicy Exports case for local economic development

Local economic development is an evolutionary process and can be seen as a value chain which requires the local capacity and the intervening variables to sustainably interact effectively: i.e. institutions, entrepreneurship, leadership, human coordination of entrepreneurial activities, empowerment and outside actors (Pennink, 2014). In order to strengthen the linkages between the intervening variables it needs a coordination mechanism. From transaction cost arguments, contracts between the involved parties are the coordination mechanism to safeguard risks, to coordinate the activities and to show commitment (Jong & Woolthuis, 2009). However, within the setting of the supply chain of Spicy Exports, contracts are the exception rather than the rule. Collaboration cannot be controlled by contracts because of the lack of institutional control in Indonesia (Heritage, 2015). Furthermore, their traditional ‘way of doing business’ is based on another coordination mechanism; namely trust. For this reasoning, to be able to interact effectively and sustainably, trust is of vital importance. Within the Multi-level, Multi-actor Model for local economic development from Pennink (2014), the explanation of how to strengthen the linkages between the actors involved is missing, thereby making research into Spicy Exports’s supply chain very relevant for, at least, International Business & Management literature. The first theoretical contribution in this research is to investigate, on the basis of the conceptual model of Pennink (2014), how to build trust between the actors involved in the value chain to create local economic development.

Looking again at figure 1, the local capacity is only used as input to the intervening variables, which is indicated by the arrow pointing towards the right. However, when the linkages between the intervening variables are improved, it can increase the local capacity: increase the amount of cinnamon trees. Therefore, this research will investigate whether the improved collaboration efforts of the involved actors can lead to an increase in the local capacity, rather than local capacity only being an input for the intervening variables. The second theoretical contribution is therefore to investigate whether the arrow also goes from the intervening variables to the local capacity.

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e.g. farmer cooperation’s bring some empowerment initiatives; however the poor actors are often not included because of the involvement of the government which they don’t trust (Best et al. 2005; Ghiassi, 2011). Even more, the land they do own is sometimes left untouched because they lack the money to buy seeds to effectively use it. This research and previous research by Ghiassi (2011), has shown that the poor actors involved are already dissatisfied with the status quo, but they lack the power, knowledge, resources and courage to do anything about it. The poor actors involved need outside support to be able to develop.

Conceptually, referring back to figure 1, we can place the suppliers as the entrepreneurial activity variable and the poor actors involved as the empowerment variable whose quality of life needs to be improved because they are the ones that are left outside the economic growth process (Also, they can also eventually be labeled as the entrepreneurial activity variable, if they are able to add value within the value chain, but this requires effective empowerment). Spicy Exports is the outside actor, the local capacity is the cinnamon trees and together they form the value chain in the model to improve local economic development. The different intervening variables should then be linked together with a focus on trust.

Within the ‘arms-length’ transactional supply chain of Spicy Exports, there is a lot of opportunistic behavior which signals a lack of trust (Kwon & Suh, 2005). Within the field of international business strategy, trust has been recognized as important for performance in the dynamic processes within the business and within the network it is situated (Boersma, Buckley & Ghauri, 2003; Parkhe, 1998). Trust deals with opportunism, it lowers transaction costs, it facilitates investments in relation specific assets and it leads to superior information sharing routines (Dyer & Chu, 2000). In other words, trust is needed for the inclusion of the suppliers into the value chain of Spicy Exports. But in a region where distrust seems to be overwhelming, the question is how to create this trust. Despite the fact that trust is important for competitive advantage, relatively little is known about how and why interpersonal trust develops, how it is maintained and how it breaks down when betrayed (Simpson & Jeffry, 2007). For these reasons, this research, linked to the question from Spicy Exports, focuses on “how to build trust

within the ‘local value chain’ to strengthen their linkages to create local economic development?”.

Main research question

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MRQ: “How can Spicy Exports build trust for the formation of a value chain with their suppliers, and how can Spicy Exports, within this value chain, reach their replantation goal and empowerment goal?”

This research uses ‘grounded theory’. This is used because of the complex (social) nature of the case and the lack of theory necessary to come to recommendations on the goals set out by Spicy Exports and conclusions on the theoretical gap put forward. Theory will be developed with data collected throughout the research (Flick, 2009; Jonker & Pennink, 2010) to answer the main research question on how to build trust with the suppliers to include them in the formation of a sustainable value chain, to reach Spicy Exports’s replantation goal and to empower the poor actors involved in the supply chain.

Research questions

To effectively perform the empirical research necessary to answer the main research question, a theoretical foundation of available research will need to be undertaken. The replantation goal is not included in the theory review because it is believed that the answer to that is highly case specific and can only be found through empirical evidence. Therefore the first research question is:

1.) “What does the current literature state about how to build trust, inclusion in the value chain and empowerment?”

The following research questions will be answered with the results from research question 1: theory review, and by gathering empirical data from Spicy Exports, their suppliers and the poor actors involved.

The second research question deals with how to create empowerment for the poor actors involved in the supply chain of Spicy Exports. Spicy Exports has the goal to realize empowerment to improve the quality of cinnamon and to develop the local community. Furthermore, the topic of empowerment needs to be dealt with because it is one of the intervening variables in the ‘local value chain’ to create sustainable LED.

2.) “How can Spicy Exports achieve empowerment of the poor actors involved in their value chain?”

The third research question deals with what the best way is to achieve the replantation goal of Spicy Exports. Answering this research question simultaneously helps to create sustainable ‘local capacity’ within the ‘local value chain’ because cinnamon is part of the characteristics of the region.

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The fourth research question deals with how to create ‘trust’ from Spicy Exports towards the suppliers to get them included in the value chain. This also needs to be answered to fulfill the theoretical contribution of this research which is to find out how the linkages between the intervening variables in the ‘local value chain’ can be improved.

4.) “How can Spicy Exports create trust to include the suppliers in the value chain?

After answering these questions, the main research question will be answered in the concluding section of this paper.

Preliminary conceptual framework

The sensitizing concepts that have come to light in this research are: trust, inclusion in the value chain, empowerment and replantation. These are illustrated below in figure 2. The research units are Spicy Exports, the suppliers and the poor actors involved.

Figure 2: Preliminary conceptual model

Before being able to properly connect the sensitizing concepts with each other to indicate their relationship and the direction of their relationship, research question 1 needs to be answered: “What does the current literature state about how to build trust, inclusion in the value chain and empowerment?” In the concluding section of the literature review, the conceptual model with relations and directions (model 1) is shown.

Layout of the paper

The remaining of this paper is structured as follows. First, as mentioned above, to answer the first research question, the literature review is undertaken. Then, the methods of gathering data are explained in the methodology section. Afterwards, the results of the data gathered are presented. From there, the recommendations for Spicy Exports are stated. Lastly, the discussion on the theoretical contribution and the conclusion on the research are given.

Trust between Spicy exports and suppliers Inclusion of suppliers

in value chain of Spicy exports

Empowerment of poor actors involved

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Literature Review: Trust, Inclusion, Empowerment

In this part, research question 1 will be answered. In order to get insight into the workings of the preliminary conceptual model (model 0), the sensitizing concepts trust, inclusion in the value chain and empowerment of the poor actors involved, need to be illuminated theoretically. First, the sensitizing concept of building trust will be explained, starting off with distrust as an introduction. Secondly, inclusion in the value chain will be dealt with and thirdly, empowerment of the poor actors involved is elaborated on. As a conclusion of the literature review, model 1 is derived that links the sensitizing concepts into connecting concepts.

Building trust

Results of mistrust

Farmers in underdeveloped countries are poorly organized (Best et al., 2005). This leads to a lack of production of scale which involves higher transaction costs followed by poor quality, low volume and weak trust-based linkages. Government and private led programs have often disappointed farmers, leading to a situation of mistrust (Best et al., 2005)

Sharing information is of key importance because the partners in the supply chain are interdependent on each other. A lack of trust is often the reason why information sharing, especially guarded information, is not efficient in the supply chain, thereby decreasing its value exponentially (Kwon & Suh, 2005). A lack of relevant information sharing creates uncertainty among the partners in the supply chain and will make room for opportunistic behavior. Opportunistic behavior based on transaction cost and agency theory lowers the trust (Kwon & Suh, 2005).

Trust creation

Successfully integrating the different stakeholders into the value chain of a multinational company requires a key element: trust (Kwon & Suh, 2005). Trust has been recognized as important for performance in the dynamic processes within the business and within the network it is situated (Boersma et al., 2003; Parkhe, 1998). Trust deals with opportunism, it lowers transaction costs, it facilitates investments in relation specific assets (asset specificity) and it leads to superior information

sharing routines (Dyer & Chu, 2000). Kwon & Suh (2005) even argue that the asset specificity

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which investments is much lower in best alternative uses or by alternative users should the original transaction be prematurely terminated”. This entails a variety of relation specific investments including human (knowledge) and physical investments (plants and equipment). Dyer & Singh (1998) say that in a relationship that is away from an arm’s length relationship, relational rents can be generated. Relational rents are profits jointly generated by value adding activities that partners could not have created in isolation due to the high asset specificity; thereby creating competitive advantage. These relational rents can be strengthened by asset interconnectedness. This occurs when two parties make asset specific investments made possible by high perceived levels of trust and result in finding new opportunities for investment that could not exist without this relationship (Dyer & Singh, 1998) To clarify asset specificity and asset interconnectedness an example is given: Company A has a factory for the production of cars and company B which makes car tires (a supplier of company A) decides to make a factory for making tires right next door (asset specificity). As a result of this situation, they decide to build a conveyer belt to transport the tires to the car factory (asset interconnectedness) thereby decreasing the cost of transport.

Information sharing with open communication reduces opportunistic behavior (Kwon & Suh, 2005). Henderson (2002) argues that information sharing should not be about sharing simple operational and financial data like e.g. the cost of goods and scheduling. It should also entail sharing valuable information like strategic goals, designs of new products and forecasting intelligence. Transparant communication that involves sharing this type of information decreases the behavioral uncertainty and thus opportunistic behavior (Kwon & Suh, 2005). Uncertainty about the decision making process within the supply chain partners, caused by a lack of information sharing, often leads to mismatches in supply and demand of products e.g. shortages of supply for some product (Kwon & Suh, 2005). According to Parkhe (1998), inter-firm cooperative relationships involve implicit and explicit promises on future behaviors where trust converts these promises into credible propositions. Trust

decreases the uncertainty regarding unknown future events and uncertainty regarding the partner’s response to those unknown events (Parkhe, 1998). Referring to psychological literature, trust will

emerge and change depending on the situations and is hard to measure (Simpson, 2007). Holmes (1981) explains the development of trust through a “strain-test”. Here, an individual is highly outcome dependent on the partner; however the actions that would be in the best interest of the individual will differ from the actions that would benefit the partner. E.g. if farmer ‘Ketut’ desperately needs company ‘Helpinghand’s’ help to complete an important task and Helpinghand willingly helps despite the fact that doing so impedes what it really wants or needs to accomplish, it has passed a strain test and, accordingly, Ketut should trust Helpinghand more (Simpson, 2007).

There are many definitions of trust, but for this research trust will be defined as: The mutual

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vulnerable to losing something of value and where the behavior of the partner is not fully under control, the behavior will be based on mutual interests (Mayer et al., 1995; Parkhe, 1998 & Sabel,

1993).

Transaction cost wise, trust decreases the costs of uncertainty more efficient then prediction, bargaining or authority (Parkhe, 1998). An example is the trust-based supplier relationships of Toyota vs General Motors, where the Japanese suppliers of Toyota are deeply embedded in the social and economic supply chain of Toyota with high levels of trust and low levels of opportunism. This results in highly specialized and vulnerable exchanges that increase the efficiency of the whole network of suppliers. In other words it leads to sharing vulnerable information that contains more risk. This is in contrast to General Motors which did not have this social embeddedness causing opportunistic behavior (they will fail the strain-test) and thereby increasing transaction costs (Parkhe, 1998). Here, vulnerable information will not be shared because of the risk it brings along that the partner will act opportunistic. The higher the uncertainty, vulnerability and lack of control (poor institutional rights for contracting), the higher trust is needed.

Trust depends on social and economic constructs (Kwon & Suh, 2005). According to Dyer & Chu (2000), main determinants of trust are: 1. social embeddedness (personal trust), which emerges due to social interactions between exchange partner where the length and intensity (face to face) of the relationship positively influences this relationship. 2. the process based trust (firm trust) is about trust between firms and this is determined by the a. interconnectedness of interorganizational routines and processes (transparency), b. supplier selection process (selecting (the same) partners in the same way every time) and c. buyer assistance which positively influences the reputation. 3. economic

hostage-based trust (hostage-based on investment) which means that when you invest in the relationship it acts as a

symbol of the relationship. Karim (2008) for example explains that an important facet of the agreements within micro financing is the social nature of it and that it is based on ‘trust’ and not on legal procedures. Here, trust is created through repeated and continuous communication and collaboration.

Looking into comparable literature on trust in international joint venture’s (IJV) from Boersma et al. (2003), there are three dimensions of trust: Competence based trust, Promissory based trust and

Goodwill based trust. Boersma et al. (2003), defines trust as follows: “on expectation that a party can

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Figure 3: process model of trust building in international joint ventures. Source: Boersma et al. (2003).

Trust creation in this process model is a process and takes time to develop itself through the stages, each stage leading to different types of trust creation. Competence-based trust starts from public information. So even before the relationship, there is already a base of which the amount of trust is determined. Promissory-based trust and goodwill-based trust develop through personal interaction (forbearance to commitment to cooperate) bonds of friendship. Before that, trust is based on perceived self-interest of the partner in JV i.e. the partners trust each other that each will act opportunistically. When bonds of friendship dominate, the source of trust shifts towards emotional commitments (less self-interest based).

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From trust to commitment

Kwon & Suh (2005) argue that commitment is a key success factor in achieving inclusion with the different partners in the value chain and that trust is the building block from which commitment thrives. This means that when trust is raised, commitment is consequently raised as well. Morgan & Hunt (1994) define commitment as: “an exchange partner believing that an ongoing relationship with another is so important as to warrant maximum efforts at maintaining it; that is, the committed party believes the relationship endures indeﬁnitely”. Commitment is needed for successful value chain integration (Kwon & Suh, 2005), without it the supply chain is vulnerable and fragile. Kwon & Suh (2005) argue that if information sharing decreases the risk of opportunistic behavior and behavioral uncertainty, then trust will be increased and subsequently this leads to commitment, which opens the door for inclusion.

Inclusion in the value chain

Globalization knows ‘winners’ and ‘losers’ because the gains from it are not distributed equally. Looking at the agricultural sector, the poor actors involved (small scale agricultural producers) are the losers and only the larger producers can make a profit (Laven, 2010). Altenburg (2006) says that value chains become more exclusive as the small scale agricultural producers fail to meet rising scale and standard requirements. In order to raise competitiveness of the small scale agricultural producers, they need to acquire new knowledge to increase their capabilities (Gereffi, 1999). E.g. introducing organic processes of production brings forward a new kind of product, in this case organic cinnamon. However, this increase in capabilities can be very difficult for the small scale agricultural producer because they are ‘locked in’ by global firms/ international traders or other parties that are related to the producers (Laven, 2010). They are dependent on the willingness of these parties; in this case the suppliers, to implement such value adding activities.

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However inclusion is not always the path taken by the suppliers. Self-exclusion is often preferred by the suppliers because they see little profit and too many risks (Laven, 2010). Inclusion or exclusion does not indicate any differences in welfare outcomes. It is not given that a group of small scale agricultural producers who are included will be better off than those who are excluded, in terms of net income or net assets, exposure to risk, or autonomy in decision-making (Berdegué et al. 2008). E.g. the ‘green market’ developed by Carrefour supermarket required investments by the farmer organizations and those were larger than the extra sales it made from selling chili pepper sauce. Furthermore, inclusion, even when profits are higher, is not always judged as beneficial, e.g. farmer villages in India that supplied to Mother Dairy have dropped out of the supply chain because the scheme was seen as abusive and discretionary and also, they found the private company to be unreliable in terms of transport, packing equipment and other related tasks assigned to it (Berdegué et al, 2008).

Empowerment of the poor actors involved

According to the framework from Pennink (2014), empowerment is one of the intervening variables required for local economic development. Without it, the quality of life of individuals and the community will not be raised (Pennink, 2014). In addition, according to the World Bank, empowerment is one of the key ways to develop rural communities economically, to help distribute wealth more equally and to fight poverty (World Development Report, 2001). Empowerment can be defined as any process that leads to self-direction, autonomy, self-worth and self-confidence (Alsop & Heinsohn, 2005). A term opted more recently in relation to empowerment and business in the ‘bottom of the pyramid’ context is: social value creation. Social value creation is any activity that leads to the development of any of the core values: sustenance (the ability to meet basic needs), self-esteem (to have dignity) and freedom from servitude (the ability to choose) (Sinkovics et al. 2014).

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Empowerment to trust

Empowering the local actors by value adding initiatives will result in an increase in ownership, commitment and satisfaction and will create positive feelings for the organization (Uiterkamp & Pennink, 2012), e.g. because it passes a ‘strain-test’. Furthermore, Laschinger & Finegan (2005) evaluated that employee empowerment leads to trust in the organization and builds commitment. So theoretically, trust follows empowerment.

Conclusion: conceptual framework

The conceptual framework of this research can be seen below in figure 4. Building trust lowers the transaction costs of the business activities (Dyer & Chu, 2000). Building trust requires information sharing routines, social embeddedness and asset specificity (Boersma et al., 2003; Dyer & Chu, 2000; Kwon & Suh, 2005 & Parkhe, 1998). Commitment between the parties involved is necessary for the successful inclusion in the value chain and trust is the building block from which it thrives (Kwon & Suh, 2005). That is why the arrow goes from trust to inclusion in the value chain.

Inclusion in the value chain leads to replantation and empowerment. Empowerment is not possible without inclusion in the value chain because the poor actors involved are locked in with the suppliers (laven, 2010). In order to open the door for empowerment, inclusion of the suppliers in the value chain of Spicy Exports is first necessary. Therefore, the arrow goes from inclusion to empowerment. Inclusion of the suppliers in the value chain of Spicy Exports will lead to the replantation goal. According to Daviron & Ponte, 2005, inclusion should lead to value adding activities which can involve a sustainable production within the supply chain i.e. in this case replantation. The arrow here thus goes from inclusion to replantation.

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23 Figure 4: The conceptual model with relations and directions

Inclusion of suppliers in value chain of

Spicy exports Empowerment of the

poor actors involved

Replantation goal Trust of supplier in

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Methodology: Interviews & Questionnaire

In order to investigate how to improve the linkages between the intervening variables through trust creation and how to reach the goals for Spicy Exports, relevant information is collected.

To begin with, the issues faced by Spicy Exports, suppliers and the poor actors involved are of complex nature and have many challenges for the research study. Because of this complexity a qualitative case study is appropriate because it takes into account the context of the phenomenon (Yin, 2009). It can deal with a variety of evidence-documents, artifacts, interviews and observations that could not be retrieved from e.g. a historical research design (Yin, 2009). A representative case is the rationale for the single case study. This case study is assumed to represent typical supplier relationships and projects, and the results acquired by the case study are thereby expected to be informative for an average region and supplier relationship.

Sample and representativeness

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This research measured the quality of the linkages between the current suppliers and Spicy Exports through measuring the amount of trust apparent. Furthermore, it investigated how Spicy Exports can built trust among their suppliers. The sampling frame consists out of two groups. Conceptually, even though the whole population delivers cinnamon to Spicy Exports, one group illustrates suppliers that have “inclusion” in the value chain because social and economic added value is created through the different empowerment projects that Spicy Exports puts forward. The other group illustrates suppliers that are “excluded” from the value chain. The first group are the chief collector, collectors, workers and harvesters that deliver cinnamon to Spicy Exports from the Padang Aro region which are included in the certification projects: FFL, NFC and organics. The second group are the chief collectors, workers, collectors and harvesters that deliver cinnamon to Spicy Exports from the Sungai Penuh region which are excluded from the certification projects. The former group is the study group and the latter group is the control group. Through this design, the effects of empowering inclusion projects are measured in terms of what it does to trust and whether this type of inclusion then actually leads to more empowerment and a stronger value chain.

Data collection

Data is gathered through a mixed method design. For measuring the current amount of trust, quantitative analysis is used in order to statistically compare the two sub-populations. Furthermore, taking into account the flexible nature of the concept trust because it is a complex, multidimensional construct that is hard to interpret (Simpson, 2007), data is gathered through semi-structured interviews. This is done on the independent variable trust of suppliers in Spicy Exports and vice versa. Also, the empowerment projects are evaluated and questions on how to achieve replantation are asked. The semi-structured interviews were of such design that there was room for the interviewee to give additional information outside the borders of the designed questions. All the data is gathered through observations and interviews (part of the interview was the quantitative questionnaire). For the observations I kept notes to prevent losing relevant information gathered outside the interviews. The questionnaire and the interviews are explained in depth below.

Questionnaire: measuring current amount of trust

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measure believes that the firm considers the welfare and interests of the partner. In order to find out the current amount of trust of the supplier in Spicy Exports, this measurement is used and adapted to fit the case study. Even though the design of the interview is ‘open’ in order to properly capture the different facets, the measurement of trust is done through closed questions with the idea to compare results between the two sample groups. The questions are measured on a likert scale from 1 = strongly disagree to 7 = strongly agree. Furthermore, the questions are randomly assigned to minimize any response bias. Furthermore, two question scales are reversed: question 2 and 7. The adapted instrument is shown in the appendix E. This instrument is translated into Indonesian by an employee of Spicy Exports to reduce the language bias. The Indonesian version is shown in Appendix F. In addition, as a control, this instrument is then translated back to English by my own translator in order to verify the translation and as a result, the inconsistencies in the translation were corrected to minimalize the bias further. The original plan was to get 10 results from the control group and 10 results from the target group. The results of the questionnaire can be found in Appendix B.

Interviews: how to reach the replantation and empowerment goal and building trust

Interview questions are made that measure how to create trust to create inclusion in the supply chain of Spicy Exports and how to create empowerment and replantation. In addition, for the interviewees in the Padang Aro region, a set of extra questions are developed that further investigate whether Spicy Exports is on the right track with their current empowerment projects and how to improve this. The questions are categorized into themes made on the basis of the gathered information on Spicy Exports and the literature review, which can be found in Appendix C. The interview can be found in Appendix D.

Indonesia is a low-trust society where there is low perceived interpersonal trust (jdsurvey, 2015). In order to get viable information, one needs to build up a relationship with the interviewees. If this is not taken into account, the cultural differences and the lack of trust will likely bias the results. Identifying with them and building their trust is done by not jumping to the important questions but to start off with general questions about themselves, how they feel who they are, and questions about their family and friends. The introduction questions are based on the research of Ghiassi (2011) and adapted to give insight into the basic needs, human capital, the environment the interviewee comes from and what they find important in life and work. During the fieldwork, some minor changes were made to the questions to fully cover the relevant topics that were to be gathered, e.g. question 3.4.3.

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required the collector not to be there. The anonymity of the interviewees throughout this research is preserved. Because of the need for referencing while keeping in line with confidentiality, all the interviews have been given a letter in a codified order. The letter for each interview can be found in Appendix I, which is in a separate file. The interviews are audio recorded. Most of the interviews were done in Indonesian. For each of these interviews, the translator and/or I summarized all relevant results on paper. This is because I do not speak Indonesian well and through this way the translator could translate the discussion through listening to it afterwards. Transcripting the data is necessary for their interpretation (Flick, 2009), Therefore, all the interviews can be found in Appendix I. Appendix I is in a separate file. Please note that in the first interview it became clear that transcripting everything from Indonesian to English was not possible due to time restrictions. Somewhere in the middle of the first interview, only a summary is given. For the interviews that were in English, a full transcription is made to minimize biases wherever possible. The audio will not be listened to, and the transcriptions/summaries will not be shown to, anyone except the researcher, the translator and the University professor without permission of the interviewee.

Codification

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Results: Confrontation with Reality

In this part of the paper, the empirical data gathered from the fieldwork in Indonesia is presented. The main findings are presented through observations and 21 interviews involving chief collectors, collectors, harvesters, workers, the local government in Sungai Penuh and staff from Spicy Exports. In line with grounded theory, the results have been made to an abstract level by categorizing them. The first screening of the data was done during the fieldwork to be able to hold a presentation for the management staff of Spicy Exports on the preliminary results. This preliminary categorization is used to further abstract the data using Atlas Ti. To start off with, a description of the situation is in place to better understand the condition of the poor actors involved and to understand the current supply chain strategy of Spicy Exports. Secondly, the results on the empowerment and replantation goal are presented that are necessary to answer research question 2 and 3. Thirdly, to be able to answer research question 4, the main findings on how to create trust are presented through explaining the main categories identified in abstracting the data. Lastly, the current amount of trust in the supply chain is presented on the basis of the questionnaire results.

Understanding the situation of actors involved in the supply chain of Spicy Exports

Current supply chain process

In order to fully understand the current supply chain of Spicy Exports, an attempt of a description is given. This description can vary in reality because roles and responsibilities sometimes overlap. An illustration of the actors interviewed and their hierarchical position can be found below in figure 5.

Figure 5: Current supply chain of Spicy Exports in Sumatra.

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Aro. This chief collector communicates with his own collectors who in turn will call their own (main) harvesters to harvest the cinnamon trees. These cinnamon trees can be owned by the (chief) collectors but also by unrelated landowners. In the latter case the collector will look for the landowner of the cinnamon trees and buy the cinnamon trees on that land to be harvested. The money to buy the trees comes from the collector itself when he is liquid enough, or when this is not the case, the chief collector will give the money to the collector. In the latter situation the collector is obligated to sell the cinnamon trees to that specific chief collector. This process is not always efficient due to liquidity problems. The collectors can only buy as much as the chief collector gives them. One collector says:

“Because my capital is limited, I can’t buy another land while I still process the trees that I have bought (from the money of the chief collector). So I have to wait until the first land is done, then I can continue to buy the other land” (Interview A). Cinnamon comes in different types; e.g. Km, Kf, Ka.

Each type is different in shape and quality. Quality depends on the moisture and the oil percentage. Higher quality means low moisture and high oil percentage. Spicy Exports transports the cinnamon to their factory and processes it (e.g. to powder) and exports it mainly to America.

The supply chain is a complex situation where many actors are involved, each having different tasks, interests and results of their work. The monetary gains of the harvester, collector and chief collector look like figure 6. When this paper was written, the exchange rate to the euro was around 15.000 Rupiah per 1 Euro.

Figure 6: Estimation of the monetary gains of the suppliers of cinnamon at Spicy Exports

Condition of the poor actors involved

In this part, it is about the poor actors involved because they are the ones that need to be empowered. They are the ones that chop, skin and package the cinnamon. During the interviews it became clear that harvesters and workers are very shy and humble when they are being interviewed. One has to build trust before they will be honest, this takes time and sincere involved.

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know their chief collector (Interview G) and say “They don’t even know we exit” (Interview G). Also, the chief collectors say they don’t know their harvesters. One of them was also not planning to get to know his harvesters: “it would take too much effort” (Interview D).

Most of the workers and harvesters only went to elementary school. Almost all of them have children which do not go to university or sometimes even to high school because they have no money to pay for it or because the children lack the motivation. Most of them cannot read and count and don’t use the internet or computer. Some have health problems, however they don’t have health insurance and they don’t know about it (Interview G, K, S).

The job of the harvesters is to chop down the cinnamon tree, skin the bark and sometimes also to dry the cinnamon. They can’t do it every day because there is not enough cinnamon available because the land owners don’t always sell their trees (Interview A). Harvesters get paid by the kg and how much kg they can earn each

day depends on their fitness, skills and motivation. On average, they harvest around 50-60 kg per day and then earn around Rp 1.000-1.300 p.kg, which is translated into +- Rp 50.000-80.000 per day. If they have to walk far because the trees are deep in the jungle without road access, they get Rp 1.700-2.000 p.kg. On average, the harvesters earn around Rp 300.000 and 500.000 per week. There are also harvesters that work from 6.30 until 24.00 and stay in the jungle (Interview L). These harvesters make more money because they harvest more: they can make Rp 1.000.000 per week (this can be done until the job is done e.g. 2 weeks, but they are then completely cut off from their families and the outside world). Harvesters do not have enough to provide in the daily need and paying for the college for children (Interview B, G, K, L). After asking how much money would be enough to get around they say that Rp 800.000 per week is necessary for their daily needs (Interview B, G, L). Now, they feel their pay is not fair for what they have to do. It is dangerous work; a harvester that talks about the harvester sitting next to him: “once get the tree falling down to his head, it’s bleeding and he passed

out at that time”, and he also says: “Sometimes we can chop off our own foot or something if we are not careful” (interview B).

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own land. They have their own lands (almost all the harvesters and workers have 1-2 hectare), but not everyone has enough money to buy seeds to cultivate that land. In another warehouse they make 200 Rp per kg; however, there is not enough work there. They asked for more pay, but their chief collector got angry (Interview P). They want more tolerance when they get sick 1 or 2 days e.g. still get paid or help with medicine (Interview P).

Current supply chain strategy of Spicy Exports

Spicy Exports’s demand is based on high quality cinnamon: “For cinnamon we don’t want large

quantity but best quality.” (Interview R). At least for cinnamon, their sourcing strategy is based on

risk spreading (interview R). They reduce the risk by having many suppliers. According to Spicy Exports this is to guarantee quantity, have price competition between the suppliers, and to solve the liquidity issue (Interview R). The latter needs explanation: It is about liquidity problems with paying the supplied cinnamon. There is a delay in the payments because Spicy Exports gets paid around 1 month post-delivery to their customer. So there is a 2 month gap in payment from supplier to customer of Spicy Exports because the transport from supplier to Spicy Exports, processing and the transport to the customer also takes at least 1 month (Interview R). Spicy Exports tries to reduce this gap by paying up front, instead of waiting for the payment from the customer, agreeing on a one month payment term with the suppliers. Spicy Exports has many products and is a growing company that has cash devoted in investments like a new building. It does not have enough cash to bridge the complete gap. They also have a strategy for sustainability which focuses on replantation and empowerment. One of the goals within these focused areas is to reinforce the relationship throughout the supply chain (FFL presentation Spicy Exports).

Empowerment & replantation goals

To help understand the complex situation Spicy Exports is in with their suppliers, I will give an explanation why and how they deal with social and environmental certifications as a sequel to the information given in the introduction section of this paper.

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this problem, Spicy Exports is involved in sustainability activities since recently. Spicy Exports has various sustainable and empowering activities:

Current initiatives of Spicy Exports

The Spicy Exports environmental awareness program (TEA) has the goal to make cinnamon an attractive crop for farmers and land owners, to ensure cinnamon production is fair, sustainable and socially responsible and to reinforce the relationship all along the supply chain. Furthermore they have their internal NFC standard and FFL certification (Spicy Exports NFC presentation, 2013). Currently, only the chief collector in Padang Aro is involved in these projects.

NFC stands for Nature Future and Culture certification. This includes standards from the philosophy of Spicy Exports, international standards and customers of Spicy Exports (NFC Handbook) to create quality assurance of the cinnamon production with the goal of sustainability. According to Spicy Exports, the requirements are the result of the collaboration processes between Spicy Exports, farmers and local authorities. The contents of the certification are control points for ‘Nature’ (i.e. biodiversity and ecosystem issues), ‘Future’ (i.e. relations stability and social sustainability of the harvesters and collectors, fair price, work conditions, training, replanting cinnamon trees) and ‘Culture’ (i.e. documentation, traceability, sustainable cultivation, supplier facilities, post-harvesting process and quality assurance) (Handbook NFC Spicy Exports).

FFL stands for Fair for Life certification. It includes practices to ensure fair trading and compliances with labor right issues (FFL presentation Spicy Exports). The compliances with labor right issues include: prohibition of child labor, non-discrimination, good working conditions and remuneration, health and safety aspects, aspects of best practice for smallholder groups (FFL presentation Spicy Exports). Lastly, fair trade practices are fair price and payment (above market price), a long term mutually beneficial trade relation and the use of a Fair-Trade Development Premium (10% of farm gate price, paid by the first buyer/consumer). The latter requires more elaboration. The money received from the development premium will be used for development, empowerment and sustainability purposes. The 5 objectives are:

1.) To empower the poor actors involved in cinnamon production

2.) To ensure the sustainability of cinnamon supply in the Kerinci region 3.) To ensure good working conditions for all the actors of cinnamon production 4.) To help with the development of local communities

5.) To reinforce relationship all along the supply chain

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harvester/workers (FFL presentation Spicy Exports). The first committee meeting was held before this research and the second meeting was held during my stay in Padang Aro.

Empowerment of the poor actors involved

Harvesters/workers are unhappy with the status quo. None of the harvesters are involved in a development program. They don’t get any training except how to differentiate the different types of cinnamon (Interview G, K). They do not know about any development programs like NFC, FFL and organics certifications (Interview B, G, K, L, P).

All of the interviewed harvesters/workers want to get more information, to increase their knowledge. Even though they don’t know Spicy Exports, they want to get involved in the development programs from Spicy Exports. One says that they would be very ‘grateful’ (Interview L). All the respondents agree that the program of NFC and FFL with its available premium (after trying to explain it when they don’t know it) is a good way to provide a better future for the poor actors involved. They say Spicy Exports is on the right track but they don’t want talk but proof (Interview A, C, J).

Currently, looking at the chief collector’s warehouse in Padang Aro involved in the FFL and NFC program. In terms of the implementation of the ‘control points’ of the NFC program and the FFL certification: there is information shared about how to handle cinnamon, no smoking in the warehouse, that the place should be clean and not to dry the cinnamon on the ground but rather on a plastic sheet (Interview F, P). Furthermore, during a visit from Spicy Exports, I observed that Spicy Exports is working on administrating everyone that works at the site.

The committee on how to spend the premium to empower the local actors involved and how to create replantation efforts

The second committee on how to spend the premium was held on 20 August 2015. A lot of people gathered, there were many ideas shared and there was a good atmosphere. The preliminary result of the committee meeting was to create a foundation that makes it possible for the actors involved to receive a loan. However, I observed that the

‘big players’ were in charge. They sat together and were the ones leading the conversation on how to spend the premium. There were few harvesters; they were sitting in the back. The harvesters are not there or are not open/honest. The main observed issues were:

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2.) Lack of time: the harvesters are working in the field or live too far away.

3.) Costs involved with transportation: there are costs involved with transportation to the meeting location, which the harvesters do not want or cannot pay.

4.) Their bosses are present: they are not open and honest during the meeting. Workers argue that:

“with the chief collector in the meeting, we cannot be as open as without him there. It would be awkward. We can lose our job” (Interview P).

Concerning question 3.4.3 from the interview (Appendix D) asked to the respondents on how to spend the premium to create empowerment for the poor actors involved. They were first asked for their own input and afterwards the list of options was given. The 15 harvesters and workers say that the top 3 best ways to spend the premium is:

1.) Free seeds: the poor actors involved will plant it on their own lands where it will act as saving for the future.

2.) Scholarship for their children: now most of the children cannot go to school because of a lack of money to pay the fee.

3.) Developing their own farming business (free seeds will help this)

Replantation of cinnamon

All the actors say it’s a problem that there is not enough cinnamon anymore, for economic purposes but also because it is part of the area. From Padang Aro until Kerinci, most (available) cinnamon is gone. Some suppliers are replanting cinnamon (Interview M, N, O, Q, S). One replanted 4 hectare (about 8000 trees) since 1998, but he also chopped parts of it already (Interview M). The harvesters and workers say that they want to replant cinnamon if they get free seeds (Interview J, L, N). They will do it on their own land, for saving purposes (J, P). The main harvesters and collectors are willing to facilitate, e.g. in saving the seeds and handing out the seeds to the harvesters (Interview D, J). Spicy Exports would like to create incentives to farmers by giving free seeds for cinnamon. One of the owners of Spicy Exports is skeptical about the shortage of cinnamon because everyone has been saying it for years but it is not reflected in the price (Interview T).

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agriculture department to get programs started on cinnamon. Furthermore, he wants to facilitate in giving land to Spicy Exports to make a nursery (Interview I).

Spicy Exports’s owner is not collaborating with the government because “they have different goals

and activities” (Interview T). He says that there are many problems with the farmers and that the

government needs to help them, however they don’t do this. Also, because the government ministers always change, they are not a solid partner to work with (Interview T).

Determinants of trust

The three most important categories identified from the data concerning how to create trust are: information sharing routines, social embeddedness and asset specificity. Also, a category of maintaining trust is found important because of the failed attempt to integrate the chief collector from interview E in Sungai Penuh into the sustainability programs of Spicy Exports.

Information sharing routines with the suppliers

The chief collectors in Sungai Penuh feel that Spicy Exports doesn’t communicate enough. They think Spicy Exports only cares about itself. One chief collector says: “they just sometimes only focus on

themselves, they don’t think how long we can make this cinnamon, how can we work, how can we buy from the harvesters. They just think, ok sir, I want this cinnamon now. But they don’t know how long it works, they do not know how we work, how we work and do everything in here…..Yeah, Spicy Exports just focuses on themselves. They don’t want to know how long it takes; they never ask us, never asking. How long does it take to process this, how long it takes to make this cinnamon, they never ask that. Alex: is this important to you? Interviewee: YA! ya” (Interview Q). The conversation with the chief

collectors is only about cinnamon (Interview O, Q, U). “…they must be more open with me. I think for

now, they are not to open with us….. maybe they have a problem in the company, they can come to us. But the payment is late sir, we have problem with other company with Europe or American. They can tell us, we can understand that. So maybe, I can lower the price because the, in the foreign country, the price is too low now. They can tell us. They never tell us something. They never build a relationship like that. So we don’t know what happened to Spicy Exports. If we know what happened to Spicy Exports, we can understand that…. we have problems, problems with communication, with relation. They never tell us why and when we ask why do you do like this, they never explain”

(Interview Q).

Important for the chief collectors is information about the price. Spicy Exports is not up to date with the prices. For example, when Padang is on 16.000, Spicy Exports is still on 15.000. “Padang is better

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the fluctuations of prices from Spicy Exports’s buyers. The chief collector of interview E feels that it’s a one way stream where Spicy Exports asks about the price of cinnamon, but they don’t share their price from their buyer.

In a discussion with the chief of purchasing in Spicy Exports on information sharing, he mentioned that he tried to be more open by buying more. During my presentation of the preliminary results, outside of the interviews, the owner of Spicy Exports says that they don’t share their price from the buyer because the suppliers would not understand it. He assumes that if they buy from the supplier for 1.5 euro, and communicating to the supplier that they get 4-5 euro for their product to their buyer, it will cause problems. He says that what the suppliers don’t understand is that, among others, Spicy Exports has costs involved with processing the cinnamon and that transportation costs are involved.

Asset specificity

Currently, asset specific investments are being made with the chief collector in Padang Aro. Spicy Exports is implementing the NFC standard and the FFL certification and have had two committee meetings on how to spend the premium. During the last meeting, the result was to set up a harvester group that makes it possible for the actors involved to get a loan. The structure of the project is as such that the success is dependent on both the chief collector and the involvement of Spicy Exports.

In the past, Spicy Exports also tried to implement the NFC standard and FFL certification with the chief collector of interview E. Next to Spicy Exports, also this chief collector has made asset specific investments in this situation. In relation to that he said: “I spend a lot of time and resources in it. One

of the conditions for the certification is traceability: from the farm to the harvester to the collector to me, to Spicy Exports. Even working with GPS where it comes from” (Interview E).

Social embeddedness

In Sungai Penuh, there is a lack of social embeddedness. The communication with the chief collectors there is impersonal and is transaction based. “The contact with Spicy Exports is just by phone. Once or

Trust, Spicy Exports and Local Economic Development