Quality and Inclusion of Producers in Value Chains: A Theoretical Note


  • The authors thank Rick Barichello, Julio Berdegué, Michael Carter, Hamish Gow, Jikun Huang, Miet Maertens, Jill McCluskey, Bart Minten, Tom Reardon, Ian Sheldon, Anneleen Vandeplas, Frank van Tongeren, Jim Vercammen and seminar participants in Beijing, Long Beach and Orlando for useful comments. This research was financed by Research Foundation—Flanders (FWO), K.U. Leuven Research Fund (Methusalem), K.U. Leuven–China Scholarship Council and the National Natural Science Foundation of China (Project 71103031).

Vandemoortele (corresponding author), Swinnen: LICOS Centre for Institutions and Economic Development, University of Leuven (K.U. Leuven), Waaistraat 6 box 3511, 3000 Leuven, Belgium. Tel: +32-16-326598; Fax: +32-16-326599; E-mails: thijs.vandemoortele@econ.kuleuven.be, jo.swinnen@econ.kuleuven.be. Rozelle: Freeman Spogli Institute, Stanford University, Encina Hall East E407, Stanford, CA 94305-6055, USA. Tel: +1-650-724-6402; Fax: +1-650-723-6530; E-mail: rozelle@stanford.edu. Xiang: School of Business Administration, Northeastern University, No. 11 Lane 3 WenHua Road, HePing District, Shenyang 110004, China. Tel: +86-24-83671629; Fax: +86-24-23891569; E-mail: txiang@mail.neu.edu.cn.


This paper develops a formal theory of the endogenous process of the introduction of high quality production in developing countries. Initial differences in income and capital and transaction costs are shown to affect the emergence of and the size of the high quality economy. Initial differences in the production structure and the nature of transaction costs—as well as the possibility of contracting between producers and processors—are shown to determine which producers are included in the high quality economy, and which not.