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 were participating in a hybrid seed contract with Pioneer Hybrid International Inc, an American MNC that has been contracting in the area since 1986. The objectives of the study were to determine whether the contract improved the welfare of those who participated and, if participation did improve welfare, to evaluate why this contract, in contrast to many other farm contracts in developing countries, is successful. A transaction cost framework was used to specify a framework for probit analysis of contract participation and regression analysis used to measure the contribution made by contract participation to gross margins. The empirical 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 improved returns to farm capital and hence was likely to be welfare improving for contractors. The success of the contract over many years was attributed to the nature of the contracting process which was between Pioneer and grower groups and not at the individual smallholder level