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Dispute resolution mechanisms in the Egyptian garment industry
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Economics Letters 99 (2008) 425 – 430 www.elsevier.com/locate/econbase
Dispute resolution mechanisms in the Egyptian garment industry Amirah El-Haddad ⁎ Department of Economics, Faculty of Economics and Political Science, Cairo University, Gamaa Street, Giza, Egypt Received 28 January 2007; received in revised form 21 August 2007; accepted 5 September 2007 Available online 14 September 2007
Abstract Egyptian data show that unilateralism dominates dispute resolution mechanisms, though with domestic clients bilateralism is equally important. Recourse to law and third parties is rare. Whether disputes are with suppliers or clients, domestic firms or foreign affects the choice of mechanism. © 2007 Elsevier B.V. All rights reserved. Keywords: Dispute resolution; Contract enforcement; Egypt; Garment industry; Institutions JEL classification: K0; L0; O1
1. Introduction
2. Dispute resolution mechanisms
Hendley and Murrell (2003) reported results of a survey on mechanisms for contract enforcement by Romanian firms. The literature identifies a wide range of such mechanisms: ‘While Williamson (2000: 599) emphasizes bilateral private ordering, North (1991: 100) stresses the importance of formal legalities. However, bilateralism and law are only two ends of a spectrum. There are also mechanisms that involve third parties but fall short of legal formalities. Greif (1997) highlights collectivist (third party) as well as individualistic (i.e. bilateral) informal enforcement; social networks are all important in the sociological literature (Granovetter, 1985; Uzzi, 1996). In transition countries, criminal groups are said to enforce agreements (Volkov, 1999)’ (Hendley and Murrell, 2003: 49). This paper presents findings from a similar survey conducted in Egypt, but with two important modifications. First, a category of ‘unilateral mechanisms’ is introduced which has not been recognized in the literature but turns out to be of great importance in Egypt. Second, it is shown that the choice of mechanism varies according to context.
Hendley and Murrell (henceforth H & M) (2003) show that bilateral arrangements are the most common means of enforcing contracts. However, their analysis ignores the possibility of unilateral actions on the part of the firm. Unilateral actions identified here are cutting relations with the offending firm, badmouthing and, in the case of a supplier, refusing to accept defective merchandise. None of these mechanisms directly resolves the dispute. Other studies have recognized the importance of badmouthing, that is attempting to damage the reputation of the offending firm, but have called this a third party device (e.g. Uzzi, 1996; Bernstein, 1992). Here third party mechanisms are restricted to those that include another party in attempting to resolve the specific dispute, which indeed needs an active third party role and usually an agreement from both parties to abide by the third party decision. By contrast, badmouthing is not an attempt to resolve the dispute by involving a third party, but a unilateral action by the firm to undermine the reputation of the offending firm. Similarly, cutting future relations with a supplier or client is a unilateral mechanism1 in that no other party is directly involved in dealing with the dispute, neither the other trading partner (as in bilateral
⁎ Tel.: +20 222668222, mobile: +20 101081888; fax: +20 235711020. E-mail address: [email protected]. 0165-1765/$ - see front matter © 2007 Elsevier B.V. All rights reserved. doi:10.1016/j.econlet.2007.09.007
1 Kranton (1996) calls it a self-enforcement mechanism in the sense that the threat of it may induce compliance.
426
Table 1 Dispute Resolution Mechanisms in the Egyptian Garment Industry (means of 260 responses) Domestic suppliers (Observation 223)
Foreign suppliers (Observation 37)
All suppliers
Client dispute resolution mechanism
Domestic clients (Observation 251)
Foreign clients (Observation 52)
All clients
Unilateral Cut future trade relations (1) Badmouth (2) Refuse to accept defective merchandise (3) Bilateral Impose fine or reduction in price (4) Return merchandise to supplier to rectify (5) Accept the merchandise (6) 3rd party Threat or use of violence (7) Use international dispute resolution mechanisms (8) Use of trade or industry association (9) Use of private association (10) Involve important, industry well-informed third party in dispute (11) Involve influential figure in local area (12) Involve religious figure (13) Legal Use legal system (14)
6.9
6.2
6.8
Unilateral Cut future trade relations (1) Badmouth (2)
6.9
6.7
6.8
Bilateral Patience (3)
7.9
3rd party Threat or use of violence (4) Use international dispute resolution mechanisms (5) Use of trade or industry association (6) Use of private association (7) Involve important, industry well-informed third party in dispute (8) Involve influential figure in local area (9) Involve religious figure (10) Legal Use legal system (11)
1.3
6.8 8.8 5.2 4.0
6 7.6 4.9 3.8
6.7 8.6 5.2 4
4.2
6.2
4.5
6.7
3.6
6.2
1 1.4
1.6 1.1 0.0 1.4
0.2 0.2
0.5
1.7
0.7
0.2 5.1
0.5 2.5
0.3 4.7
2.3
1.5
2.2
1.4
0.1 1.2
2.0
Standard errors are available from the author upon request.
1.2 1.9
1.2
7.1 6.3
6.4 7.9
7.0 6.7
7.6 6.4
7.6
1.1 1.4
0.2 0.0
2.0
7.0 6.7
1.8
0.6
1.2
0.1 0.0
0.0 1.3
0.1 0.2
0.3
0.8
0.4
0.3 4.7
0.3 1.2
0.3 4.1
2.4
0.3
2.0
1.1 4.0
0.2 2.5
4.0
1.0 3.7
2.5
3.7
A. El-Haddad / Economics Letters 99 (2008) 425–430
Supplier dispute resolution mechanism
A. El-Haddad / Economics Letters 99 (2008) 425–430
427
with responses from each respondent taking the full range from 0 to 10.4 The survey was conducted through face-to-face interviews from March–May, 2004 with 260 garment firms located in 9 Egyptian governorates containing 95% of garment firms. The respondent was the owner or a senior manager (which mostly coincide), i.e. someone close to the decision making process if not the decision maker him or herself. The choices provided in the questionnaire, summarized in Table 1 (which also presents the results), were identified through preliminary in-depth case studies of a sub-sample of firms. Fig. 1. Supplier Dispute Resolution Mechanisms.
3. Descriptive analysis
mechanisms) nor a third party (as in third party mechanisms) of any kind; and without resolving the dispute. Bilateral mechanisms on the other hand entail a joint role in resolving the dispute such as abiding by the imposition of a fine or rectifying the defective merchandise. The same applies to patience regarding clients; where the firm gives the trading partner the benefit of the doubt in response to excuses combined with continuous reminders concerning the money it owes. Legal mechanisms refer to how important the legal system is in resolving disputes. H & M also overlook the context for the dispute, which may vary in two ways. The first distinction is whether it is with a supplier or a client and if the other firm is domestic or foreign. Accordingly, respondents were asked how they handled disputes2 in the context of four different types of transactions (domestic/foreign supplier, domestic/foreign client), ranking the possible mechanisms by frequency of use and effectiveness on a scale of 0 to 10.3 Most respondents gave replies over the whole range from zero to ten. However, a few grouped their replies around the centre of the scale. Hence, the data were rescaled to ensure scale equivalence
The mechanisms employed vary according to both whether the dispute is with a supplier or a client, and if the other firm is domestic or foreign. The mean of the scaled responses are shown in Figs. 1 and 2. The figures clearly show the importance of unilateral mechanisms with respect to supplier disputes: badmouthing the supplier is ranked top (mean: 8.8, for domestic and 7.6 for foreign suppliers) among all unilateral mechanisms followed by termination of the relationship (mean 6.8, 6.0) (Table 1). These unilateral mechanisms are generally more important than bilateral options, and clearly more important than appealing to the legal system or third parties (violence, influential figure, religious body, associations). Reliance on unilateral mechanisms illustrates two points. First, the absence of avenues for resolving disputes other than taking the matter into one's own hands and; second, the importance of the firm's location along the vertical chain of production. If the firm is a downstream buyer, it has more power as opposed to being an upstream supplier who is owed money and therefore prefers to resort to patience (bilateral) especially when the Egyptian legal system is still not in a position to handle payment disputes efficiently. Therefore, going bilateral holds the first position—although not by a long way— regarding disputes with domestic clients (mean 7.9) followed by unilateral (6.9) , legal (4.0) then third party respectively (1.3). The importance of patience with debtors is consistent with McMillan and Woodruff (1999). Some differences along the supplier/client axis are the obvious ones where the choice is not available. In addition, legal means are more often used to enforce payment by customers (4.0) rather than in disputes with suppliers (2.0). This finding is consistent with the argument of Johnson et al. (2002) that courts do not have the technical expertise to arbitrate on compliance with quality standards. Context is also important on the domestic/foreign front. The reasons are sometimes intuitively clear: for example the finding that referring the dispute to an influential figure in a local area or an important well-informed third party is more common with domestic partners, as is, in the case of suppliers,
2 Whilst H&M inquire about mechanisms that create viable trade relations and minimize disputes mine is a narrower question that is interested in utilized mechanisms in the event that a dispute actually occurs, resulting in a different mix of mechanisms. 3 For exact wording please refer to the following website: http://webapp.icpsr. umich.edu/cocoon/ICPSR-STUDY/04270.xml.
4 H&M (2003) scaled by normalizing results by the sum of all responses from that respondent (multiplied by 100). This approach does not ensure scale equivalence. However, comparing the two approaches the Egyptian data showed that the choice of scaling method in fact made little difference to the results in this case.
Fig. 2. Client Dispute Resolution Mechanisms.
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Table 2 Cross Tabulation of Most Important Dispute Resolution Mechanisms: Domestic Suppliers Unilateral
Unilateral (1) (2) (3) Bilateral (4) (5) (6) 3rd party (11) (12) (13) Legal (14)
Bilateral
3rd party
Legal
Cut future Badmouth Refuse to Impose fine Return Accept the trade relations accept defective or reduction merchandise merchandise merchandise in price to supplier to rectify
Involve important industry wellinformed third party
Involve Involve Use legal influential religious system figure in figure local area
(1)
(6)
(11)
(12)
(13)
(14)
3 1 1 0 1 5 0 0 0 1
16 20 27 7 15 0 36 12 9 7
8 6 11 3 7 0 12 15 5 3
8 5 8 3 3 0 9 5 12 2
15 14 16 4 8 1 7 3 2 19
(2)
98 34 68 14 44 3 16 8 8 15
(3)
34 67 50 14 30 1 20 6 5 14
(4)
68 50 155 20 62 1 27 11 8 16
14 14 20 31 12 0 7 3 3 4
(5) 44 30 62 12 97 1 15 7 3 8
Table 3 Cross Tabulation of Most Important Dispute Resolution Mechanisms: Foreign Suppliers Unilateral
Bilateral
3rd party
Legal
Cut Badmouth Refuse to future accept trade defective relations merchandise
Impose fine or reduction in price
Return Accept the merchandise merchandise to supplier to rectify
Use international dispute resolution mechanism
Use trade Involve or industry important association industry wellinformed third party
Involve influential figure in local area
Use legal system
(1)
(2)
(3)
(4)
(5)
(6)
(8)
(9)
(11)
(12)
(14)
Unilateral (1) 12 (2) 3 (3) 6 Bilateral (4) 3 (5) 3 (6) 1 3rd party (8) 0 (9) 0 (11) 0 (12) 0 Legal (14) 0 Total 28
3 13 10 2 4 1 0 1 4 4 1 42
6 10 18 3 4 1 0 1 4 4 1 51
3 2 3 10 2 0 0 1 1 1 1 23
3 4 4 2 8 0 0 1 0 0 0 22
1 1 1 0 0 3 1 0 0 0 0 7
0 0 0 0 0 1 3 0 0 0 0 4
0 1 1 1 1 0 0 1 1 1 1 7
0 4 4 1 0 0 0 1 4 4 1 18
0 4 4 1 0 0 0 1 4 4 1 18
0 1 1 1 0 0 0 1 1 1 1 6
Mechanism numbering matches numbering in Table 1.
returning defective merchandise (transportation costs are lower). Other findings require deeper analysis, such as that imposing a fine or price reduction is more common for foreign suppliers (6.2 compared to 4.2). Possible explanations include: (1) an Egyptian firm would regard being asked to pay a fine as inappropriate “not becoming”; and (2) whilst foreign cultures (mostly Western and south Asian) accept taking responsibility for their mistakes Egyptians argue and blame conditions that went wrong. Thus, a domestic firm may engage in lengthy haggling over the fine, even if specified in the contract, reflecting a cultural attitude toward contracts. There are at least two factors ensuring contract enforcement and reduced rates of contract breach, resulting in a lesser reliance upon the legal system, when dealing with foreign firms (the average score for the use of the legal system for clients of foreign and domestic firms is 2.5 and 4 respectively; for suppliers these figures are 1.2 and 2): (1) more accurately specified contracts, and (2) the
existence of well-functioning legal institutions in developed countries, creating a credible threat against breach of contract for contracting firms.5 4. Mix of dispute resolution mechanisms Do firms rely on just one or two dispute resolution mechanisms, or do they tend to utilize several? Most firms ranked more than one mechanism as “very important” (i.e. a score of 10). So the next question is whether the options chosen by each firm can be grouped, e.g. does one firm tend to rely exclusively on unilateral mechanisms but another on the legal system?
5 In contrast, Bigsten et al. (2000) conclude that well functioning institutions in the case of Zimbabwe go hand in hand with contractual breach.
A. El-Haddad / Economics Letters 99 (2008) 425–430
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Table 4 Cross Tabulation of Most Important Dispute Resolution Mechanisms: Domestic Clients Unilateral
Unilateral Bilateral 3rd party
Legal Total
(1) (2) (3) (8) (9) (10) (14)
Bilateral
3rd party
Cut future trade relations
Badmouth
Patience
Involve important industry well-informed third party
Involve influential figure in local area
Involve religious Figure
Legal Use legal system
(1)
(2)
(3)
(8)
(9)
(10)
(11)
121 58 49 16 8 4 45 301
58 116 64 23 8 4 39 312
49 64 140 23 4 2 28 310
16 23 23 47 12 5 11 137
8 8 4 12 15 5 5 57
4 4 2 5 5 7 3 30
45 39 28 11 5 3 56 187
Mechanism numbering matches numbering in Table 1.
Table 5 Cross Tabulation of Most Important Dispute Resolution Mechanisms: Foreign Clients Unilateral
Unilateral Bilateral 3rd party Legal Total
(1) (2) (3) (5) (8) (11)
Bilateral
3rd party
Legal
Cut future trade relations
Badmouth
Patience
Use international dispute resolution mechanism
Involve important industry well-informed third party
Use legal system
(1)
(2)
(3)
(5)
(8)
(11)
29 14 6 1 0 6 56
14 24 10 1 0 3 52
6 10 23 0 0 2 41
1 1 0 2 0 0 4
0 0 0 0 1 0 1
6 3 2 0 0 6 17
Mechanism numbering matches numbering in Table 1.
This question was analysed by cross tabulating the number of firms ranking the various methods as very important, i.e. assigning them a score of 10. This analysis shows that firms rarely rely solely on legal means. For example, in the case of disputes with domestic suppliers, of the 19 firms saying legal means are very important, 16 (84%) also say that refusing to accept the merchandise is very important, 15 (79%) say about cutting future relations and 14 (74%) about badmouthing the supplier (Table 2). Similarly for disputes with domestic clients, 80% (45 out of 56) of firms who said legal options were very important also said they would cut future relations, and 70% said that they would badmouth the client (Table 4). Hence, even the few firms which are willing to use the legal system are reluctant to rely solely upon it. The analysis shows further that the majority of firms using bilateral mechanisms also resort to unilateral action: close to 2/3 (62 out of 97) of those imposing a fine or returning the merchandise for rectification also rank refusing to accept the merchandise as being an important dispute resolution mechanism (Table 2). Finally, firms utilizing unilateral mechanisms usually rely on other unilateral mechanisms (Tables 2–5).6 6
Since these tables present numbers of respondents ranking a mechanism as “very important” they show the importance of unilateral mechanisms more clearly than Table 1.
Thus in general, the importance of unilateral mechanisms carries across to most firms using these even if they rely on other means. The exception (i.e. those using it did not identify other methods as very important) is the use of international dispute resolution mechanisms in dealing with foreign suppliers, but this finding is based on just three observations. 5. Conclusion This paper has examined how disputes are dealt with in the Egyptian garment industry. There are three main results. First, there is an emphasis on unilateral mechanisms in dealing with business problems rather than resorting to bilateral mechanisms or mechanisms involving third parties or outsiders especially with respect to supplier disputes. The legal system is barely used, with the partial exception of disputes with domestic clients. Second, the importance of the various mechanisms depends on the context.7 The importance of methods varies if the dispute is with a supplier or client, and if the offending firm is foreign or domestic. Finally, producers rarely rely on a single mechanism, but are more likely to combine them. Where the legal system is 7 Context is also important in (Pyle, 2006) where the geographical location of the debtor affects the cost of debt recovery and in turn affects the scope of future business relationships.
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considered important, it is nonetheless nearly always combined with a unilateral mechanism. Indeed, given the dominance of unilateral mechanisms, firms using one unilateral mechanism are likely to also use another. This paper is mainly descriptive, and a further discussion of the definition and classification of mechanisms would be useful. Whilst the paper has demonstrated how the choice of mechanism is context specific, further research is required to understand the underlying factors affecting these choices. Acknowledgment The author thanks Peter Murrell and Howard White for comments on earlier versions of this paper, and the National Science Foundation for financial support for the survey. Any errors and omissions are my own responsibility. References Bernstein, L., 1992. Opting out of the legal system: extralegal contractual relations in the diamond industry. Journal of Legal Studies 21 (1), 115–157. Bigsten, Arne, Collier, Paul, Dercon, Stefan, Fafchamps, Marcel, Gauthier, Bernard, Gunning, Jan W., Oduro, Abena, Oostendorp, Remco, Patillo, Cathy, Soderbom, Mans, Teal, Francis, Zeufack, Albert, 2000. Contract
flexibility and dispute resolution in African manufacturing. Journal of Development Studies 36, 1–37. Granovetter, M., 1985. Economic actions and social structure: the problem of embeddedness. American Journal of Sociology 91 (3), 481–510. Greif, A., 1997. Contracting, enforcement, and efficiency: economics beyond the law. In: Bruno, M., Pleskovic, B. (Eds.), Annual World Bank Conference on Development Economics 1996. The World Bank, Washington, DC, pp. 239–265. Hendley, K., Murrell, P., 2003. Which mechanisms support the fulfillment of sales agreements? Asking decision-makers in firms. Economic Letters 78, 49–54. Johnson, S., McMillan, J., Woodruff, C., 2002. Courts and relational contracts. Journal of Law, Economics, and Organization 18, 221–277. Kranton, R., 1996. Reciprocal exchange: a self-sustaining system. American Economic Review 86 (4), 830–851. McMillan, J., Woodruff, C., 1999. Dispute prevention without courts in Vietnam. Journal of Law, Economics, and Organization 15 (3), 637–658. North, D., 1991. Institutions. The Journal of Economic Perspectives 5, 97–112. Pyle, W., 2006. Resolutions, recoveries and relationships: the evolution of payment disputes in central and eastern Europe. Journal of Comparative Economics 34, 317–337. Uzzi, B., 1996. The sources and consequences of embeddedness for the economic performance of organizations: the network effect. American Sociological Review 61 (4), 674–698. Volkov, V., 1999. Violent entrepreneurship in Russia. Europe–Asia Studies 51, 741–754. Williamson, O.E., 2000. The new institutional economics: taking stock, looking ahead. Journal of Economic Literature 38, 595–613, September.
Economics Letters 99 (2008) 425 – 430 www.elsevier.com/locate/econbase
Dispute resolution mechanisms in the Egyptian garment industry Amirah El-Haddad ⁎ Department of Economics, Faculty of Economics and Political Science, Cairo University, Gamaa Street, Giza, Egypt Received 28 January 2007; received in revised form 21 August 2007; accepted 5 September 2007 Available online 14 September 2007
Abstract Egyptian data show that unilateralism dominates dispute resolution mechanisms, though with domestic clients bilateralism is equally important. Recourse to law and third parties is rare. Whether disputes are with suppliers or clients, domestic firms or foreign affects the choice of mechanism. © 2007 Elsevier B.V. All rights reserved. Keywords: Dispute resolution; Contract enforcement; Egypt; Garment industry; Institutions JEL classification: K0; L0; O1
1. Introduction
2. Dispute resolution mechanisms
Hendley and Murrell (2003) reported results of a survey on mechanisms for contract enforcement by Romanian firms. The literature identifies a wide range of such mechanisms: ‘While Williamson (2000: 599) emphasizes bilateral private ordering, North (1991: 100) stresses the importance of formal legalities. However, bilateralism and law are only two ends of a spectrum. There are also mechanisms that involve third parties but fall short of legal formalities. Greif (1997) highlights collectivist (third party) as well as individualistic (i.e. bilateral) informal enforcement; social networks are all important in the sociological literature (Granovetter, 1985; Uzzi, 1996). In transition countries, criminal groups are said to enforce agreements (Volkov, 1999)’ (Hendley and Murrell, 2003: 49). This paper presents findings from a similar survey conducted in Egypt, but with two important modifications. First, a category of ‘unilateral mechanisms’ is introduced which has not been recognized in the literature but turns out to be of great importance in Egypt. Second, it is shown that the choice of mechanism varies according to context.
Hendley and Murrell (henceforth H & M) (2003) show that bilateral arrangements are the most common means of enforcing contracts. However, their analysis ignores the possibility of unilateral actions on the part of the firm. Unilateral actions identified here are cutting relations with the offending firm, badmouthing and, in the case of a supplier, refusing to accept defective merchandise. None of these mechanisms directly resolves the dispute. Other studies have recognized the importance of badmouthing, that is attempting to damage the reputation of the offending firm, but have called this a third party device (e.g. Uzzi, 1996; Bernstein, 1992). Here third party mechanisms are restricted to those that include another party in attempting to resolve the specific dispute, which indeed needs an active third party role and usually an agreement from both parties to abide by the third party decision. By contrast, badmouthing is not an attempt to resolve the dispute by involving a third party, but a unilateral action by the firm to undermine the reputation of the offending firm. Similarly, cutting future relations with a supplier or client is a unilateral mechanism1 in that no other party is directly involved in dealing with the dispute, neither the other trading partner (as in bilateral
⁎ Tel.: +20 222668222, mobile: +20 101081888; fax: +20 235711020. E-mail address: [email protected]. 0165-1765/$ - see front matter © 2007 Elsevier B.V. All rights reserved. doi:10.1016/j.econlet.2007.09.007
1 Kranton (1996) calls it a self-enforcement mechanism in the sense that the threat of it may induce compliance.
426
Table 1 Dispute Resolution Mechanisms in the Egyptian Garment Industry (means of 260 responses) Domestic suppliers (Observation 223)
Foreign suppliers (Observation 37)
All suppliers
Client dispute resolution mechanism
Domestic clients (Observation 251)
Foreign clients (Observation 52)
All clients
Unilateral Cut future trade relations (1) Badmouth (2) Refuse to accept defective merchandise (3) Bilateral Impose fine or reduction in price (4) Return merchandise to supplier to rectify (5) Accept the merchandise (6) 3rd party Threat or use of violence (7) Use international dispute resolution mechanisms (8) Use of trade or industry association (9) Use of private association (10) Involve important, industry well-informed third party in dispute (11) Involve influential figure in local area (12) Involve religious figure (13) Legal Use legal system (14)
6.9
6.2
6.8
Unilateral Cut future trade relations (1) Badmouth (2)
6.9
6.7
6.8
Bilateral Patience (3)
7.9
3rd party Threat or use of violence (4) Use international dispute resolution mechanisms (5) Use of trade or industry association (6) Use of private association (7) Involve important, industry well-informed third party in dispute (8) Involve influential figure in local area (9) Involve religious figure (10) Legal Use legal system (11)
1.3
6.8 8.8 5.2 4.0
6 7.6 4.9 3.8
6.7 8.6 5.2 4
4.2
6.2
4.5
6.7
3.6
6.2
1 1.4
1.6 1.1 0.0 1.4
0.2 0.2
0.5
1.7
0.7
0.2 5.1
0.5 2.5
0.3 4.7
2.3
1.5
2.2
1.4
0.1 1.2
2.0
Standard errors are available from the author upon request.
1.2 1.9
1.2
7.1 6.3
6.4 7.9
7.0 6.7
7.6 6.4
7.6
1.1 1.4
0.2 0.0
2.0
7.0 6.7
1.8
0.6
1.2
0.1 0.0
0.0 1.3
0.1 0.2
0.3
0.8
0.4
0.3 4.7
0.3 1.2
0.3 4.1
2.4
0.3
2.0
1.1 4.0
0.2 2.5
4.0
1.0 3.7
2.5
3.7
A. El-Haddad / Economics Letters 99 (2008) 425–430
Supplier dispute resolution mechanism
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427
with responses from each respondent taking the full range from 0 to 10.4 The survey was conducted through face-to-face interviews from March–May, 2004 with 260 garment firms located in 9 Egyptian governorates containing 95% of garment firms. The respondent was the owner or a senior manager (which mostly coincide), i.e. someone close to the decision making process if not the decision maker him or herself. The choices provided in the questionnaire, summarized in Table 1 (which also presents the results), were identified through preliminary in-depth case studies of a sub-sample of firms. Fig. 1. Supplier Dispute Resolution Mechanisms.
3. Descriptive analysis
mechanisms) nor a third party (as in third party mechanisms) of any kind; and without resolving the dispute. Bilateral mechanisms on the other hand entail a joint role in resolving the dispute such as abiding by the imposition of a fine or rectifying the defective merchandise. The same applies to patience regarding clients; where the firm gives the trading partner the benefit of the doubt in response to excuses combined with continuous reminders concerning the money it owes. Legal mechanisms refer to how important the legal system is in resolving disputes. H & M also overlook the context for the dispute, which may vary in two ways. The first distinction is whether it is with a supplier or a client and if the other firm is domestic or foreign. Accordingly, respondents were asked how they handled disputes2 in the context of four different types of transactions (domestic/foreign supplier, domestic/foreign client), ranking the possible mechanisms by frequency of use and effectiveness on a scale of 0 to 10.3 Most respondents gave replies over the whole range from zero to ten. However, a few grouped their replies around the centre of the scale. Hence, the data were rescaled to ensure scale equivalence
The mechanisms employed vary according to both whether the dispute is with a supplier or a client, and if the other firm is domestic or foreign. The mean of the scaled responses are shown in Figs. 1 and 2. The figures clearly show the importance of unilateral mechanisms with respect to supplier disputes: badmouthing the supplier is ranked top (mean: 8.8, for domestic and 7.6 for foreign suppliers) among all unilateral mechanisms followed by termination of the relationship (mean 6.8, 6.0) (Table 1). These unilateral mechanisms are generally more important than bilateral options, and clearly more important than appealing to the legal system or third parties (violence, influential figure, religious body, associations). Reliance on unilateral mechanisms illustrates two points. First, the absence of avenues for resolving disputes other than taking the matter into one's own hands and; second, the importance of the firm's location along the vertical chain of production. If the firm is a downstream buyer, it has more power as opposed to being an upstream supplier who is owed money and therefore prefers to resort to patience (bilateral) especially when the Egyptian legal system is still not in a position to handle payment disputes efficiently. Therefore, going bilateral holds the first position—although not by a long way— regarding disputes with domestic clients (mean 7.9) followed by unilateral (6.9) , legal (4.0) then third party respectively (1.3). The importance of patience with debtors is consistent with McMillan and Woodruff (1999). Some differences along the supplier/client axis are the obvious ones where the choice is not available. In addition, legal means are more often used to enforce payment by customers (4.0) rather than in disputes with suppliers (2.0). This finding is consistent with the argument of Johnson et al. (2002) that courts do not have the technical expertise to arbitrate on compliance with quality standards. Context is also important on the domestic/foreign front. The reasons are sometimes intuitively clear: for example the finding that referring the dispute to an influential figure in a local area or an important well-informed third party is more common with domestic partners, as is, in the case of suppliers,
2 Whilst H&M inquire about mechanisms that create viable trade relations and minimize disputes mine is a narrower question that is interested in utilized mechanisms in the event that a dispute actually occurs, resulting in a different mix of mechanisms. 3 For exact wording please refer to the following website: http://webapp.icpsr. umich.edu/cocoon/ICPSR-STUDY/04270.xml.
4 H&M (2003) scaled by normalizing results by the sum of all responses from that respondent (multiplied by 100). This approach does not ensure scale equivalence. However, comparing the two approaches the Egyptian data showed that the choice of scaling method in fact made little difference to the results in this case.
Fig. 2. Client Dispute Resolution Mechanisms.
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A. El-Haddad / Economics Letters 99 (2008) 425–430
Table 2 Cross Tabulation of Most Important Dispute Resolution Mechanisms: Domestic Suppliers Unilateral
Unilateral (1) (2) (3) Bilateral (4) (5) (6) 3rd party (11) (12) (13) Legal (14)
Bilateral
3rd party
Legal
Cut future Badmouth Refuse to Impose fine Return Accept the trade relations accept defective or reduction merchandise merchandise merchandise in price to supplier to rectify
Involve important industry wellinformed third party
Involve Involve Use legal influential religious system figure in figure local area
(1)
(6)
(11)
(12)
(13)
(14)
3 1 1 0 1 5 0 0 0 1
16 20 27 7 15 0 36 12 9 7
8 6 11 3 7 0 12 15 5 3
8 5 8 3 3 0 9 5 12 2
15 14 16 4 8 1 7 3 2 19
(2)
98 34 68 14 44 3 16 8 8 15
(3)
34 67 50 14 30 1 20 6 5 14
(4)
68 50 155 20 62 1 27 11 8 16
14 14 20 31 12 0 7 3 3 4
(5) 44 30 62 12 97 1 15 7 3 8
Table 3 Cross Tabulation of Most Important Dispute Resolution Mechanisms: Foreign Suppliers Unilateral
Bilateral
3rd party
Legal
Cut Badmouth Refuse to future accept trade defective relations merchandise
Impose fine or reduction in price
Return Accept the merchandise merchandise to supplier to rectify
Use international dispute resolution mechanism
Use trade Involve or industry important association industry wellinformed third party
Involve influential figure in local area
Use legal system
(1)
(2)
(3)
(4)
(5)
(6)
(8)
(9)
(11)
(12)
(14)
Unilateral (1) 12 (2) 3 (3) 6 Bilateral (4) 3 (5) 3 (6) 1 3rd party (8) 0 (9) 0 (11) 0 (12) 0 Legal (14) 0 Total 28
3 13 10 2 4 1 0 1 4 4 1 42
6 10 18 3 4 1 0 1 4 4 1 51
3 2 3 10 2 0 0 1 1 1 1 23
3 4 4 2 8 0 0 1 0 0 0 22
1 1 1 0 0 3 1 0 0 0 0 7
0 0 0 0 0 1 3 0 0 0 0 4
0 1 1 1 1 0 0 1 1 1 1 7
0 4 4 1 0 0 0 1 4 4 1 18
0 4 4 1 0 0 0 1 4 4 1 18
0 1 1 1 0 0 0 1 1 1 1 6
Mechanism numbering matches numbering in Table 1.
returning defective merchandise (transportation costs are lower). Other findings require deeper analysis, such as that imposing a fine or price reduction is more common for foreign suppliers (6.2 compared to 4.2). Possible explanations include: (1) an Egyptian firm would regard being asked to pay a fine as inappropriate “not becoming”; and (2) whilst foreign cultures (mostly Western and south Asian) accept taking responsibility for their mistakes Egyptians argue and blame conditions that went wrong. Thus, a domestic firm may engage in lengthy haggling over the fine, even if specified in the contract, reflecting a cultural attitude toward contracts. There are at least two factors ensuring contract enforcement and reduced rates of contract breach, resulting in a lesser reliance upon the legal system, when dealing with foreign firms (the average score for the use of the legal system for clients of foreign and domestic firms is 2.5 and 4 respectively; for suppliers these figures are 1.2 and 2): (1) more accurately specified contracts, and (2) the
existence of well-functioning legal institutions in developed countries, creating a credible threat against breach of contract for contracting firms.5 4. Mix of dispute resolution mechanisms Do firms rely on just one or two dispute resolution mechanisms, or do they tend to utilize several? Most firms ranked more than one mechanism as “very important” (i.e. a score of 10). So the next question is whether the options chosen by each firm can be grouped, e.g. does one firm tend to rely exclusively on unilateral mechanisms but another on the legal system?
5 In contrast, Bigsten et al. (2000) conclude that well functioning institutions in the case of Zimbabwe go hand in hand with contractual breach.
A. El-Haddad / Economics Letters 99 (2008) 425–430
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Table 4 Cross Tabulation of Most Important Dispute Resolution Mechanisms: Domestic Clients Unilateral
Unilateral Bilateral 3rd party
Legal Total
(1) (2) (3) (8) (9) (10) (14)
Bilateral
3rd party
Cut future trade relations
Badmouth
Patience
Involve important industry well-informed third party
Involve influential figure in local area
Involve religious Figure
Legal Use legal system
(1)
(2)
(3)
(8)
(9)
(10)
(11)
121 58 49 16 8 4 45 301
58 116 64 23 8 4 39 312
49 64 140 23 4 2 28 310
16 23 23 47 12 5 11 137
8 8 4 12 15 5 5 57
4 4 2 5 5 7 3 30
45 39 28 11 5 3 56 187
Mechanism numbering matches numbering in Table 1.
Table 5 Cross Tabulation of Most Important Dispute Resolution Mechanisms: Foreign Clients Unilateral
Unilateral Bilateral 3rd party Legal Total
(1) (2) (3) (5) (8) (11)
Bilateral
3rd party
Legal
Cut future trade relations
Badmouth
Patience
Use international dispute resolution mechanism
Involve important industry well-informed third party
Use legal system
(1)
(2)
(3)
(5)
(8)
(11)
29 14 6 1 0 6 56
14 24 10 1 0 3 52
6 10 23 0 0 2 41
1 1 0 2 0 0 4
0 0 0 0 1 0 1
6 3 2 0 0 6 17
Mechanism numbering matches numbering in Table 1.
This question was analysed by cross tabulating the number of firms ranking the various methods as very important, i.e. assigning them a score of 10. This analysis shows that firms rarely rely solely on legal means. For example, in the case of disputes with domestic suppliers, of the 19 firms saying legal means are very important, 16 (84%) also say that refusing to accept the merchandise is very important, 15 (79%) say about cutting future relations and 14 (74%) about badmouthing the supplier (Table 2). Similarly for disputes with domestic clients, 80% (45 out of 56) of firms who said legal options were very important also said they would cut future relations, and 70% said that they would badmouth the client (Table 4). Hence, even the few firms which are willing to use the legal system are reluctant to rely solely upon it. The analysis shows further that the majority of firms using bilateral mechanisms also resort to unilateral action: close to 2/3 (62 out of 97) of those imposing a fine or returning the merchandise for rectification also rank refusing to accept the merchandise as being an important dispute resolution mechanism (Table 2). Finally, firms utilizing unilateral mechanisms usually rely on other unilateral mechanisms (Tables 2–5).6 6
Since these tables present numbers of respondents ranking a mechanism as “very important” they show the importance of unilateral mechanisms more clearly than Table 1.
Thus in general, the importance of unilateral mechanisms carries across to most firms using these even if they rely on other means. The exception (i.e. those using it did not identify other methods as very important) is the use of international dispute resolution mechanisms in dealing with foreign suppliers, but this finding is based on just three observations. 5. Conclusion This paper has examined how disputes are dealt with in the Egyptian garment industry. There are three main results. First, there is an emphasis on unilateral mechanisms in dealing with business problems rather than resorting to bilateral mechanisms or mechanisms involving third parties or outsiders especially with respect to supplier disputes. The legal system is barely used, with the partial exception of disputes with domestic clients. Second, the importance of the various mechanisms depends on the context.7 The importance of methods varies if the dispute is with a supplier or client, and if the offending firm is foreign or domestic. Finally, producers rarely rely on a single mechanism, but are more likely to combine them. Where the legal system is 7 Context is also important in (Pyle, 2006) where the geographical location of the debtor affects the cost of debt recovery and in turn affects the scope of future business relationships.
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considered important, it is nonetheless nearly always combined with a unilateral mechanism. Indeed, given the dominance of unilateral mechanisms, firms using one unilateral mechanism are likely to also use another. This paper is mainly descriptive, and a further discussion of the definition and classification of mechanisms would be useful. Whilst the paper has demonstrated how the choice of mechanism is context specific, further research is required to understand the underlying factors affecting these choices. Acknowledgment The author thanks Peter Murrell and Howard White for comments on earlier versions of this paper, and the National Science Foundation for financial support for the survey. Any errors and omissions are my own responsibility. References Bernstein, L., 1992. Opting out of the legal system: extralegal contractual relations in the diamond industry. Journal of Legal Studies 21 (1), 115–157. Bigsten, Arne, Collier, Paul, Dercon, Stefan, Fafchamps, Marcel, Gauthier, Bernard, Gunning, Jan W., Oduro, Abena, Oostendorp, Remco, Patillo, Cathy, Soderbom, Mans, Teal, Francis, Zeufack, Albert, 2000. Contract
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