How Kenyan flower industry thrives in absence of contracts

Operating a business in a developing country is not always for the faint of heart. But new research suggests that long-term relationships between buyers and sellers can go a long way toward overcoming obstacles like political instability and weak governing institutions.

To build his case, Ameet Morjaria, an assistant professor of managerial economics and decision sciences at the Kellogg School, turned to the rose trade in Kenya—a thriving industry that he says has “managed to set up a supply line to the developed world. And they’ve achieved this in a relatively short period.”

Just how healthy is the rose industry in Kenya? Today, an estimated 500,000 Kenyans on over 100 flower farms depend on the trade for their livelihood. The nation’s flower exports have grown from about 11,000 tons in 1988 to more than 136,000 tons in 2014, making Kenya the third-largest exporter of cut flowers in the world. Many of these flowers head to the European Union, where they account for about a third of all flower sales.

The rose trade’s rapid growth has been driven by Kenya’s sunny climate, low labor costs, and strong air-transportation links to Europe. And this has all been done in the absence of formal contracts. Since flowers are highly fragile and perishable, contracts would be unenforceable, with buyers and sellers making claims that no court could verify.

So instead, buyers and sellers rely on longstanding relationships.

Click here to read the complete article at insight.kellogg.northwestern.edu.