Thesis

学校代码： 10246

学号：12210680364

硕士学位论文

建立可追溯制度:中国食品安全的经济学分析

LEVERAGING TRACEABILITY: AN ECONOMIC PERSPECTIVE ON FOOD

SAFETY IN CHINA

院系：经济学院

专业：应用经济学（中国经济）

姓名：葛安竹

指导教师：程大中

完成日期： 2014年 4月 25日

UNIVERSITY CODE: 10246

STUDENT ID: 12210680364

LEVERAGING TRACEABILITY: AN ECONOMIC PERSPECTIVE

ON FOOD SAFETY IN CHINA

MA THESIS

Presented in Partial Fulfillment of the

Requirement for the Master Degree by the

Graduate School of Fudan University

By

Greene, Andrew

Fudan University

2014

Defense Date: April 25, 2014 EMA Chinese Economy Program

指导小组名单

程大中教授

沈国兵教授

黄亚钧教授

陆寒寅副教授

尹晨副教授

杜莉副教授

i

Contents

摘要 ........................................................................................................................................... 1

Abstract ..................................................................................................................................... 2

1. Introduction and Background ............................................................................................ 3

1.1 Research objectives ......................................................................................................... 5

1.2 Research contribution ...................................................................................................... 5

1.3 Structure of the thesis ...................................................................................................... 6

2. Methodology ......................................................................................................................... 7

2.1 Identifying the scientific field ......................................................................................... 7

2.2 Identifying the research method ...................................................................................... 8

2.2.1 Cost benefit analysis ................................................................................................. 8

2.2.2 Research sources .................................................................................................... 11

3. What is traceability? ............................................................................................................ 13

3.1 Defining traceability ...................................................................................................... 13

3.2 Key concepts ................................................................................................................. 14

3.2.1 Forward and backwards traceability ....................................................................... 14

3.2.2 Breadth, Depth and Precision ................................................................................. 15

3.2.3 Instruments for traceability ..................................................................................... 16

4. Governance structures for FTSs .......................................................................................... 18

4.1 Identifying mandatory and voluntary FTSs ................................................................... 18

4.2 Comparing mandatory and voluntary FTSs................................................................... 19

4.3 Mandatory and voluntary FTSs in China ...................................................................... 22

5. The benefits of voluntary FTSs ....................................................................................... 26

5.1 Identifying the benefit categories .................................................................................. 26

5.2 The benefits for market differentiation .......................................................................... 29

5.2.1 A China perspective ............................................................................................... 33

5.3 The benefits for supply chain management ................................................................... 35


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5.4 The benefits for food safety risk management .............................................................. 40


6. Costs of voluntary FTSs ...................................................................................................... 47

6.1 Identifying the cost categories ....................................................................................... 47


6.2 Transaction costs of FTSs ............................................................................................. 51


7. Summary and Conclusion ................................................................................................ 56

7.1 Summary of Key Findings ............................................................................................. 56

7.2 Conclusion ..................................................................................................................... 57

7.3 Limitations and Future Research ................................................................................... 58

iii

List of Tables and Figures

Table 1: Studies outlining the general benefits of FTSs ...................................... 27

Table 2: Key benefit components ........................................................................ 29

Table 3: Research on the benefits for market differentiation ............................... 31

Table 4: Research on the benefits for market differentiation in China ................ 35

Table 5: Research on the benefits for supply chain management ........................ 37

Table 6: Research on the benefits for supply chain management in China ......... 40

Table 7: Research on the benefits for food safety risk management ................... 43

Table 8: Research on the benefits for food safety risk management in China ..... 46

Table 9: Research on the general costs of voluntary FTSs .................................. 48

Table 10: Research on the costs of voluntary FTSs in China .............................. 50

Table 11: Why are the costs greater in China? ..................................................... 50

Figure 1: Applicable research fields ...................................................................... 7

Figure 2: FTSs must trace backwards and forwards ............................................ 14

Figure 3: The depth of a FTS depends on the attributes of interest ..................... 16

1

摘要

为了应对众多的食品安全事件，近年来，许多研究者质疑如何以最佳方式确保有

效的食品安全体系。基于这个原因，食品溯源的重要性已经被频繁强调。食品追

溯系统把产品流通和产品属性的信息记录在整个供应链中.这些数据可以用于有

效地降低食品安全的风险,缩小范围.虽然完整的食品追溯系统是完全能够实现

的,但是决定其实施和发展的关键问题在于,它是否可以给私营企业和公共决策

者带去经济效益. 本研究探讨了这些经济刺激措施，并从一家私营企业的角度

来确认它的成本和效益.本论文通过对文献的全面检索做到了这一点。主要的研

究结果表明，可追踪性，不仅能带来食品安全控制的好处，而且也可以扩展到多

种业务功能，如供应链管理，市场差异化的改进。对更广泛的各种效益的认可，

可能会刺激更多的民营企业采用可追溯系统，以获得竞争优势。它也能给公众带

去一个更高的食品安全标准,和公共福利,这对决策者来说是一件非常值得考虑

的事情.该研究主要集中于中国市场.中国市场是一个既充满机遇又充满挑战的

领域.

关键词: 食物可追溯制度, 食物安全经济, 中国食物工业, 成本效益分析

2

Abstract

In response to numerous food safety incidents in recent years, many researchers have

questioned how best to ensure efficient food safety systems. Arising from this, the

importance of food traceability has been frequently highlighted. Food traceability

systems record information on product flow and product attributes throughout a

supply chain; this data can be effectively used to mitigate the risk and scope of food

safety incidents. While full traceability is certainly possible, a key issue driving its

implementation and development is the economic viability it offers for private firms

and public policy makers. This research explores these economic incentives and

identifies the costs and benefits from a private firm perspective. It does this via a

comprehensive review of the literature. The key findings indicate that the benefits of

traceability not only include food safety control but also extend to the improvement of

a variety of business functions such as supply chain management and market

differentiation. The recognition of a broader variety of benefits may incentivise more

private firms to adopt traceability systems to gain competitive advantage. It may also

lead to a higher collective standard of food safety and public welfare which is of

important consideration to policy makers. The research focuses on the Chinese market

which offers both considerable opportunities and challenges in this field.

Key words: food traceability systems, food safety economics, China food industry,

cost-benefit analysis

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1. Introduction and Background

In recent years, globalisation trends have transformed the global food supply chain.

Food markets have become more integrated and trade more liberalised. This

combined with changing consumer preferences has increased the length and

complexity of the food supply chain. Consumer demand for more specialised and

convenient food has risen. For example, modern food products such as a frozen pizza

or a pre-made fruit salad may include ingredient inputs from many different regions

creating multiple layers in the supply chain. Such trends have created a supply chain

that is characterised by a higher division of labour and greater outsourced production.

These developments in the food industry have brought with it new market

opportunities for producers and greater choice among consumers. However, following

these trends, there has also emerged new challenges for global supply chains, and

particularly more pressure on food safety control.

Owing to such pressures, we have seen how food safety problems can quickly develop.

Such incidents in recent years have greatly damaged global markets and harmed the

health of consumers. This was highlighted clearly in the late 1990s during the Bovine

Spongiform Encephalopathy (BSE) scandal, and more lately with the contaminated

milk scandal in China in 2008, the pork dioxin scare in Ireland in 2008, the e-coli

epidemic in Germany in 2011, and most recently with the horse meat contaminated

burger incidents in Europe in 2013. The complexity in the supply chain has been the

underlying cause in many of these food accidents and has often amplified the impact.

Often, nobody knows who the responsible parties are, where the source of the problem

is or how many products need to be recalled. Many such incidents have brought about a

panic among consumers which may lead to wider social and political consequences.

Turning to China, we see the issue of food safety is very pertinent. As Liu, Hobbs and

4

Kerr (2012) put it, “the Chinese food safety system has struggled to keep pace with the

rapid growth and radically changing structure of the economy”. Burgeoning trends such

as urbanization and rapidly changing consumer preferences has put great pressure on

the food industry. Moreover the food supply chain in China is highly fragmented with

hundreds of thousands of small producers each vying for a piece of the market (Zhang,

Bai and Wahl, 2012). The margins in the food industry are generally very thin and

consumers highly price sensitive. Moreover, food safety control mechanisms are

largely absent and liability law is weak. This has incentivised some producers to take

risks or cut corners on quality standards. However the tide is turning; consumers are

becoming more aware of safety issues (largely through media circulation) and the

Chinese government is promoting more food control and monitoring systems.

One of the most important components in ensuring food safety is the implementation of

a food traceability system (FTS) (Ding and Gao, 2011). Traceability has become an

essential index for food safety (Wang and Li, 2008). Since the 1990’s, traceability has

played a key role in governing food safety in other countries, particularly in Europe in

response to the BSE scandal; recently the Chinese government has also started to

acknowledge the importance of traceability in managing food safety. For example, in

the lead up to the Beijing Olympics, FTSs were used as the key instrument to ensure

food safety (Zheng et al. 2012). Private firms are also beginning to use FTSs to improve

their safety standards, and now we are seeing more Chinese food firms marketing safety

attributes that are backed up by FTSs. Overall, there is a growing trend towards safer

food standards that is driven by government, consumers and private firms. This paper

first discusses the driving governance structures behind FTSs; that is, the private and

public sectors implementing voluntary and mandatory FTSs. The main body of this

paper then explores the key economic incentives for private firms implementing FTSs.

Overall, the aims of this research paper can be broken down into 4 research objectives.

5

1.1 Research objectives

1. What are the definition and key concepts of FTSs?

2. What are the driving governance structures for FTSs? What is the most suitable

system for China?

3. What are the general benefits for private firms implementing a FTS? How do they

differ in China?

4. What are the general costs for firms implementing a FTS? How do they differ in

China?

1.2 Research contribution

This research firstly explores the most appropriate governance structure for the

implementation of FTSs. Previous research in this area exists, however is not abundant

in the context of China. In this regard, this paper may act as a useful reference to those

researching policy approaches to promote food safety in China.

Growing awareness among Chinese consumers towards food safety has prompted some

private firms to consider traceability as a way to improve safety standards and gain

competitive advantage. An important part of this decision making process is the

identification of the benefits over costs. This research shows that FTSs can provide

multiple benefits to a firm; that is, benefits that not only relate the protection of food

safety, but also include the improvement of a variety of business functions. The paper

identifies these benefits within the context of China. As highlighted in the review of

the literature, there is low awareness of this total number of benefits in the Chinese

market. The paper also outlines the costs of FTSs within the Chinese market. To this

end, the research may provide a useful reference to a private firm considering the

implementation of FTSs in China.

6

1.3 Structure of the thesis

Chapter 2 will explain the research methodology

Chapter 3 will define traceability and explain some of its key concepts

Chapter 4 explores the concept of mandatory and voluntary FTSs. It then looks to

compare the two systems; first from a general perspective and then from the context of

China.

Chapter 5 discusses and identifies the key benefits arising from voluntary FTSs. It then

analyses the benefits from the context of China.

Chapter 6 discusses and identifies the key costs arising from voluntary FTSs. It then

analyses the costs from the context of China.

Chapter 7 provides a summary of the key findings, draws a conclusion, and suggests

further research areas

7

2. Methodology

2.1 Identifying the scientific field

Figure 1: Applicable research fields (Karlsen et al. 2012)

Traceability

studies

Social

science

Natural

Science

Supply chain

management

Economics

Marketing

research

Quality

Management

Engineering

Costs and benefits of using

traceability

Consumer behaviour

Industrial buying behaviour

Inventory management

Risk management

Supply side management

Product differentiation

Distribution systems

Decision support systems

Market orientated certification

Quality control

Quality improvement

Quality assurance system

Quality management systems

Implementation of traceability

Traceability systems

Information technology

Electronic identification and data

recording

Bar codes and RFID technology

8

As indicated in Figure 1 the traceability studies have been undertaken throughout a

variety of academic fields (Karlsen et al, 2012). As Moe (1998), Ritson et al. (1998),

and Golan (2004) discuss, essentially, the establishment of a traceability system and

processing of traceable information are largely related to economic issues. Economists

play multiple roles in advising governments and key industry decision makers on food

safety. Most commonly, economists are called on to assess the costs and benefits of

proposed policies (Hoffman 2010). Karlsen et. al (2011) show that motivation is a

critical factor for implementing traceability, and that motivation is closely linked to the

identification of benefits and costs associated with traceability. Sparling and Sterling

(2004) stress that from a technical perspective full traceability is achievable, however

from an economics perspective “traceability must offer an overall net benefit which

exceeds the implementation and ongoing costs through investments in traceability

systems”. Indeed, in the field of economics, several cost-benefits analyses using

traceability in the food industry have been carried out (Disney et al., 2001, Sparling et

al., 2006; Pouliot, 2008). This paper also aims to approach the issue from an economics

perspective. In order to do so, it will identify and discuss the key costs and benefits.

Some of the costs and benefits pertain to other academic disciplines, such as marketing,

consumer behaviour and supply chain management.

2.2 Identifying the research method

2.2.1 Cost benefit analysis

As is evident in the name, a cost-benefit analysis identifies, quantifies, and adds all the

positive factors. Then it identifies, quantifies, and subtracts all the negatives. The

difference between the two indicates whether the planned action is advisable (Virender,

2010). As companies increasingly seek to cut costs and improve productivity,

9

cost-benefit analyses have become a valuable tool for evaluating a wide range of

business opportunities, such as major purchases, organizational changes, and

expansions (www.inc.com). Cost-benefit analysis findings can justify and give

credence to these kinds of important decisions made by managers. Most cost-benefit

analyses compare the total capital investment against the total projected return, of

which the findings are quantified in monetary units. A number of techniques can be

employed to evaluate different aspects of a new project proposal; for example, the

payback period, the rate of return, the net present value etc.

However, in its most basic form, two approaches for cost-benefit analysis are

commonly adopted: the ratio approach and the net benefit approach. The ratio approach

indicates the amount of benefits that can be realised per unit expenditure on a new

project proposal vs. a comparator. In the ratio approach, a proposal is cost beneficial vs.

a comparator if the ratio of the change in costs to the change in benefits is less than one.

The net benefits approach indicates the total amount of money saved or lost due to the

use of a proposal vs. a comparator. In the net benefits formulation, a proposal is

cost-beneficial vs. a comparator if the net change in benefits exceeds the net change in

costs.

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Evaluating future costs and benefits can involve a large amount of subjectivity and

complexity. For example, discounts must be made for the length of time involved in the

new project. Costs and benefits that occur in the future usually have less present value

than costs and benefits realised today. Discounting reflects the time preference for

benefits earlier rather than later; it also reflects the opportunity costs of capital, for

example, returns on investment that could have been gained if resources had been

invested elsewhere. Thus, costs and benefits should be discounted relative to their

present value.

Moreover, often the costs and benefits are both direct and indirect. Direct costs and

benefits refer to easily quantifiable monetary units, for example product price premium.

On the other hand, indirect costs and benefits refer to intangible goods, and are much

more difficult to measure, for example, consumer trust. Sometimes, indirect costs and

benefits are calculated in models using monetary units; however such models are based

on more tentative estimates.

11

In regard to the topic of this paper, the costs and benefits relate to the implementation of

a FTS. It is well documented in the literature on FTSs that the costs and benefits are

difficult calculate. This is because many of the relevant costs and benefits are indirect

(Van Ravenswaay, 1995; Jensen and Unnevehr, 1999; Valeeva, Meuwissen and Huirne,

2004,). Assigning a monetary value to attributes such as increased nutrition, or better

consumer confidence is difficult to measure. This problem is reflected in the literature

as monetized data of the marginal private costs and benefits and their distribution are

missing in the literature, both at the level of the single chain participant and for the

chain as a whole (Valeeva, Meuwissen and Huirne, 2004). Moreover, as the food

industry includes a large variety of industries and processes, it is almost impossible to

find data that would represent such a variety of samples.

For this reason, this paper will identify the cost and benefits but will not venture to

quantify them. Direct costs and benefits involved as well as monetised indirect costs

and benefits (i.e “consumer willingness to pay”) where relevant are displayed, but only

serve to develop a qualitative conclusion. As such, this paper does not strictly employ a

cost-benefit analysis. However one of the most important parts of a cost-benefit

analysis is the clear identification of the relevant costs and benefits, to this end this

paper serves as a useful preparation for a cost-benefit analysis. It identifies and

discusses the costs and benefits which can be useful for managers or researchers

undertaking a cost-benefit analysis.

2.2.2 Research sources

The research was undertaken by means of a review of the literature. Each section will

display the key articles that have been referenced in drawing a conclusion. In this

regard, further researchers can conveniently identify the source of information

12

The literature review was carried out primarily by use of the databases: EBSCO

Business Source Premier, Elsevier Science Direct Journals, Emerald Journals, IEEE

Xplore Digital Library, Wiley Online Journals, Google Scholar (Jounal of Agribusiness,

AgEcon research in agriculture and applied economics).

A total of 89 articles were referenced. The following combinations of terms were used

in the search for literature: ‘food safety economics’ ‘traceability food’, ‘traceability

definition’, ‘economics of food traceability’, ‘food traceability and the private firm’,

‘food traceability and public policy’, ‘benefits of food traceability’, ‘costs of food

traceability’.

13

3. What is traceability?

3.1 Defining traceability

Under the “European General Food Law” (EGFL, Regulation (EC) No 178/2002)

(2002), traceability is defined as “the ability to trace and follow a food, feed, food‐

producing animal or substance through all stages of production and distribution”.

Other organisations such as the World Trade Organization (WTO) and International

Organization for Standardization (ISO) are also active institutions in providing

definitions and guidelines. Within the academic literature there are many other varying

definitions. Opara and Mazaud (2001) present traceability as: “...the collection,

documentation, maintenance and application of information related to all processes in

the supply chain in a manner that provides a guarantee to the consumer on the origin

and life history of a product”. Moreover, Golan et.al (2004) defines it as: “traceability

systems are record-keeping systems designed to track the flow of product or product

attributes throughout the production process or supply chain”.

Most traceability definitions differ depending on the industry, stage in the supply chain

and applicable legislation etc. According to Golan et al. (2004) the definition of

traceability is necessarily broad because the food industry is complex due to the variety

of food products available for consumers and to the range of inputs and ingredients used.

As a result, firms can customize the most appropriate approach (Folinas et al. 2006).

Traceability is also strongly fundamental in other food control systems. For example,

Hazard Analysis and Critical Control Point (HACCP) is a quality control management

system that can identify and prevent potential hazards in the food production process

Each company’s HACCP system must be able to provide data to the next company in

the food chain. HACCP systems are being adopted worldwide under the

14

recommendation of the Codex Alimentarius Committee of the United Nations and have

already been mandated in many countries.

Perhaps more importantly is how consumers perceive or interpret traceability. As will

be discussed further on in the paper in more detail, studies indicate that consumers

relate to traceability in terms of its benefits to health, safety, quality and control (Van

Rijswijk et al., 2008; Giraud and Halawany, 2006).

3.2 Key concepts

3.2.1 Forward and backwards traceability

Figure 2: FTSs must trace backwards and forwards (Can-Trace. 2007)

According to Wynne et al. (2007) two kinds of traceability are important for product

recalls. Forward traceability relates to the tracing of products that may contain

ingredients from a particular supplier through the production process and the

15

distribution network. For example, in January 2009, the Kellogg company issued an

industry-wide product recall on many of its products after one of their suppliers

warned that the peanuts they supplied were potentially contaminated with salmonella.

Backward traceability is concerned with the ability to trace the supplier and the

production process. For example, in July 2009, a number of passengers on Virgin

flights became ill after eating chicken contaminated with bacteria. The source of the

contamination was eventually traced back to a factory in Australia. Figure 2 above

illustrates this concept.

3.2.2 Breadth, Depth and Precision

According to Golan et. al. (2004) the amount of data collected depends on the desired

breadth, depth and precision of information. A private firm must decide how much or

how little of this information to record and use. Public policy must decide on the

minimum extent of this information is optimally beneficial for society.

Breadth describes how much or how little information a traceability system can record.

For example, bananas may have been grown using any number of pesticides or

fertilizers, be grown on a huge industrial farm or just a small family owned business, be

transported in containers that are hygienic or pest-infested, picked by underage workers

under harsh conditions or treated well. These are just some of the information that a

traceability system may record. In reality, only a handful of these attributes may need to

be recorded.

Depth refers to how far back or how far forward in the supply chain does the

traceability system track. Most companies have one-up, one-back traceability, usually

including important information regarding their immediate suppliers and buyers. For

example, information on certified organic bananas relate to the crop maintenance from

the seed stage, however a traceability system for fair trade bananas will only extend to

16

information on price and terms of trade between coffee growers and processors.

Precision is the degree of accuracy with which the traceability system can identify a

particular food product’s movement or characteristics. A precise traceability system

may trace a single banana to its farm with high assurance, while a less precise system

would only trace a crate of bananas to two or three orchards with lower assurance. High

precision can be very costly, however may lead to a lower product error rate and easier

product recall. As shown in graph 3 below, the attributes desired will determine the

degree of precision required.

Figure 3: The depth of a FTS depends on the attributes of interest (Golan et. al, 2004)

3.2.3 Instruments for traceability

In many lesser developed countries, traceability is recorded using a paper-based system.

However, nowadays, advances in technology are greatly supporting the implementation

of FTSs in a way that is cheap and convenient. Aung and Chang (2013) list four of the

main instruments for modern FTSs:

1. Alphanumeric Codes: A label which includes a sequence of numbers and letters of

17

various sizes.

2. Bar codes: An optical machine readable representation of data. It encodes

alphanumeric characters and consist of vertical bars, spaces, squares and dots.

3. Radio Frequency Identification (RFID): Can detect the presence of tagged objects.

It tracks using radio waves.

4. Wireless Sensor Network (WSN): It collects sensing data from physical or

environmental conditions. It has a variety of sensors available for sensing and

monitoring

Moe (1998) estimated that demand for information along the food chain will increase

and it will set higher requirements for well-structured traceability systems. As

consumer demand grows for food supply chain information so too will companies

invest in the technology and make it available to consumers. For example, in many

countries the use of mobile phone internet allows customers to view supply chain

information in real time while shopping. This technology offers the potential to

implement full traceability information, however ultimately its implementation can

only be made after the consideration of the costs and benefits (Golan et al. 2004)

18

4. Governance structures for FTSs

4.1 Identifying mandatory and voluntary FTSs

Voluntary (or private sector driven) traceability describes a private firm’s individual

decision to go beyond required regulations to implement FTSs to create value for its

business. This is usually done in coordination with many firms that constitute a supply

chain (McEvoy and Souza Monteiro, 2008). Mandatory (or government led)

traceability refers to the legal enforcement of FTSs in food production. The use of

mandatory FTSs came into prominence in the late 1990s as a government response to

the BSE scandal that disrupted European food supply. In the early 2000s both the EU

and Japan created public initiatives to make traceability mandatory, initially in the beef

industry and then, in the EU, for all food sectors (Souza Monteiro and Caswell 2004).

Since then, mandatory FTSs have grown in number and are now utilized in most OECD

(Organization for Economic Cooperation and Development) countries today.

Mandatory FTSs are employed by national governments, and as such their aim is to

protect the national interest; this may pertain to social, economic, and environmental

policy aims. Usually the aim of government in using mandatory FTSs is to protect

public health (social) and to prevent market failure (economic). On the other hand, the

number of food companies who are implementing voluntary FTSs is also growing in

number (Stranieri and Banterle, 2006). Voluntary FTSs are implemented by private

firms whose motivation is primarily to gain a competitive advantage and create value

for their shareholders. The benefits arising from voluntary FTSs are largely debated in

the literature; as will be discussed later in this paper, they pertain mainly to market

differentiation, supply chain management improvement and food safety risk

management. These act as the economic arguments for private firm adoption.

19

Different countries utilise different forms of FTSs. In a regional study conducted on the

implementation of FTSs in the beef industry by Souza Monteiro and Caswell (2006),

they categorize major the major beef producing and trading countries into four groups:

adoption of mandatory FTSs in response to consumer concerns (EU and Japan),

utlisation of mandatory traceability to maintain or enhance export market shares

(Australia, Brazil, and Argentina), industry managed mandatory programs for animal

identification (Canada), and voluntary systems (United States). National policy towards

FTSs has huge implications for the international food trade. Adopting better FTSs may

allow firms greater access to export markets, moreover mandating stricter FTSs may

prevent access to foreign exporters. For example, higher traceability standards in the

European Union act as an extra cost and a trade barrier to South American food exports.

4.2 Comparing mandatory and voluntary FTSs

The question of what is the efficient level of traceability and whether it is best attained

by mandatory or voluntary rule is an important one and has important economic

implications (Golan et al. 2004). Hobbs (2004) argues that “the debate on whether

traceability is the responsibility of private firms or the government depends on the

eventuality and extent of market failures”. That is, even though traceability may have

obvious private benefits, such as improving the supply chain management, it may also

have large public benefits as it can potentially reduce the frequency and/or severity of

food-safety incidents (Meuwissen et al. 2003; Golan et al. 2004).

Given that traceability possesses public good characteristics, its implementation by

private firms may be inadequate; as firms will attempt to benefit from traceability

without bearing the cost of providing it. This point is argued by Havinga (2006) who

raise concerns about how effective the private sector may be in maintaining safety

20

controls that coincide with societal goals. Indeed the consequences of inadequate levels

of voluntary FTSs in the private sector may be very costly, as highlighted by the recent

outbreaks in the United States (e-coli in spinach in 2009). In short, when traceability

provides public benefits, the optimal choice among private firms may not coincide with

the optimum choice for public welfare. To this end, government may need to play a

strong role in bridging this margin of error; and thus prevent market failure and/or

health risk.

Evidently, mandatory FTSs also possess a record of food safety epidemics. Zhou et al.

(2013) make the point that the mandatory traceability of raw materials, input, and

processing standard is quite low. Thus, it does not meet the quality standards of some

consumers with higher traceability requirements. Moreover, it often fails to

differentiate between valuable quality attributes, and does not include traceability

related to food safety aspects, animal welfare, or high rate of sample testing. These are

some of the attributes that customers are looking for, thus many firms turn to voluntary

FTSs to provide the precision needed to trace such aspects. Golan et. al (2004), in their

study of voluntary FTSs in the United States, also make the point that the government is

inefficient in issuing blanket mandatory FTSs across industries with a variety of

production processes and changing consumer demands.

This view is backed up by a study by McEvoy and Souza Monteiro (2008), who

conclude that voluntary FTSs can be successful in controlling food safety. However,

they warn that this will not be effective if only a single firm is implementing it, rather

the industry as a whole must act collectively if they are to achieve a high standard safety

control. Moreover, they point out that the actual number of firms joining the voluntary

agreement will depend on the relative cost of providing traceability and the resulting

benefit from a reduction in the cost of an outbreak. They describe the firms that don’t

participate in these voluntary agreements as ‘free riders’, and conclude that the too

21

many industry free riders will make it impossible to achieve an optimal level of

traceability. This is because the free riders will reap some of the rewards but will not

bear any of the costs, resulting in a decrease in competitiveness for the rest.

A large number of voluntary FTSs have recently emerged in the food industry (Fulponi

2006). One example is provided by EurepGAP, a scheme initially developed by an

association of European retailers to harmonize standards imposed by different

supermarket chains in their procurement strategies for fruit and vegetables. Voluntary

FTSs are becoming more widespread and are being used by more and more firms. This

is evidenced in Havinga’s (2006) study which shows that large supermarkets possess

such economic power that they can force many food industry suppliers and producers to

adhere to more voluntary FTSs. Supermarkets often act as the leading agent in the

supply chain and will often develop and dictate their traceability requirements to the

other agents, depending on their customer and process needs.

Assessing the costs and benefits of mandatory and voluntary FTSs can be difficult to

measure. Mandatory FTSs are normally measured in terms of loss of economic

productivity and costs to the health care system. There is only limited data on the

economic consequences of food contamination and foodborne disease (Aung and

Chang, 2012). However, the U.S. Department of Agriculture (USDA) estimates the cost

of illness associated with medical expenses and losses from five major types of

foodborne illnesses at USD6.9 billion annually (Vogt, 2005). From a private firm

perspective, the benefits/costs of FTSs can be measured qualitatively and quantitatively.

Qualitatively may refer to costs such as a loss in consumer confidence or brand

reputation, quantitatively may refer to costs such as fewer product recalls or less

lawsuits. These will be discussed in more detail further on the paper.

As explained, there are clear benefits arising from both voluntary and mandatory FTSs.

22

Voluntary FTSs can be efficient mechanisms and deliver a more accurate and cost

effective system. On the other hand, mandatory FTSs can deliver a base line system of

traceability; so that when the private sector, owing to different incentives, fails to

provide an optimum level of traceability, mandatory FTSs can step in to protect

consumer health and prevent market failure. Some regions such as the European Union

and Japan now use a hybrid structure of both voluntary and mandatory. This emphasises

the role of government in supporting voluntary FTSs, for example the Japanese

Ministry of Agriculture have been very active in providing funding for voluntary

traceability projects and for helping to publish industry guidelines and information on

traceability (Setboonsarng, Sakai, Vancura, 2009).

4.3 Mandatory and voluntary FTSs in China

Food safety is an extremely critical issue in China currently. The Chinese food safety

system has struggled to keep pace with the rapid growth and radically changing

structure of the economy Liu and Hobbs (2010). Opinion polls rank food safety among

the top concerns of Chinese consumers (Wang et al., 2007). Poor management of food

safety has caused illness and created social instability. Food safety is commonly seen

as an important challenge in China’s drive towards modern society or the “Chinese

dream” (Caixin Online). From an economic perspective, food safety incidents have

also had a considerable impact. For example, the incident in 2011 when Clubenterol

was added to pig feed and remained within the pigs after the time of slaughter. The

residues in pork meat led to serious human health issues. In just 1 week, the total loss in

pork sales amounted to RMB300 million (USD46.3 million) across the entire Chinese

live pig-raising industry (Zhou, Zhen and Liu, 2013). Zheng et al. (2012) point out that

the weak food traceability system in China has become a trade barrier to China’s

agricultural exports. Product safety incidents, both abroad and in the Chinese domestic

23

market, have damaged the reputation of Chinese food products in importers markets

and, at times, led to disruptive reductions in foreign demand (Liu et al., 2009). For

example, D’Amico et al. (2013) in their study of Chinese fish exports to Europe found

that 83% of products assessed did not meet European requirements for traceability. It is

evident that Chinese private firms must develop their voluntary FTSs if they want to

compete on the global food markets.

This importance both socially and economically has been acknowledged by the

China’s food regulators (Financial times, 2007). The Chinese government has recently

recognised the importance of mandatory FTSs in controlling food safety by issuing

China’s nationwide New Food Safety Law which came into effect on June 1, 2009.

The new law targets the entire national food safety monitoring system. Under the law,

food producers, processers, packers, and retailers are required to implement testing

and record keeping systems for all inputs and outputs and to archive the records for at

least two years (Articles 36-41). Food manufacturers and distributors are also required

to establish a regime to be able to immediately stop the production of food that does

not meet food safety standards, to promptly recall food already in the market place,

and to issue a notification to related participants (Article 53). For violations, the new

law stipulates associated punishments, including warning fines ranging from

RMB2000 to 20,000 according to the degree of seriousness (Article 87).

According to China Chain Store and Franchise Association (2007), a number of

challenges have hindered China from the fast development of mandatory FTSs. First, in

a country the size of China safety standards are difficult to unify across different

production sectors. Second, food circulation channels in China are often obstacles and

not efficient. Third, China lacks effective food legislation and supervision systems.

Fourth, it incurs a huge investment to build a nationwide food traceability system. A

key reason of this slow progress is the economic structure of the Chinese agricultural

24

industry. For example the pork industry comprises of nearly 64.59 million scattered

pig-rearing farmers making it extremely difficult to trace back products effectively.

Moreover, the size of firms in China is very small, 80 percent of the food producers, or

roughly 350,000 enterprises, have fewer than 10 employees (Engardio, Dexter,

Balfour and Einhorn 2007). In addition, farmers engaged in breeding and producing

are not well-educated and are generally unaware of agricultural product safety/quality

(Zhou and Jiang 2007) and quality traceability (Liu et al. 2007; Li and Kou 2010). Also,

the government role in supervising and monitoring these laws is notoriously poor, and

does not motivate firms to participate (Zhou and Liqing 2007). These factors indicate

that a mandatory FTS may simply not be viable in the Chinese market.

In response to growing consumer demand for better quality safer food, some Chinese

firms have been compelled to set up voluntary FTSs (Zhou et al., 2013). Private firms

with market incentives are more efficient in dealing with the intricate food safety

demands of their consumers and are likely to do it in a more cost effective way. As

discussed previously, a hybrid structure of mandatory and voluntary FTSs has been an

efficient option in Japan and Europe. In this regard, the Chinese government may look

to cooperate with the private sector in setting the right incentives to implement

voluntary FTSs. These include support to private firms in the form of: grants, technical

guidelines and third party accreditation/auditing etc.

A recent high profile industry case example of FTSs in China is the current partnership

between IBM and Shandong Group for the design of a food traceability system for the

pork industry in Shandong. As reported on Bloomberg (2011), this project involves full

supply chain traceability, from farms to warehouses to retailers. Shandong Commercial

Group is a large state owned company and is carrying out this project as part of the

government’s wider initiative to improve food safety. IBM reported that demand for

food safety products (arising from traceability systems like this) is growing at 15

25

percent a year in China. This initiative represents a government owned project for

voluntary traceability. It is a hybrid structure, but different to cases in Europe and Japan

as the government is acting as the owner rather than the supporter. The growing

literature suggests that the way private firms can keep such projects on budget is by

recognizing the total number of benefits arising from traceability. This will be

discussed in the next section. Whether or not, the Shandong project, as a government

owned hybrid structure, can obtain the same variety of benefits remains to be seen.

26

5. The benefits of voluntary FTSs

5.1 Identifying the benefit categories

To many businesses, implementing traceability is still seen as a daunting task without

any obvious benefits to a business in financial terms (Wang and Li, 2008). This is

because many managers do not look beyond traceability as a regulatory compliance

issue (Sparling and Sterling, 2006). In fact, the implementation of FTSs can be used as

a useful tool to create competitive advantage for a business. The key to achieving those

benefits is first to identify them and then to develop a plan to achieve them (Stirling,

2004). Hobbs et al. (2005), point out that the benefits of FTSs are often difficult to

evaluate as they vary among different markets, products and processes. However,

throughout the literature, several research papers have presented an overview of the

benefits of FTSs. The benefits included in the literature have been measured both

qualitatively and quantitatively. While most benefits can be given a real value (such as

product recall cost savings), others are less tangible in nature (e.g. the impact on

company reputation). Chryssochoidis et al. (2009) divide up the quantitative benefits in

terms of labor savings, costs avoided, revenues and intangibles. Frederiksen et al. (2008)

provide a case example of the qualitative impact of poor FTSs with Perrier (bottlers of

mineral water) who sustained a loss of market share from 60 to 15 percent worldwide

and suffered eventual takeover of the company due to traceability related problems.

Below is a list of 10 research papers which outline the broad spectrum of benefits to be

obtained from traceability. These research papers were chosen due to their relevance

and their strong contribution (highly cited) in the research field. The research

cumulatively includes data from 14 countries and encompasses evidence across a wide

range of sectors in the global food industry.

27

Table 1: Studies outlining the general benefits of FTSs

Authors Paper Topic Industry Methodology Benefits proposed

Table 1

Banterle

and

Stranier

i 2008

Analyses the

effects of

voluntary

traceability on

vertical

relationships

within food

supply

chains

Meat

processing

, fruit and

vegetable,

dairy,

wine, olive

oil,

baking,

and feed

sectors in

Italy

Questionnaire

to 190 firms

Product differentiation,

reduction in product

recall, liability

identification among

supply chain actors,

supply chain

improvement

Chrysso

choidis

et al.

2009

Provides a cost

benefit analysis

of a pilot

traceability

system

Water

company

in a south

European

country

Questionnaire

to company

executives

Supply chain operations

efficiency, improved

trading partner

relationships, increased

productivity, consumer

trust, product

differentiation,

regulation compliance,

risk management,

Frederi

ksen et

al. 2008

Describes the

implementation

of a FTS

throughout a

supply chain

Fish

industry in

Denmark

Questionnaires

and work flow

studies

Brand protection, which

includes: production

efficiency, damage

control, recall

procedure, identity

protection, consumer

confidence

Golan et

al. 2004

A study of the

economic theory

and industry

implementation

of traceability

US food

industry

Market studies

and company

interviews

Improved supply chain

management, higher

food safety and quality

control, differentiation

of food products that

possess credence

attributes (attributes that

are difficult to detect)

28

Authors Paper Topic Industry Methodology Benefits proposed

Table 1

Mai et

al. 2010

A cost benefit

analysis on the

implementation

of traceability

systems

The fish

industry in

Europe,

Chile and

Vietnam

Questionnaires

received by 24

companies

Market growth; recall

reduction; liability claim

and lawsuits reduction;

labour savings;

and process

improvement

Ollson

and

Skjolde

brand

2008

A discussion on

the food supply

chain

from a critical

context point of

view in order to

highlight the

risks and

traceability

issues

Swedish

food

industry

Industry case

studies

Recall minimization,

retaining market share,

protection of

trademarks, and

strengthening reputation

Poghosy

an et al.

(2004)

Research on the

motivations of

traceability

implementation

and its benefits

Agribusin

ess

companies

from 9

different

countries

Focus

interviews with

17 companies

Supply chain

management

efficiency, food quality,

reduced risk and

liability, regulatory

compliance,

market access, consumer

confidence and brand

reputation.

Sparling

and

Henson

2006

An analysis of

the costs and

benefits of

traceability

Canadian

dairy

processing

industry

Interviews and

mail surveys

with 386

processing

facilities

Regulatory benefits,

market and consumer

response benefits, recall

and risk management

benefits, supply chain

benefits

Sterling

2004

A report on the

business case for

traceability

implementation

Canadian

food

industry

Industry

interviews and

surveys

Market response benefit,

recall scope benefit,

supply chain benefit,

regulatory benefit

Wang

and Li

(2006)

A discussion of

the value added

arising from the

implementation

of FTSs

British

meat

processing

industry

Case study and

discussion

Supply chain efficiency,

regulatory benefits,

recall benefits, market

benefits, and quality and

safety benefits

29

After reviewing the literature above, all of the benefits outlined can be summed up and

categorized into three different groups: The benefits will be further explored under

these categories

1. Market differentiation

2. Supply chain management

3. Safety risk management

Table 2: Key benefit components

Market differentiation Safety risk management Operation efficiency

Market growth

Product differentiation

Brand development

Consumer

confidence/trust

Product recall reduction

and minimization

Liability protection

Food quality risk

management

Company reputation

protection

Supply chain

management

Process efficiency

5.2 The benefits for market differentiation

Voluntary FTSs are largely driven by a customer need or requirement. This may be

demanded within the supply chain, for example by retailers of their suppliers, such as

Wal-Mart imposing Radio Frequency Identification (RFID) systems on their suppliers

in the search for process efficiencies and ultimately reduced cost (Stirling 2004).

However, it is mainly driven by the end consumer seeking an assurance of product

attributes, particularly for attributes which are not visible, often referred to as credence

attributes (Golan et. al., 2004; Hobbs, 2004; Stirling, 2004). In a competitive market,

food producers will try to differentiate one product from others in ways that matter to

the consumers. Often, these attributes in food are difficult for a consumer to distinguish

even after consuming the product, for example a consumer may find it difficult to tell if

a food is organic or genetically modified etc. These types of attributes are known as

30

credence attributes. In these cases, a FTS is needed to monitor and record the processes

by which these claims are made and to provide evidence to the customer that the

credence attributes are accurately claimed, and therefore can justify the products value.

This reduces the information asymmetry costs for the consumer.

According to Golan et al. (2004), credence attributes fall into two categories: content

attributes concerns the physical properties of a product, for example whether or not

orange juice contains preservatives and colourings, or the amount of calcium in an

infant milk formula product. Process attributes refer to the characteristics of the

production process, for example place of origin, fair trade, animal welfare etc.

Traceability allows companies to verify the product quality; it is necessary to do this in

conjunction with a third party accreditation system to further boost credibility.

Companies must then be able to market these attributes and create awareness among the

consumer in a way that is convenient and suitable for the customer (i.e. concise labeling

etc.) (Xu and Wu, 2009). Technology and the internet can support the implementation

of such a market strategy, for example real time information flow via smart phones

(Aung and Chang, 2013).

Hobbs (2004) terms this function of traceability (that is the role of traceability in

verifying credence attributes) as ex ante traceability. This is opposed to ex post

traceability which is reactive in nature. For example, in the event of a problem ex post

traceability allows the identification and trace back of the product. Hobbs points out

that ex ante traceability is effective in reducing information asymmetry between the

customer and the producer. In the presence of information asymmetry, there will be an

incentive among producers to cheat and produce faulty, mislabeled products. Within the

private sector, if there is a market premium for safer food there will be an incentive for

firms to label and promote their products as having enhanced safety attributes. The

pressing question in the literature pertains to what extent are consumers concerned with

31

and willing to pay for traceability. Below are 6 studies undertaken to evaluate this.

Table 3: Research on the benefits for market differentiation

Author Industry and

region

Methodology Results

Chen and

Huang 2012

Fast food in

Taiwan

435

questionnaires

Traceability led to a reduction in

perceived information asymmetry

and fears of seller opportunism, this

caused a reduction in perceived

uncertainty and a higher intention to

purchase

Choe et al.

2008

Food

products in

Korea

491

questionnaires

Traceability mitigated uncertainty (as

a result of lower information

asymmetry and fear of seller

opportunism) and led to a greater

intention to purchase and a higher

willingness to pay

Dickinson

and Bailey

2002

Red meat

products in

the US

Experimental

auction

markets (102

participants)

Willingness to pay a price premium of

USD0.37 for traceability alone and

USD1.1 for one with traceability and

other assurances

Hobbs 2003 Beef

sandwiches in

Canada

Experimental

auction

markets (204

participants)

Willingness to pay a premium of 7%

(Cdn 0.2) alone for traceability and

20% (Cdn0.28) for one with

traceability and other assurances on a

beef sandwich worth C$2.85

Kehagia et

al. 2007

Beef in

Greece

123

questionnaires

Customers are willing to pay extra for

some attributes arising from

traceability but not all, this is

contingent on the respondents level of

education

Van

Rijswijk et

al. (2011)

Food

products in

Germany,

France, Italy,

Spain

163

interviews

A clear consumer need for

information on production processes,

which could be made available

through traceability

The literature provides evidence throughout many countries of consumers who display

a need for traceability. This is particularly the case when traceability is coupled with

32

quality verification such as an additional food safety assurance (Golan et al., 2004).

However, the results often contain many variables. Chen and Huang (2012) and Choe et

al. (2008) identify perceived uncertainty as the driver for valuing traceability among

consumers. According to Van Rijswijk et al. (2008), traceability can be meaningful to

consumers, but primarily in an indirect manner through the general benefits that they

perceive associated with food purchases in general, for example in their study they

found process attributes (specifically country of origin) as the most important attribute;

their analysis indicates that while respondents may not be so concerned with the

concept of traceability itself, they will be interested in the attributes resulting from

traceability. An example is provided in Clemens’ (2003) study, they discusses a recent

strategy by Japanese food retailers to market “story meats,” for which information is

available on the BSE status and basic production information about the animal, together

with traceability information throughout the supply chain back to the farm of origin.

Respondent’s response to such credence attributes is heavily contingent on the

respondent’s income (Giraud and Amblard, 2003) and education (Kehagia 2007b).

Moreover, geographical location and national culture play a role in consumer’s

perception of traceability. In a study by Giraud and Halawany (2006), it was found that

participants in southern European countries (France, Italy, Malta, Slovenia and Spain)

are more aware of the term ‘traceability’ than northern ones. In southern European

countries, traceability is considered as a buying and confidence criterion; while it does

not influence participants’ purchase in The Netherlands and Germany. As studied by

Golan et al. (2004), consumer response to traceability and hence firm incentive to

employ FTSs is influenced by the existing mandatory systems set in place and the

recent record of food safety in the region. If there is a successful system of mandatory

traceability already in place and recent records in food safety are clean, then consumers

will be less concerned about traceability and will be less willing to pay (Sodano and

Verneau, 2003). De Jonge et al. (2004) categorized the factors affecting customers’

33

view of traceable food products according to (1) demographic and socio-economic

factors such as age, education and income, (2) consumer trust in the administration and

food supply chain participant and (3) food safety incidents, consumer knowledge

regarding labeling, and media reports on food safety problems, among others. Much of

the research on consumer opinion uses the willingness-to-pay approach, which is

preferred by many economists for measuring food safety/quality issues. The approach

theoretically represents the full value of the added attribute based on the consumer’s

preferences (Valeeva, Meuwissen and Huirne, 2004).

5.2.1 A China perspective

In the Chinese market, the numbers of firms using voluntary FTSs to gain a market

advantage are relatively low compared to Europe. Table 4 below contains papers

measuring Chinese consumer sentiment towards traceable foods. The first noticeable

aspect of these studies is the lack of awareness of Chinese consumers towards FTSs.

This is evident in all of the studies below. For example, in Wu et al’s (2011) study, 63

percent of respondents had never heard of FTSs. In Wang et al. (2009c) sample, over 80

percent had not heard of the HAACP systems of traceability. This is further elaborated

by another study by Zhou et al. (2013) on the determinants of voluntary traceability in

the pork industry in Zhejiang; they did not include product differentiation in their study

due to the “present consumer unawareness of food safety traceability in China”. In fact,

Chinese consumer attitude to safe food in general is low. This indicates that firm

incentives to market the benefits of FTSs are also low

However, as is also demonstrated in the studies in table 4 below, of the Chinese

consumers who are familiar with traceability, there is a desire for traceable food and a

willingness to pay for it. Wu et al. (2011) note that after consumers were informed of

the meaning of FTSs, it resulted in over 30 per cent of respondents in the three regions

34

more likely to buy traceable food. Zhang et al. (2012) note “the more respondents are

aware of the features of food traceability and the more they know about China’s food

certifications, the more they are willing to pay for traceable products”. This suggests

that Chinese consumers despite having low knowledge of the concept of traceability in

safe food do have a positive attitude towards it. The studies in table 4 also stress that

this is highly linked to income, education and age demographic variables.

Golan et al. (2004) writes that the larger the market, the greater the benefits of

traceability for credence attribute marketing. The evidence suggests that while

currently there is a gap is a low level of awareness among consumers, there is a growing

positive attitude towards FTSs. This is largely influenced by the media platforms

reported widely on many Chinese food accidents (Wu, Xu and Gao, 2011, Liu, 2012).

These food safety trends are a growing concern for Chinese consumers and will lead to

a greater interest in FTSs. The potential market benefits will motivate firms to

implement voluntary FTSs in the future. Signs suggest this is already in motion. For

example, the Carrefour retail chain is experimenting with offering ‘‘quality line” fruits,

fish, and meat in its Chinese outlets, and some other retailers offer premium-priced

‘‘green food” produce and meats in an attempt to tap into this market segment (Wang et

al., 2007). Golan et al., (2004) also conclude that the higher the expected premiums, the

larger the benefits of traceability for credence attribute marketing. As the Chinese

economy continues to grow, and the disposable income rises people are likely to be

more willing to pay premiums for guarantees on credence attributes; once again

emphasizing the role of FTSs.

35

Table 4: Research on the benefits for market differentiation in China

Author Industry and

region

Methodology Results

Wang et al.

2007

Milk in Beijing 569 interviews of

supermarket

shoppers

Most respondents willing to pay

less than 10% for certified

traceable milk, however low

awareness of respondents

towards important traceability

systems such as HACCP

Wu et al.

2011

Food products

in 13 cities in

Jiangsu

province

Interviews with

1757 consumers

68% of respondents said they

would be willing to pay extra for

certified traceable food products

Zhang et al.

2012

Pork, milk and

cooking oil in

Nanjing

Interviews with

247 households

Respondents showed a

willingness to pay 21.7% higher

than regular milk

prices, 19.8% higher than

regular cooking oil prices and

16.7% higher than regular pork

prices for traceability in these

products

Zheng et al.

2012

Pork in Beijing 400

questionnaires

and a logistic

model

Respondents were willing to

pay an average price premium

of 22.5% more for traceable

pork than non-traceable

5.3 The benefits for supply chain management

As Mentzer et. al (2001) defines, supply chain management is the systemic, strategic

coordination of the traditional business functions and the tactics across these

business functions within a particular company and across businesses within the

supply chain, for the purposes of improving the long-term performance of the

individual companies and the supply chain as a whole.

Often overlooked by firms, the benefits of traceability in supply chain management are

becoming more apparent. According to Wang and Li (2006), when a FTS is

36

implemented without considering other supply chain activities it has limited value,

however when it is integrated as part of the supply chain management process, it may

deliver considerable competitive advantages. According to Golan et al. (2004), a

critical element of any supply management strategy is the collection of information on

each product from production to point of sale. That is to have an information trail that

follows the product’s physical trail. Information trails, or in other words, traceability

systems, provide the basis for good supply management. This information is an

important asset and can lay the basis to efficient production, assembly, warehousing

and distribution. In the food industry where margins are often thin, efficiency in

supply management is a key area of competition.

Moe (1998) distinguishes traceability in supply chain management in two categories:

chain traceability is the ability to track a product batch and its history through the

whole, or part, of a production chain from harvest through transport, storage,

processing, distribution and sales; and internal traceability is the ability to track within

one of the steps in the chain. Thus, traceability is helpful towards supply chain

management from the view of the single firm and towards each firm comprising an

entire supply chain, and thus involves efforts that are both inter and intra

organizational. .

As demonstrated in table 5 below, the importance of traceability in improving the

supply chain management of a firm is backed up by a growing number of research

papers. For example, in Mai et al.’s (2010) study of the fish industry in Europe, Chile

and Vietnam, the respondents rated supply chain management as the most important

benefit to their business resulting from traceability. Sparling and Sterling (2004) note

that in the industries of pharmaceuticals, automotive, aerospace and electronics,

traceability has an important role in improving logistics and warehouse operations,

however the food industry surprisingly does not place such an emphasis on

37

traceability for such purposes. Results show that the information gained from FTSs

can greatly support other supply chain activities such as warehousing, inventory

management, quality control, labour cost reduction, procurement etc.

Table 5: Research on the benefits for supply chain management

Author

Industry and

region

Methodology Results

Table 5

Alfaro and

Rabade

2008

Vegetable

industry in

Spain

Longitudinal

case study

Improved the management of

inventories through a better use of

warehousing space; reduced handling

costs; decreased inventory level; and

minimised errors related to the whole

production and logistics processes

Canavari

et al. 2010

Fruit industry

in Italy

Interviews

with 17

companies

Traceability is part of information

management which plays a strong role

in logistic and strategic management

issues

Moe, 1998 Global food

industry

Discussion Quality control, production control

and for fulfilling consumer demands

Raggatieri,

Gamberi,

Manzini,

2007

Parmesan

cheese in

Italy

Case study on

one company

Process control, indicates cause and

effect when the product fails to

conform to standard, improves

planning so that raw material use is

optimized, and improves grounds for

implementing IT solutions to control

and manage production.

Sahin,

Dallery,

Gershwin,

2002

Not

applicable

Framework

proposition

Labour cost reduction; acceleration of

physical flows; less shrinkage (loss of

inventory from human error);

improved stock control and

production monitoring; better

knowledge of consumer behaviour

Saltini and

Akkerman

2011

Chocolate

industry in

Denmark

A simulation

model

If well integrated with the production

operations, can benefit food producers

in terms of safety issues as well as in

the daily operational activities

38

Author

Industry and

region

Methodology Results

Table 5

Setboonsar

ng, Sakai,

and

Vancura,

2009

Mushrooms

and poultry in

Japan

2 industry case

studies

Faster, more reliable access to

production data which led to greater

efficiencies in supply chain

management

Wang and

Li, 2006

British meat

processing

industry

A discussion of

the value added

arising from

the

implementatio

n of FTSs

Production planning; inventory

control; dynamic pricing; supply

logistics and distribution

management;

Wang et

al., 2009a

Cooked

meats in the

UK and

baked goods

in the

Netherlands

A proposed

integrated

planning

model and 2

industry case

studies

They show that an integrated model

combining the protection of food

safety with the operational systems

can optimize overall operational

performance


Most of the literature reviewed in this study suggests that Chinese firms are not

adopting voluntary FTSs systems for the purpose of improving supply chain

management. In fact, the number of studies on traceability for the purpose of supply

chain management in China is quite low. First of all, the evidence suggests that only

large Chinese enterprises are implementing voluntary FTSs (Wang et al., 2009b; Zhou

et al., 2013). Almost all studies undertaken on the incentives of Chinese firms to

implement voluntary FTSs note the difficulty of small to medium enterprises to do so.

This mainly relates to cost among other reasons (more on this in the “voluntary costs

section”). As we look at the incentives for larger Chinese firms in implementing

voluntary FTSs we see that the perceived benefits do not normally include the

39

improvement of supply chain activities. The majority of researched papers on the

benefits of voluntary FTSs in China do not mention supply chain management as an

influential factor. In Zhou et al.’s paper (2013) exploring the incentives for pork firms

in implementing FTSs, they concluded that “operation efficiency was not significant in

any of the firm’s voluntary traceability behavior, as electronic information systems

have not yet been established in most Chinese pork firms”. Limited technology is on

one barrier to implementation (see “costs”)

Nevertheless, as displayed in table 6, three studies were found (Pan et al., 2012; Wang

et al., 2009b; Xiong et al., 2010) that discuss the benefits of supply chain management

in FTSs. In particular, Wang et al. (2009b) who empirically show the role of “better

enterprise management standard” was instrumental in their decision to implement FTSs

in the Guangdong and Hainan fish industry. However, in each of these studies the

authors do not elaborate on what areas of “production process”, “enterprise

management” “production management” they mean exactly. They do not provide a

detailed description on the areas influenced. This reduces the credibility of the results.

This is in contrast to studies done in other countries with more established traceability

systems, for example Setboonsargn et al. (2009) in their study of FTSs in Japan, give

detailed descriptions and use clear examples in their case studies. In their case, FTS

greatly quickened their data processing time which improved their inventory

management and other supply chain activities. More detailed studies need to be carried

out in China to demonstrate the impact of voluntary FTSs on supply chain management.

40

Table 6: Research on the benefits for supply chain management in China

Author Industry and

region

Methodology Results

Pan et al. 2012 Beef and

vegetables in

Beijing, Shanghai

and Shandong

An industry case

study

Improvement in production

process management

Wang et al.,

2009b

Fish in

Guangdong and

Hainan

Interview with

21 firms

Improving enterprise

management standard was a

key influencing factor in

the decision to implement

traceability in SOE, JV and

private firms

Xiong et al.,

2010

Pork industry in

Tianjin

A traceability

design

framework

Traceability creates more

information which can

benefit production

management

Zhou, Yan and

Liu 2013

Pork industry in

Zhejiang

22 firm

interviews and

58 email

questionnaires

Few benefits due to

undeveloped information

systems

5.4 The benefits for food safety risk management

In the review of the literature (see table 7 below), it was noted that the most important

benefit arising from voluntary FTSs was the management of food safety risk. For

example, Sparling et al. (2004) report that food safety risk management was a

significant benefit in all 3 of their pilot studies in Canada. Hobbs (2004) terms this as

ex post cost reduction as it is a reactive function after a food problem has arisen.

Traceability, as applied to food products, provides detailed product information on

product’s origins and location, characteristics and production processes that can be

used to more easily identify the source of a food safety issue (Pouliot and Sumner

2008). So long as there is high precision in a FTS (Golan et al., 2004) the scope or

volume of a product recalled in a food safety incident can be greatly reduced. Specific

41

product batches containing the faulty product can be accurately identified and

removed, this is as opposed to the removal of large product stocks, which is a

characteristic of most recent food crises. Authorities often respond in an over-zealous

way, recommending recalls on all suspect products (Pouliot, 2008). More precise

FTSs greatly reduce the scope and time in which an unsafe product can be identified.

For example, during the recent BSE beef recall, one supermarket chain used its

preferred customer cards to identify and warn shoppers who had bought the suspect

meat (Anderson, 2004). The accuracy and speed of FTS recalls can produce direct

cost savings which have been quantitatively studied (Saltini, Akkerman 2011; Sparling

et al., 2004).

Moreover, as Saltini and Akkerman (2012) note, “a large share of the costs (of poor

safety control) are caused by indirect consequences, such as damage to the reputation

of the brand and loss of market value, which can even lead to the bankruptcy of the

brand”. Poor FTSs can create longer periods of uncertainty among consumers. As

evidenced in the “market differentiation” section, a loss of consumer confidence can

become detrimental for a firm in the highly competitive food industry.

Many instances have highlighted the importance of voluntary FTSs to the

management of food safety accidents. Pouliot and Sumner (2008) identify the e-coli

tainted spinach scandal in the United States in September 2006 as a prime example.

This example highlights the economic damage that can occur after a badly managed

food safety problem:

“Soon after the spinach was identified as the carrier of e-coli, the contaminated

spinach was traced to Natural Selection Foods as the packer. However, because the

Food and Drug Administration was unable to rapidly identify the farm source of the

outbreak and to isolate the contaminated spinach, it advised consumers on September

42

14 not to eat bagged spinach. Stores did not limit their response to the bagged product

and pulled all fresh spinach from the shelves. The farm of origin was only identified

with further extensive investigation. However, the precise means by which spinach

was contaminated could not be identified. The delivery by one grower of tainted

spinach resulted in the largest recall ever for leafy-green products. Six months after

the outbreak, the retail sales of bagged spinach were still below the previous year

level while the consumption of bunched spinach (substitute good) had rebounded.”

Similar product recall inefficiencies have been seen in Europe, namely the horse meat

scandal in 2013 and the pork dioxin scandal in 2008. One important point arising from

these scandals was the slow time and large scope in which these products were

recalled. There simply wasn’t enough information available to clearly identify the

source of the problem. The product recall inefficiencies were pointed out in an Irish

government investigation report after the pork dioxin scandal, it wrote “an absence of

an effective traceability scheme necessitated a 100 percent recall for a 10 percent

contamination rate”. This emphasizes the role of precise FTSs in limiting the scope of

product recall; these examples should act as a motivator to firms considering

implementing voluntary FTSs.

In addition, another benefit of voluntary FTSs in an event of a food safety crisis is the

direct cost reduction in liability claims by customers (Aung and Chang, 2012; Mai et

al., 2010; Sparling et al. 2004). Customer lawsuits in food safety incidents can be

extremely costly, reducing the scope and time in which food safety occur will save this

cost. Moreover, in the event of a safety incident, FTSs will greatly help in assigning

liability where it is due. FTSs can provide excellent records that can be used as strong

evidence in a liability claim. In fact, some actors in a supply chain may be able to use

voluntary FTSs to pass on liability further up or down to other members in the chain

(Hobbs, 2004). Voluntary FTSs provide an assurance to each supply chain actor of their

43

relevant liability. This reduces the likelihood of seller opportunism and fraud, inducing

each party to take full responsibility for his own contribution. Voluntary FTSs also

reduce the costs of monitoring and verification (transaction costs – see “costs” section)

from other supply chain actors or from third party auditors; this is because there is a

higher accuracy and quantity of documentation (Setboonsarng, Sakai, and Vancura,

2009; Souza-Monteiro and Caswell, 2004).

Table 7: Research on the benefits for food safety risk management

Author Industry and

region

Methodology Results

Aung and

Chang 2012

Global food

industry

Overview and

discussion

Minimizing the production and

distribution of unsafe products, and

therefore the potential for bad

publicity, liability, and recalls

Mai et al.,

2010

Fish in

Europe,

Vietnam and

Chile

Case study and

questionnaires

Recall reduction, Liability claim and

lawsuits reduction

McEvoy,

Souza

Monteiro,

2008

Global food

industry

An industry

model

Short run economic cost savings are

product recalls, long run economic

savings are consumer distrust and

loss of goodwill

Pouliot and

Summer

2008,

Global food

industry

An economic

model

Product recall, Protect industry

reputation

Regattieri,

Gamberi,

Manzini

2007

Cheese in

Italy

A case study Rapid recall strategies

Saltini

Akkerman

2011

Chocalate in

Denmark

A simulation

model

Led to a reduction of potential

product recall sizes between 0.5 and

4% in case of contamination of the

raw materials and between 6 and

16% in case of contamination

of a processing batch size.

Sparling et

al. (2004)

Beef, pork

and produce

in Canada

Questionnaires,

pilot studies,

mock recalls

Risk management, recall scope/time

was reported as being a significant

benefit in all 3 of the pilot studies

44


Controlling the impact of food safety accidents is evidently a huge issue in China

currently. There are a large number of examples over the last 10 years whereby a

precise FTS would have reduced the cost of a food crisis. Both direct and indirect

costs have been shouldered by the Chinese food industry as a result of such crises. For

example, China Mengniu Dairy Co Ltd, said direct losses brought on by the melamine

scandal would reach RMB900 million (USD131.39 million) in 2008 (China Daily).

Moreover the Clubenterol contamination of meat lead to a total loss in pork sales of

RMB300 million (nearly over USD46.3 million) across the entire Chinese pork

industry. Taking into account the indirect cost of loss of company reputation and

consumer confidence the total losses may have extended much further. These

incidents should only encourage private firms and industry supply chains to

implement voluntary FTSs.

While the benefits of voluntary FTSs for product recalls in China are acknowledged in

many research papers it is difficult to find clear evidence of examples (see 3 relevant

studies in table 8 below). This is because traceability in China is still at an early stage

and there is little voluntary traceability undertaken to increase the efficiency of

product recall. This perhaps surprising as since 2002, there has been a long list of

costly mismanaged food recalls in China. This is evidenced in Zhao et al.’s (2012)

study on the impact of product recalls on the Chinese stock markets. They found that

the food recalls had a much greater effect on the firm’s stock market value than other

industries, such as the automotive. This they claim is because food firms only

announce a product recall on very serious occasions involving health risk. This they

claim indicates an immature, passive strategy towards food recalls. This shows that

traceability is an issue that private firms and supply chains must get to grips with.

Golan et al. (2004) outline three market characteristics that influence the need for

45

voluntary FTSs; it is useful criteria by which to assess its status in China:

1. The higher the value of the food product, the larger the benefits of traceability for

safety and quality control.

2. The higher the likelihood of safety or quality failures, the larger the benefits of

reducing the extent of failure with traceability systems for safety and quality

control

3. The higher the penalty for safety or quality failures, where penalties include loss

of market, legal expenses, or government mandated fines, the greater the benefits

of reducing the extent of safety or quality failures with traceability

Golan’s criteria as it relates to the Chinese market:

1. While average Chinese wages have been rising steadily, the market for higher

value food in China is still much lower than more developed countries. Premium

value goods usually demand precise voluntary FTS. However, this is changing

especially as disposable income rises in China.

2. In 2008 alone, there were 1160 food safety recall incidents in China (Wynne et al.

2011). Moreover, the cost was very damaging and extensive. This would indicate

a high risk. However, firms still do not seem incentivised to employ efficient

voluntary FTSs. Firms low motivation to implement voluntary FTSs is

emphasised by Roth et al. (2008) in their study on Chinese export recalls; they

point out that product trace back of Chinese products was made timely and very

complicated making product recall difficult.

3. Liu, Kerr and Hobbs (2010) make the point that liability law is not developed

enough in China to warrant an extra investment in voluntary FTSs. Poor liability

law means firms may not be reprimanded for poor safety control. Thus, private

firms are not incentivised to invest in higher safety standards. Moreover, Chinese

firms are less motivated to invest in voluntary FTSs to protect their brand

46

reputation in a safety problem. In the general literature, a food safety incident can

lead to a loss of reputation that effects future sales over the long term and easily

leads to bankruptcy. In China, branding and reputations are far less developed

(Hingley et al., 2009). The markets are fluid, firms change names and their

structures frequently; a firm suffering a food safety incident can easily re-emerge

with a new name, placing a new brand in the market without any disruption to its

operations (Liu, Kerr and Hobbs 2010).

Table 8: Research on the benefits for food safety risk management in China

Authors Industry

and

region

Methodology Results

Liu,

Kerr

and

Hobbs

2010

Aquatic

products

in China

A regulatory

assessment

approach

Liability law is not sufficiently developed

to provide an effective deterrent to

under-investing in, or cheating on, food

safety. The threat of loss of reputation

plays too small a role in motivating both

fish farmers and processors.

Roth et

al., 2008

Chinese

pet food

Present a

strategic insight

The length of time to trace origin source in

China as well as extensive subcontracting

made it difficult to achieve efficient recall

Zhao, Li

and

Flynn,

2012

Food

companies

on the

Shanghai

and

Shenzhen

stock

exchange

They collected

stock market

information

relating to

product recall

announcements,

6 of which were

from food

companies

The food industry experiences a more

severe stock market reaction to food

recalls, the food industry only announces a

recall when there is a danger to human

health, therefore they try to minimize

recalls – this passive recall strategy leads

to great fear and financial loss on food

firms’ stock capitalization

47

6. Costs of voluntary FTSs

6.1 Identifying the cost categories

The cost of traceability is a sensitive question as margins in the food industry are

usually very thin. According to Sparling et al. (2006) the costs of traceability are easier

to quantify than benefits as they are more tangible. Golan et al. (2004), describe the

costs of voluntary FTSs in two categories: costs of recordkeeping and product

differentiation. Recordkeeping costs refer to the collection of and maintenance of

information on product attributes throughout the supply chain. This can become costly

if the degree of information required is much greater than the existing system. Product

differentiation for traceability refers to keeping certain products separate from each

other in the supply chain. Costs in product differentiation will rise when new separate

lines of production and distribution must be built especially for the purpose of

voluntary FTSs and/or if unused capacity arises from the new facilities. Golan et al.

(2004) note that safety/quality attributes necessitating high precision tracing require

smaller batch tracing and are much more costly. The greater number of handlers and

distribution systems involved, and the greater complexity of inputs in the product will

increase the costs of voluntary FTSs. As the research in table 9 below indicates, there

have been many studies undertaken across a variety of different industries and countries

that outline the total categories of costs that are involved in voluntary FTS

implementation. Firms should refer to these costs and aim to quantifiably calculate the

total amount.

48

Table 9: Research on the general costs of voluntary FTSs

Author Industry

and region

Methodology Costs incurred

Asioli, Boecker,

Canavari, 2010

Fish in Italy 60 surveys Equipment and software,

training, materials,

certification and audits

Canavari et al.,

2010

Fruit in Italy 17 interviews

with key

informants

IT expertise and equipment,

additional staff training

Saltini and

Akkerman 2012

Chocalate in

Denmark

A simulation

model

Reduction in overall

production efficiency from

7-22% due to increased

production setup times, setup

costs, cleaning efforts

Sparling et al.

2006

Dairy

products in

Canada

130 postal

surveys

Most notable costs were

inspections/audits,

laboratory testing, and the

extra time spent by staff

Chryssochoidis et

al. 2009

Mineral

water in a

south

European

country

Questionnaires

to company

executives

Initial costs: purchase and

installation of software,

education and training, cost

reduction to other parts of the

organization due to business

process reengineering.

Ongoing costs: equipment

maintenance, ongoing

training, licensing

Meuwissen 2003 Global food

industry

Industry analysis Implementation:

transforming processes, less

flexibility, automation, extra

storage, production

materials, personnel,

documentation

Maintenance:

Audits

49


As demonstrated in table 10, while the listed costs do not vary much against other

foreign examples, there is a clear indication in the literature that voluntary FTSs in

China are more difficult to implement than in many more developed countries. This is

because the cost of implementing such measures is greatly amplified in China. Below in

table 11 are 5 studies in which the difficulties for Chinese food firms are expressed.

Most studies noted that Chinese food companies feel that implementing voluntary FTSs

are too expensive. Wang et al. (2008) point out that in the Chinese food industry

margins are very thin and consumers are very price sensitive; food producers simply

cannot afford to pass on the costs of FTSs to the consumer. Moreover, as the Chinese

agricultural industry consists mainly of millions of small scale farmers, there simply are

not enough financial resources to install such systems. Wang et al. (2008), comment

that small farmers also find it difficult to obtain credit from banks.

Another difficulty which was mentioned frequently throughout the studies was the lack

of regulation or monitoring in traceability. This presents a situation whereby the cost of

implementing voluntary FTSs is that another company who ignores the rules will

ultimately overtake you. Liu and Hobbs (2010) make the point that the regulations are

not adequate to deter unlawful food production, they remark “every farmer is

competing with other farmers who they know are willing to cheat and ignore legal

obligations to gain a cost advantage”. This creates a situation where “free riders” will

benefit from not following the regulations at the expense of those who do abide them.

In Miao et al’s (2011) survey, they also found that most of the technology for voluntary

FTSs is made abroad and is often too expensive to justify the cost of purchasing in

China.

50

Table 10: Research on the costs of voluntary FTSs in China

Author Industry

and

region

Methodolog

y

Costs incurred

Feng et al.,

2012

Beef in

Tianjin,

Shandong

and Hebei

Document

collection,

field analysis

and company

interviews

High installation cost and difficult to use

among staff

Wang et. al

2009c

Poultry

products in

Beijing

Case study Before implementation

Plan development, team member, training

Implementation

Sanitation (66% of cost), staff training,

process improvement (27% of cost),

verification and testing, record keeping,

document control

Table 11: Why are the costs greater in China?

Difficulties of implementing FTSs

that are specific to China

Zhou

et al.

2013

Wang

et al.

2008

Feng

et al.

2009

Miao

et al.

2011

Zhou

and Jin

2009

Lack of education among

workers/management

SMEs cannot finance it

Lack of government support

Poor regulation and monitoring/

inconsistent standards

Poor infrastructure/ low technology

Lack of awareness among consumers

51

6.2 Transaction costs of FTSs

Engelseth (2009) argues that food product traceability should be viewed from a more

network-oriented perspective and can only be achieved in practice by cross-functional

interaction. FTSs are more effectively implemented as part of a supply chain than as an

individual firm. In order to meet the required standards for traceability, firms must

collectively meet certain production and control requirements. This necessitates a

greater cooperation and integration among parties of a supply chain. As Banterle et al.

(2006) writes, “the correct execution of the voluntary system brings with it the

necessity to reorganize economic exchange among supply chain agents, through the

introduction of new modes of vertical coordination and in providing new transaction

governance”. In order to guide the vertical coordination in the supply chain firms will

participate in supply chain agreements. These rules set out the rules for the new

standards of quality and safety. It is important that a firm weighs up the relevant costs

and benefits of being a part of such an agreement.

In accordance to Williamson’s theory (1993) on transaction cost economics, these

agreements incur transaction costs. Such costs are classified in three main categories

depending on where they arise in the transaction. Information or search costs identify

costs that arise in searching for a suitable transaction partner; negotiating costs take

place during transactions; monitoring and enforcement ensure that inputs meet their

quality and safety requirements. (Hobbs,1996). Such costs occur because a party takes

advantage of or is subject to seller opportunism, information asymmetry and/or

bounded rationality. In order to protect oneself from these costs, supply chain agents

must set in place a governance structure to manage the supply chain agreement. This

structure can be simply achieved on spot market whereby the continuity of trade is not

of value to each party; it can be achieved in a hybrid structure which are forms of

long-term contracts that bind the parties for a period of time; or it can be done through

52

a hierarchal structure, which is the full integration of all parties into a single entity

which uses administrative rules to decide the allocation of rights. According to

Williamson (1993) choosing a suitable governance structure depends on three factors,

each factor contains varying costs. They are:

1. Asset specificity- This is correlated to the bilateral dependency of economic

agents, due to the resources invested to support the agreement. Such assets

include specialized human, physical, geographical and intangible investments.

The existence of durable investments creates a risk of the counterparty stranding

the asset and jeopardizing the project. These assets make it important to the

parties that there is continuity in trade. The greater the asset specificity the greater

the transaction cost.

2. Transaction uncertainty – This depends on the degree of information asymmetry

among economic agents and is strictly connected to the probability that subjects

will respect contractual obligations. An increase in uncertainty will determine an

increase in transaction costs.

3. Transaction frequency – This is related to the lapse of time between one

transaction and another. An increase in frequency will incur an increase in

transaction costs.

The implementation of voluntary FTSs may entail a considerable change in

transaction costs. It is important for a supply chain actor to assess these costs.

Banterle and Straneiri (2008) studied the supply chain structures in Italian food firms

before and after implementing FTSs. They concluded that implementing voluntary

FTSs increased asset specificity and decreased uncertainty among supply chain actors.

The results show that due to the specific investment necessary to implement

traceability there was an increase of monitoring costs and an increase in firms’

liability among the agents of the supply chain, this lead to a general increase in

53

vertical coordination. The results also show that greater information transparency (or

decreased uncertainty) resulted in lower risk of contractual infringement, no change in

transaction costs and no change in the vertical coordination. They also conclude that

transaction frequency is not altered in accordance with voluntary FTSs. They suggest

a hybrid form of governance to manage these transaction costs.

In short, participating in a supply chain requires a change the relationship with other

participating firms. Firms must agree to a supply chain agreement in order to

successfully implement new traceability standards. This new agreement if

mismanaged may result in huge costs for firms. As we can see from the previous

example this is most likely to arise from asset specificity. For example, if supply

chain members co-invest in a production facility for FTSs, and a strategic member of

the supply chain decides to suddenly abandon the project, the rest of the members will

incur a huge transaction cost as that member may possess certain expertise or market

reputation etc. that cannot be replaced. The other firms will be left stranded and may

lose the investment. To avoid this, the firms must implement a governance structure to

monitor this transaction cost risk. In the case of the Italian firms, it was achieved

through a hybrid governance form/ long term contracts. These costs must be

forecasted in order to ensure project mismanagement.


In China, the issue of transaction costs is an even more of a pressing issue. One clear

factor why is that despite continued institutional reform since 1979, the central

government has not created a stable legal structure to enforce contract law throughout

its provinces. Zhou and Poppo (2010) point out that enforcement is subject to

particularism and personal accommodation due to:

54

1. Intervention from local or regional government officials,

2. The lack of independent law enforcement, and

3. At times, frequent unjustified law changes.

This creates a situation where opportunism, information asymmetry is enhanced in the

Chinese market because there is less transparency in Chinese contract law and fewer

repercussions for offenders. This increases the transaction costs because greater time

and money will need to be spent in ensuring there is no breach of a supply chain

agreement. This makes voluntary FTSs more costly to establish in the supply chain.

Xin and Pearce (1996) find that Chinese managers draw on personal relationships as a

substitute for formal institutional support. In this regard the contractual measures

taken to control transaction cost in asset specificity in the Italian firm may not work in

a Chinese context. A key question in the context of asset specificity in Chinese

voluntary FTSs is whether to use a formal governance structure based on economic

incentives or to depend on optimizing personal relationships with other supply chain

actors to provide transaction cost governance. Lui et al. (2008) analyse the issue of

partnership performance as it relates to asset specificity in China. Their survey

concludes that in the context of China’s weak institutions and strong business

relationships, asset specificity is related to partnership performance through

generating cooperative behaviour rather than reducing opportunistic behaviour. Their

study did not support the transaction cost economic theory in the context of China.

Instead it found that asset specific investments have a significantly and positive

relationship with trust. In turn, trust facilitated cooperative behaviour, which enhanced

satisfaction in a partnership. This indicates that the economic costs of setting up a

voluntary FTS in a supply chain should be directed more towards generating trust

cooperative behaviour.

55

Investing in specific assets in a business partnership is risky for managers. In a

Chinese context, it is perhaps beneficial to combine two aspects, that is, managing the

transaction costs to prevent opportunism from other partners and also to focus on how

to foster trust and cooperative behaviour in a partnership in order to improve

partnership performance.

56

7. Summary and Conclusion

7.1 Summary of Key Findings

Voluntary FTSs offer more efficient systems for traceability however may not

provide an optimal level of food safety for public welfare. Mandatory FTSs are

useful as a last resort mechanism to protect market failure and prevent health risk.

Mandatory FTSs are particularly difficult to implement in China due to the

fragmented structure of the agricultural economy. Voluntary FTSs offer good

potential in China due to growing consumer awareness of safety issues. China

offers a new form of hybrid systems which differs from those in Japan and Europe;

this is the state owned voluntary FTS.

The benefits of voluntary FTS are best categorised in terms of market

differentiation, supply chain management and food safety risk management.

Research on market differentiation benefits suggests customers do associate

traceability with better safety/quality and that they are willing to pay a premium it.

Research on this area in China is abundant and generally consistent with studies in

other countries; however it does stress the low awareness of Chinese consumers

towards FTSs and/or the product attributes arising from FTSs.

Research on supply chain management benefits suggests that FTSs are useful for

improving business functions such as inventory management, warehousing,

procurement etc. This can help offset the cost of FTSs. In the context of China,

there are few studies that prove this.

Research on food risk management indicates that FTSs are highly important for

57

minimising the scope and time to recall products during a food safety problem.

This saves direct costs on the volume of products recalled and also on liability

claims; indirect costs saved include damage to a firm’s reputation. In China, due to

poor liability law and less established brand recognition, the incentive to

implement FTSs for food safety risk management is lower than most OECD

countries.

Costs of FTSs refer to product differentiation and recordkeeping. This is no

different in China. However, the research on China suggests that costs are

amplified because of financial restraints for small businesses, lack of government

support, lack of user education/management, poor regulation/monitoring and low

of awareness among consumers

Implementing FTSs requires heightened cooperation between supply chain agents.

This will incur transaction costs. For FTSs, these costs are likely to rise due to the

governance of asset specificity and may be consolidated by lower uncertainty. In

China, these costs will be even higher due to poorly enforced contract law.

However, in China, evidence also suggests that the governance of supply chain

agreements may not be best managed through contracts (and hence transaction cost

economics is not completely applicable) rather it is achieved by building

cooperative relationships or a combination of both.

7.2 Conclusion

The issue of food safety is critical to China’s future social and economic development.

Consumers, private firms and the government all have a strong role in driving this

forward. This study has highlighted the role FTSs in achieving this. From a policy

58

perspective it is very difficult to introduce FTSs into an agricultural economy as large

and as complex as China’s. However, more initiatives can be taken to ensure that China

reaches an optimum level of food safety. A key to achieving this is to encourage private

firms to introduce FTSs. Government support to the private sector has a very important

role in achieving this. This study presents a useful outline of the benefits and costs for

any private firm considering implementing FTSs. The paper demonstrates how FTSs

can be viewed not only as a requirement for food safety but also as a means to improve

a variety of business functions and to create competitive advantage. Consumer

behaviour and technology trends also suggest it can be a worthwhile strategy. In doing

so, the goal for higher food safety standards in China can develop forward with

improved business performance.

7.3 Limitations and Future Research

This study has drawn its findings based on the collective evidence of other research.

The findings were not empirically proved. The subjects in this study consist of a wide

variety of industries and regions. It is difficult to collect data that collectively

represent such a wide bracket of subjects. This is made more difficult by the

non-market nature of many of the benefits and costs arising from FTSs. This is a

limitation.

However, this study does act as a valuable tool for future empirical studies. These

studies could focus on specific firms, industries and regions. As indicated throughout

the study, the following research would be useful in further assisting firms

considering the implementation of FTSs:

A study to identify what are the specific benefits of FTSs to supply chain

management in China

59

A case study to evaluate the costs saved on a product recall by a Chinese firm

after implementing FTSs

Moreover, when firms are considering the implementation of voluntary FTSs, they

must decide the degree of breadth, depth and precision of traceability. An important

question is how much detail is necessary or how much detail is cost effective? In this

case a framework to design a breakeven point of traceability would be very useful.

60

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Postscript

Acknowledgements

I would firstly like to thank Professor Cheng for his valuable advice throughout this

research.

The completion of this thesis marks the end of my university education, and following

this I would also like to thank my parents for their endless support and guidance over

the years.

Finally, I would like to pay a special mention to my classmates in the EMA Chinese

Economy programme. I wish them every success in their future careers.

Statement of Originality

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thesis does not include anything published or written by other persons or organizations.

Inspirations and contributions by other people have been clearly stated and appreciated

in the thesis.

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