Contract flexibility and dispute resolution in African manufacturing

TLDR

Strong legal institutions encourage firms to take risks, increasing trade, breach incidence, and court use, so frequent non‑compliance does not indicate weak institutions. The study surveys contractual practices of African manufacturing firms across six countries. The survey shows pervasive contractual flexibility and relational contracting, with long‑term ties enabling negotiation over non‑performance; confrontation is limited to large firms and occurs mainly in Zimbabwe, where robust legal institutions correlate with higher breach and court use, indicating that frequent breaches reflect risk‑taking rather than institutional weakness.

Abstract

This article examines the contractual practices of African manufacturing firms using survey data collected in Burundi, Cameroon, Côte d'lvoire, Kenya, Zambia, and Zimbabwe. Descriptive statistics and econometric results are presented. They show that contractual flexibility is pervasive and that relational contracting is the norm between manufacturers, their suppliers, and their clients. The existence of long‐term relations between firms helps them deal with contract non‐performance through negotiation. Confrontational methods such as lawyers and courts are used only by large firms and when negotiations fail. Whenever confrontation can be avoided, business is resumed. Of the six studied countries, incidence of breach and the use of lawyers and courts are highest in Zimbabwe which is also the country with legal institutions that best support business. Our favoured interpretation is that good legal institutions incite firms to take more chances, thereby encouraging trade and leading to more cases of breach and more recourse to courts and lawyers. A high frequency of contract non‐compliance should thus not be interpreted as a sign of imperfect legal institutions.