Institutional structures and transaction costs in Indonesian Sustainable Palm Oil (ISPO) certified smallholder palm oil value chains

¹ Agricultural Economics Study Program, Department of Resource and Environmental Economics, Faculty of Economics and Management, IPB University, Bogor, 16680, Indonesia
² Agribusiness Department, Faculty of Agriculture, Universitas Sumatera Utara, Medan, 20155, Indonesia
³ Agribusiness Department, Faculty of Economics and Management, IPB University, Bogor, 16680, Indonesia
⁴ Department of Resource and Environmental Economics, Faculty of Economics and Management, IPB University, Bogor, 16680, Indonesia

^* Corresponding author: This email address is being protected from spambots. You need JavaScript enabled to view it.

Abstract

Indonesian Sustainable Palm Oil (ISPO) certification aims to improve competitiveness and governance within the sustainable palm oil value chain. However, compliance with ISPO standards often creates complex institutional interactions, thereby increasing transaction costs. This study maps the institutional structure of smallholder farmers palm oil value chains and examines the differences in transaction costs between ISPO and non-ISPO smallholder farmers. A face-to-face survey was conducted with 160 smallholder farmers in the Batubara and Labuhan Batu Regencies, North Sumatra, comprising 80 ISPO and 80 non-ISPO smallholder farmers, selected through a multistage sampling design. Data were analysed using quantitative descriptive methods, transaction cost structure analysis, and the Mann-Whitney test. The results indicate that ISPO smallholder farmers value chains involve three institutional layers: primary institutions as core actors; secondary institutions that facilitate cultivation, finance, and marketing; and tertiary institutions that support value chain development through certification. In contrast, non-ISPO smallholder farmers value chains involve only primary institutions. Significant differences in transaction costs were found between ISPO and non-ISPO smallholder farmers. These findings underscore the need for policies that strengthen farmer institutions to provide inputs and harvest, thereby collectively reducing transaction costs.