International Business Review Vol. 2, No. 3. pp. 281-296, 1993

Printed in Great Britain

0969-593 1193 $6.00 + 0.M) 0 1993 Pergamon Ress Ltd

Co-operative vs Private Firms: Co-operative vs Private Firms

An Empirical Comparison of Co- operative and Private Small Firms

in Britain Andrew Robinson and Nick Wilson

Bradford Management Centre, University of Bradford, Emm Lane, Bradford, West Yorkshire, BD9 4JL, UK

Introduction The transition from central planning to market mechanisms, via privatisation, in Eastern Europe has led economists and industrialists to assess the relative merits of different possible ownership and incentive structures, in order to guide emerging enterprises and shape future economic development in these economies. One particular focus has centred on the role of employee ownership in the re-structuring process. Ellerman (1991), for instance, has been a strong advocate of the promotion of worker-owned firms* amongst small and medium-sized businesses as part of the marketisation process. One of the arguments against the worker ownership of firms stresses the relative inefficiencies of such organisations in terms of productivity, employment creation and capital investment. It therefore seems pertinent to examine the actual characteristics and behaviour of employee-owned firms in Britain compared to a matched sample of private firms.

Much of the debate surrounding the relative merits of the cooperative, employee-owned or labour-managed firm (L-M) has been waged at a theoretical level. Motivated by the desire to investigate the effects of collectively owned enterprises and their distinct organisational and behavioural characteristics, early theorists, worked with the Illyrian model pioneered by Ward (1958) and Vanek (1970). L-M firms, in this framework, were deemed to underemploy, underinvest, and underperform in terms of output and efficiency compared to the optimal levels of the idealised neoclassical firm (under perfect competition). As Furobotn (1976) concluded: “The ultimate conclusion on the L-M firm is clear. Whatever its contribution to industrial democracy, it is not an inherently efficient organisation”.

Andrew Robinson is an Economic and Social Research Council Teaching Fellow and Nick Wilson is an KM Professor of Credit Management. The authors are grateful to the Economic and Social Research Council (Grant number: RO023 1859) for providing financial assistance. *Employee-owned firms are often referred to as co-operatives or labour-managed firms. Ellerman prefers a structure known as an ESOP (Employee Share Ownership Plan).

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However, there is limited actual empirical evidence on the relative efficiency of cooperatives. Moreover, the theoretical results are far from robust, and extremely sensitive to modest changes in the specification of the objective function. Further, the emergence of new models of employee ownership, e.g. Share Option Schemes, Profit-Sharing Schemes, Employee Share Ownership Plans (ESOPs) and Common Ownership Schemes (ECOPs) has refocused attention on the role, potential viability and comparative performance of the cooperative enterprise.

This paper aims to examine empirically, the characteristics and behaviour of firms organised as cooperatives and matched private small companies in the UK. The database consists of detailed data on the organisation and performance of 101 cooperative firms and 85 small privately owned firms. The paper will proceed as follows. In the next section we briefly assess the effectiveness of neoclassical theory in evaluating the behaviour of cooperative enterprises. The third section proceeds to disseminate the major predictions from theory relating to the comparative characteristics and performance of L- M and capitalist enterprises. The fourth section surveys the empirical evidence relating to these predictions. The fifth section lists our conclusions.

Theory As highlighted in the previous section many of the predictions about the comparative behaviour of cooperatives and private (capitalist) firms derive from “black-box” neoclassical theories of the firm that assume a cooperative simply has a different objective function and largely ignores issues such as social relationships, internal organisation and comparative incentive structures. Economists such as Williamson (1980), Aoki 1984, Aoki et al., (1990) and Milgrom and Roberts (1992), however, view the modem firm as a nexus of contracts for cooperative relationships between the different actors, which makes possible the optimal distribution of risk as well as the efficient collective use of skills, knowledge, and funds. The modern firm is not as neoclassical theory would have us believe a “mere mechanical ‘black box’ that transforms atomistic factors of production into marketable outputs”‘, rather, “successful business organisations are complex systems of mutually reinforcing parts, and it is how these pieces of an efficient organisation fit together into a coherent whole that is important”.? These facts, the persistence and continuing growth of the cooperative movement in the U.K.$ and the emergence of new forms of employee ownership and participatory work practices, has led to a re-examination of the reasons why co-operatives do survive in market economies and workers support them.

Recent literature has taken on board the “nexus of contracts” approach by

*Aoki, p. 4. tMilgrom and Roberts (1992). $Recent evidence form the Cooperative Research Unit at the Open University suggest the cooperative sector has grown by approximately 4.5% between 1988 and 1992. They now total 1,460.

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developing a socio-economic perspective in which the cooperative is seen as Co-operative vs an alternative social grouping where atmosphere, attitudes and relationships Private Firms within the organisation are central. In common with the developing literature on Employee Ownership (see Wilson, 1992). this has centred on the impact of institutional structures on labour productivity and the appeal of co-operatives to workers with different socio-economic characteristics. While there is little consensus amongst economists as to how institutional structures impact on labour productivity. the influence of the unique ownership structure of cooperatives and the resulting positive attitudes have become the major components of this new view of the firm.

Predictions from Theory This section is not meant to be an exhaustive review of the theory. Rather, it intends to enable empirical scrutiny of the most important theoretical predictions concerning the behaviour and economic contribution of cooperative enterprises.

Enterprise Objectives The neoclassical and socio-economic framework highlighted above raise a number of issues which need to be developed and examined. In particular is the need to consider the extent to which models of the cooperative organisation are based on verifiable foundations.

Neoclassical theory postulates that the perverse behaviour of the L-M firm (underemployment and underinvestment) derives from an objective function of maximising per capita income vis-&-vis profit-maximisation for capitalist firms. Attempts to broaden the objective function of the L-M firm by including the size of membership as well as divergent versions of the workers’ utility function (see for example, Law, 1977; Berman. 1977; Estrin. 1979 and Stephen, 1983), indicate that the perverse supply responses can at least be mitigated. Socio-economic studies have adopted a less rigid approach, instead emphasising that coopcrativc members may have a range of objectives; frequently occurrin, (7 ones, for instance, refer to the choice of new forms of division of labour and technology; equality of wages and of tasks undertaken; concern with maintaining and increasing employment; and more generally for production to be determined by social need rather than profit. Clearly such objectives do not imply straightforward profit maximisation nor maximisation of income per worker, and indeed may well be incompatible with such objectives.

However, while it may not be possible to comment empirically on the precise form of the objective function, it may be possible to examine the sorts of motivations and behavioural patterns which will influence them. Consequently, we may infer something about the general nature of the objective function by observation.

Wages and Ernplqment A variety of hypotheses have been developed to explain wage and

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employment policies within L-M firms. The basic Ward-Vanek model implies that employment is a short-run variable which is susceptible to changes in the market place. The implications being that in order to maximise their in- come and appropriate the rewards from their risk-taking, employment levels are unlikely to expand in an economic upturn and decrease in a downturn.

However, given the inclination of L-M firms to substitute income risk for employment risk by the adoption of more or less explicit internal “job- insurance” arrangements, and the inability of democratic and collectively- owned enterprises to sanction layoffs (of one of their membership) for a temporary economic gain, instead implies a situation of relative employment stability compared to the privately-owned firm where current marginal productivity can be expected to determine the level of employment independently of workers’ preferences (Steinherr and Thisse. 1979).

Accepting this view of relative employment stability in the short-run is not to claim that output or labour input will therefore be fixed. Labour input may vary by the temporary employment of non-member employees. Alternatively, labour input can be adjusted by variations in worktime contributed by members.

In terms of wages two trends emerge. First, the tendency of cooperatives towards self-exploitation. and/or the existence of a trade-off between income and other workplace attributes (including employment security), indicates that wages will bc below the market rate. Similarly, L-M firms in the early phases of their development will be inclined to take below-market wages for a period to finance investment for future growth (Bartlett, 1987). Second, there is little evidence to suggest that the trade union movement will intervene to increase the level of wages. Trade Unions remain wary of full-scale employee- ownership, fearing it will undermine their traditional collective bargaining role within the firm, limit the scope and flexibility of wage demands, and even dispense with the need of trade union representation altogether.

In vestment The ideological and legal structure of cooperative firms in the UK often makes it impossible for them to raise large sums from external sources (issue of ordinary shares to non-employee investors) or internal sources (prohibit unequal investment amongst employee owners). Although it is well known that all small firms suffer from the same inability to raise external finance, this forces them to place a greater emphasis on owner-financing, trade credit and working capital management.

Theory suggests that cooperatives, which have to rely on internal funding to finance any investment, will suffer certain undesirable consequences. Principally, only investments with either a quick or high rate of return will proceed. This will be exacerbated by the fact that returns from private savings accounts are likely to be higher than the returns from investments in collectively-owned assets. Secondly, workers will have an incentive to liquidate the cooperative in order to recoup their money. Thirdly, in order to

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maximise their investment, members may be reluctant to admit new members, Co-operative vs and finally, co-operatives tend to be in a position where they produce in the Private Firms zone of increasing returns to scale at relatively low size and low levels of output.*

This tends to suggest a cooperative sector concentrating in small-scale, labour-intensive service sectors where barriers to entry for new businesses and capital requirements are low.

Economic Performance Of interest here is the extent to which an organisational form specific to the co-operative leads to efficiency gains. Drawing on the growing pool of work in this area (Williamson, 1980; Alchian and Demsetz, 1972; Vanek, 1970; Jensen and Meckling, 1979) it has been possible to hypothesise that L-M and profit-maximising production might have different cost functions. This has developed into two contrasting schools of thought.

The early and influential research of Webb and Webb (192 1) suggested L- M firms were an inefficient and unsatisfactory form of organisation, which would have to adopt capitalist attitudes and practices or perish. Central to the Webbs’ critique were the objectives and internal structure of L-M firms. Efficiency for the Webbs depended on an efficient management hierarchy and the needs of the market and the consumer. L-M firms met none of these criteria; indeed their preoccupation with the internal functioning of the organisation and relationships between management and workers in L-M firms, it was argued, would lead to inefficiency.7 This view gained subsequent support with the work of Alchian and Demsetz (1972) and Williamson ( 1980) who argued that not only are workers poor decision-makers but that the organisational form of profit-maximising firms is best able to minimise the degree of shirking and free-riding, i.e. has the best incentives and monitoring properties.

Conversely, a different school of thought has developed (Vanek, 1970; Cable, 1984; Jensen and Meckling, 1979) around the contention that the neoclassical production function framework is wrong in attributing efficiency differentials primarily to differences in technology. Its neglect of alternative modes of production, such as the internal organisation of co-operatives (which Webb, Williamson and others criticise) they contend, may instead hold the key to performance advantages over capitalist fums. Advocates of this view advance the idea of a theoretical impact on company performance via a number of factors:

(1) an incentive to increase workers effort; (2) a source of more positive worker attitudes, co-operative behaviour and

financial awareness;

*Derived from Vanek (1975). tThis is backed up by Thomley (198 I), who suggests the following reasons as to why the co- operative movement did not grow: (1) undercapitalisation. (2) lack of management skill, (3) inexperience of democratic practice, (4) lack of political support.

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(3) increased organisational efficiency through information sharing: (4) intemalisation of conflict between workers and management; (5) greater responsiveness to change: (6) reductions in labour turnover and absenteeism, and as a consequence of

(6): (7) a growth in the stock of human capital.

Non-economic Pegormnnce If economic analysis is to be correctly interpreted it needs to be based on a deeper understanding of the processes and dynamics within co-operatives. At the same time, it has been argued that the usual economic indicators of performance are likely to be inadequate to explain the true scope and impact of co-operatives, and are thus inappropriate for comparing two types of firm which have such notable differences.

Co-operatives, unlike private profit-maximising firms, may consciously seek to fulfil social objectives. This may be reflected by workplace characteristics, their industrial relations record, its involvement in the local community, and environmental considerations. Capitalist firms on the other hand may be all too willing to trade off many of the above considerations for short-run gains in profits. It therefore seems that if true efficiency comparisons are to be made, then these must extend beyond the purely economic measures and include some social efficiency measurements.

Empirical Findings The analysis from this section is based on data collated on a matched sample (by size and sector) of 101 cooperative and 85 privately-owned small firms in the UK, during 1992/3. Data obtained by interviews and postal qucstionnairc focused on the following key issues; market characteristics. employment, wages, performance, work organisation, finance and investment, and industrial relations. Evidence reported here, concentrates on those variables which the literature suggests may be associated with significant bchavioural differences. The statistical significance of the differences in the mean values of these variables is based upon a t-test.*

Compnrcctive Chctmcteristics In general terms, discernible differences exist between the market characteristics of co-operative and private enterprises. These can be distinguished at various levels. Knowledge of the degree in which each respective organisation operates in the different markets seems central to gaining an understanding of their behavioural and organisational framework. The tendency and ability of co-operatives to concentrate on the local market (67% of all sales and 60% of inputs), contrasts with the international orientation of privately-owned firms (12% of sales exported and 18% of

*The significance level derived from the [-test is based on the assumption of equal or unequal variances as denoted by the result of the F-test.

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Variable Co-operatives Private films t-st;lt.

Sales (%) Local

National Exports

Inputs (%) Local National Imports

Competition Local National World

66.60 47.79 3.7 j***

29.68 40.65 -1.05** 3.61 I’.06 -2.7-l***

60.47 44.88 7,.3s** 34.79 33.67 0.19

4.16 18.46 -3.13***

2.57 3.57 -3.79*** 4.44 4.96 -1.79* 5.64 5.81 -0.60

Note: Average of Competition scores derived from following scale: I represents “no competitors” 4 represents “I I-20 competitors” 2 represents “l-5 competitors” 5 represents “2 l-50 competitors’* 3 represents “6-10 competitors’* 6 represents “more > 50

competitors”. Statistical significance: *** at the 0.01 level, ** ;\I 0.05 level. * at 0.10 Icvcl.

inputs imported). whereas local sales only account for 47% of their total. Some explanation of the geographical scope of the markets of the sample firms may stern from the comparative levels of competition they face in each market. On average, coopcrativc firms face a significantly smaller level of competition in local markets than do their capitalist counterparts. The increased level of competition faced by privately-owned firms at all levels is exacerbated by the fact that private firms are more likely to bc operating in a market sector which is dominated by large competitors and large buyers of their product.

These findings, while stressing the importance of local linkages to the co- operative sector and the impact of competition, also signals its growing marginalisation. Indications are that co-operatives seem unable or unwilling to expand beyond the boundaries of their locality. Likewise, the lack of competitive pressures may have repercussions on the efficient running of co- operatives, on top of the inherent risk in relying on the demands of one market.

Enterprise Objectives Table 2 reveals several unexpected pieces of information. Firstly, capitalist firms tend to adopt performance based objectives, notably to maximise profits and increase sales, whereas co-operatives seem to be driven less by performance measurements, and more by the desire to prdvide a specific product and/or service which is produced in a pleasant and secure working environment.

Common to both types of organisation, however, are their growth

Co-operative vs Private Firms

Table 1. Market

Characteristics of Sumple Firms

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Table 2. Objectives of Sample Firms

Objective Co-operatives Private firms r-stat.

Provide important product 4.43 ( I ) Improve moral 3.88 (2) Increase sales 3.82 (3) Job security 3.79 (1) Improve I.R. 3.77 (5) Provide service to particular group 3.71 (6) Increase incomes (Profits) 3.67 (7) Allow workers to manage 3.35 (8) Increase employment 3.28 (9) Job rotation 2.30 (IO

3.99 (3) 3.71 (5) 4.36 (2) 3.74 (4) 3.07 (7) 3.37 (6) 4.43 (I) 2.88 (8) 2.54 (9) 2.17(10)

3.00*** 1.21

-3.75*** 0.28 4.36*** 1.71*

-3.95*** 2.80*** 4.63*** 1.33

Average of scores derived from 1-5 scale in which a score of 1 represented “significantly below average importance” and a scale of 5 represented “significantly above average importance”. Figures in brackets show the ranking of each variable. ***Statistically significant at the 0.01 level, ** at 0.05 level. * at 0. IO level.

aspirations in terms of increasing sales. This, as Bartlett et al. (1992) suggest, could reflect either that the sampled firms had not yet “reached their equilibrium size, that they were growth rather than profit motivated, or that increasing sales was an essential survival strategy in an imperfectly competitive market”.

Nevertheless, there may be grounds to re-examine the theoretical underpinning’s of both co-operative and capitalist enterprises. There is some doubt that capitalist firms’ foremost and only interest is profit maximisation, whereas co-operative firms tend to offer no support to the supposition that their primary aim is the maximisation of per capita income. It is evident that these simplistic models of the “firm” are unlikely to pick up many of the distinctions between the two forms of organisation until they implicitly recognise the different types of organisational structure and internal organisation .of work that prevail within them. At issue, however, is the question as to whether these behavioural patterns, which can change between situations as well as over time, are capable of being modelled in a conventional neoclassical way.

Table 3 presents evidence on the composition of wages and salaries in the respective enterprises. On average, total pay is lower at all levels within co- operative firms. Thus, while co-operatives do not seem to have dispensed with the need for trade unions (38% representation against 5% in capitalist firms), these facts do tend to support trade union fears concerning their scope and influence over wage demands.

The key finding, however, is the marked narrowing of income differentials between blue collar and managerial staff, or alternatively the more equitable pay structure that exists within the co-operative firm. The payment of managers below the market rate may not be irrational. Whilst one must accept

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Description Co-operatives Private firms

Average overall wage (p.a.) 9549.23 13716.01

Average wages (~.a.) Part-time 537 I .‘5

5666.67 4742.42

Unskilled 7046.67 Semi-skilled 9369.09 12456.00 Admin. 8115.50 8978.57 Management 11906.79 22276.25

*** Statistically significant at the 0.01 level, ** at 0.05 level.

r-stat.

-3 . 970*** .,

0.61 -0.46

-2.3 I** -0.81

-L54***

that co-operatives may face some difficulties in not only motivating but attracting high-level managerial staff, evidence from the rest of this paper would indicate that this merely reflects a trade-off in the individuals’ utility function between income and other attributes. Indeed, utility derived from job satisfaction, an equitable pay structure, job security and other positive attributes associated with co-operative rather than capitalist producticn (see later), may compensate for the payment of a lower basic salary.

There also seem to be distinct behavioural differences in the treatment of employment. The evidence from our sample suggests that internal “job- insurance” and increased levels of employment stability are likely to be of considerable importance (see Table 4). L-M firms have various mechanisms in place in order to deal with fluctuations in their workload. In times of excess demand overtime predominates for existing members, otherwise they call upon a pool of on-call non-members (both paid and voluntary) or short-term contracts for non-members, which will not dilute the earnings of existing members. In times of insufficient demand, co-operatives seem unwilling to lay people off, instead they are more inclined to collectively reduce the length of the working week. Private firms, on the other hand, tend to rely heavily on the use of overtime, whether up or down, as a means of regulating their labour inputs. There seems little inclination to use any other mechanism, although, as

Description Co-operatives Private firms r-stat.

Overtime 3.12 3.05 0.33 Decrease working week 2.13 1.62 2.94*** Temporary layoff 1.37 I .48 -0.77 Agency temporaries 1.40 1.52 -0.96 Short-term contracts I .96 1.76 1.01 On-call workers (paid) 2.26 1.73 2.59*** On-call workers (voluntary) 2.05 1.38 3.61***

Co-operative vs Private Firms

Table 3. Employment and

Wage Characteristics of Sample Firms

Table 4. Means of Absorbing

Fluctuations in Workloads of Sample Firms

Average of scores derived from 1-5 scale in which a score of 1 represented “signiftcantly below average importance” and a scale of 5 represented “significantly above average importance”. ***Statistically significant at the 0.01 level.

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Objective Co-operatives Private firms r-stat.

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Table 5. Investment Objectives of Sample Firms

Increase productivity Cost reduction New product launch Meet sales target New plant introduction New process introduction

4.05 ( I ) 4.26 ( I) -1.26 3.78 (2) 1.01 (2) -1.43 3.60 (3) 3.7’ (1) __ I .87* 3.18 (1) 3.87 (3) -1.91* 3.45 (5) 2.78 (6) 3.16*** 3.X (6) 2.95 (5) X8**

J Average of scores derived from l-5 scale in which a score of I represented “significantly below average importance” and ;I scale of 5 represented “significantly above average importance”. Figures in brackets show the ranking of each variable. ***Statistically significant at the 0.01 level. ** at 0.05 level. * at 0. IO level.

in co-operative firms, there is little evidence to suggest that workers will be

temporarily laid off.

The ranking of reasons expressed as to why firms undertook investment

showed remarkable similarities (see Table 5). The prime concern of both

forms of organisation was cfficicncy. in terms of increasing productivity and

reducing costs. Of secondary concern were factors more relntcd to market

strategy (sales and new products bcin g relatively more important reasons for

investment).

Looking al the statistical differences bctwccn the mean values, whereas

capitalist firms’ reasons for investment tended to diminish once they had

considered its efficiency and markctin g strategy implications, co-operatives

were increasingly concerned with the rok of new process innovations and

plant modcrnisation. This confirms much of the work on innovation in L-M

firms (Bonin, 1983; Vanck, 1970) which emphasiscs the close linkages (and

inccntivcs provided) bctwcen innovation and increased levels of rcvcnue and

members’ income. Private firms on the other hand, are more likely to

concentrate innovation activity within the sales and marketing promotion

activities rather than the production process itself.

Surprising results stem from Tables 6 and 7. The theoretical basis of the

Source Co-operatives Private firms I-SLlt. I

Internal funds a.57 56.43 -I .70* Bank credit I-t.94 I720 -0.44 Government loan 3.13 0.00

Table 6. Government subsidy 5.7x 0.07 Sources of Finance (8 Membership 11.16 0.00 of Total) Other 19.47 26.3 I

* Statistically significant at Ill12 0. IO lcvcl

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Description Co-operatives Privze firms f-stix. Co-operative vs

Private Firms

Net-present-value technique (Rate of interest) Payback period used (years)

8.67 13.86 3.19 3.09

-3 39* _._ X6*“*

Table 7. Evaluation of

Investment Plans

** Statistically significant at the 0.05 level. * at 0. IO level.

underinvestment hypothesis relating to co-operatives is that. not only will they

be reluctant to sanction the internal financing of investments, but the time

horizon over which investments will be evaluated will be short relative to the

private firm. Our evidence contradicts this view on both counts.*

Amongst those co-operatives making use of a formal investment-appraisal

technique. the payback-period method predominates. The willingness of co-

operatives to undertake investments is reflected in the finding that the time-

horizon/payback period over which investments are evaluated by co-

operatives. as well as the rate of interest used in the net-present-value

appraisal technique. is more conducive to undertaking investments than in

capitalist firms. Similarly. evidence on the sources of finance indicate that co-

operatives (including contributions to invostmcnts made by existing members)

arc not unwilling to internally finance investments (XC Table 7).

Of intcrcst in thcmsclvcs arc the other sources of finance. In theory it was

frequently advocated that “agcncics” (the state, trade unions, co-operative

organisations. and political movcmcnts) should financially support co-

opcrativcs (given the so-called disinclination of co-operatives to invest

themselves. and problems in obtaining finuncc clsewhcre), in order to cnsurc

their viability in capitalist economics and to permit workers to cxprcss their

prcfcrcnccs for co-opcrativcs. In comparison to the private small-firm sector.

this has occurred, albeit on a limited scale, with government loans or subsidies

(9%), charitable grants (5%) and 1COF loans (2.3%) being the major sources.

Similarly, both organisations have increasingly looked at alternative

sources of finance. Standing out above the rest is the USC ot

lease-hirepurchase agreements. Of the 26% of investment financed from other

sources in private firms, 24% of this relates to lease-hirepurchase agreements,

1% to new equity finance and just over 1% to other unnamed sources. Co-

operatives, limited somewhat by their legal constitution, have utilised a

broader range of options. Of the 19.5% of investments financed from other

sources, just over 6% relates to lease agreement, 2.9% to family loans, and

3. I % to loan stock options, the rest relating to charitable grants or loans and

ICOF loans mentioned previously.

While this section offers no evidence as to the comparative levels of

investments undertaken, nor the frequency of such investments, it does imply

that the theoretical analyses of underinvestment tendencies in the co-operative

*Similar results wcrc obtained by Bartlett PI trl. (1992).

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enterprise are incorrectly based upon differences in the period of time over which returns to investment are evaluated. The growing availability and use of other forms of finance suggest that “closer attention to differences in the structure of ownership rights may provide the answer to the underinvestment hypothesis” (Bartlett et al., 1992).

Economic Peflormance In the case of the UK, very little empirical work has been carried out on the comparative performance of L-M and capitalist enterprises. While the evidence presented in this section cannot claim to provide the definitive answer, it does hope to reveal the basic organisational framework underlying each firms performance. Whatever one’s view on the relative performance merits of L-M vs the capitalist firm. the indicators of economic performance presented in Table 8 indicate that there exist no significant differences between the two types of organisation. All the measures, whether they relate to market growth, growth in turnover, or employment growth indicate some grounds for optimism in the future. In the short run, the evidence points to a growth rate of no more than 10% in all three measures. The long run similarly, points to growing economic confidence with almost all measures (except employment growth for private firms) indicating growth rates of no less than 10%. Of significance in the long term, arc the better prospects of employment growth within the co-operative sector (this is supported by evidence on the employment objectives of co- operative vis-a-vis private firms, Table 2). This suggests there are circumstances under which the promotion of the co-operative sector would be more advisable and cost-effective than the promotion of capitalist firms or the provision of welfare payments. (see Bradley and Gelb, 1980, 1983 for related views). Are these results what WC would have cxpectcd?

While we can find no costs-performance differentials between the organisations. the underlying organisational and behavioural structures of each enterprise type were found to be quite distinct. Capitalist firms tended to conform to the “efficiency model” as developed by the Webbs, Alchian and Demsetz, Williamson and others. The evidence suggests a hierarchical organisation, with informational asymmetries, in which consultation between managers and workers over workplace and business issues is low. The evidence on co-operatives, conversely, points to a non-hierarchical organisation, where all information is shared, thus allowing a high degree of consultation between managers and workers over workplace and business decisions.

The lack of performance differentials, however, nullifies a lot of the subsequent debate about the relative merits of each form of organisation. Ultimately, the impact of the different organisational forms should not be judged purely on the basis of performance, but judged against the initial objectives of each firm. Based upon this criterion, the owners of small firms operate under the condition that the share of profits that accrues to them

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Description Co-operatives Private firms r-stilt.

Change over next 12 months Market growth Turnover Employment

2.67 2.82 -1.07 2.86 3.00 -1.03, 2.40 2.1 I 0.71

Change over next 3 years Market growth 3.77 3.16 0.83 Turnover 3.17 3.10 0.64 Employment 3.01 2.86 1.62

Average of’ scores derived from I-4 scale in which a score of I represented “decline”; 7 represents “remain the same”; 3 represents “grow by less than 10%“: and 4 represens “grow by more than 10%”

is inversely related to the power wielded by workers, which is positively related to their control over the firm. Thus the non-separability of ownership and control is a rational response to their prime objective of profit maximisation. Similarly, the participative culture of co-operative organisation is in line with their aims of sales growth and the provision of an important product or service which is produced in a pleasant and secure workplace.

Non-economic Perjbnnance While WC: have shown that co-operative workers work in a less hierarchical and more participative work environment than capitalist firms, theory would indicate that this would lead to better industrial relations characteristics. The evidence, however, is mixed (see Table 9).

Information collected on abscntceism rates suggest the significantly lower rates to be found in co-operative firms arc a direct result of the participatory workplace and pleasant working atmosphere that co-operatives stress.

The level of labour turnover rcllects a less clear picture. There is some indication that co-operatives may have a slightly higher quit rate than capitalist tirms. This runs counter to much of the theory on participative firms, but may be explained by the comparative wage levels in the different enterprises. Indeed, interviews carried out as part of the data-collection process tended to imply that employment for co-operative non-members (especially in times of recession), was often used as a stop-gap until better- paid jobs came about.

On other non-economic grounds, co-operatives clearly differentiated themselves from the performance aims of capitalist firms. In written responses to questions on their aims, co-operatives frequently stressed their desire for a “pleasant, equitable working environment”, to work for oneself and to provide particular products and services, notably in the social economy, all in “harmony with the environment”. It would seem that the performance of co- operatives needs to be assessed on a more diverse range of economic and social issues than has previously been the case.

Co-operative vs Private Firms

Table 8. Performance

Projections of Smplr Firms

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Table 9. Industrial Relations Characteristics of Sample Firms

i I Characteristics Co-operatives Private tirms r-stat.

Days lost per employee I .45 2.68 -3.69*** Labour turnover (No. per year) 2.57 2.33 0.29

Both measurements based on average figures for the last 5 years.

Conclusion The matched sample of co-operative and privately-owned small firms has offered some interesting insights into the comparative behaviour and performance of these two types of enterprise. Differences in objective functions, market characteristics, wage and employment practices, and internal structure are stressed, while theoretical expectations of relative inefficiencies in terms of performance, job creation and capital investment are unproven.

Central to many of the differences between co-operative and capitalist firms were their distinct objective functions, and the internal structures and behavioural patterns this induced. Capitalist firms, driven by profits and (Trowth. developed into hierarchical organisations with poor information flows lnd a lack of’ nlanagcmcnt-worker consultation. Co-opcrativcs, in direct contrast to the objcctivcs postulated by economic theory (Vanck. 1970: Ward, 1958, and others), wcrc driven by the need to provide an important product, and to do so in a pIcasant and sccurc work cnvironmcnt. Thus co-operatives have tcndcd to dcvclop with weak hierarchical structures, good participative mechanisms, and free access to information.

Thcsc structural diffcrcnccs rcvcalcd thcmsclves in different ways. In terms of cmploymcnt, wages, and labour relations. it was evident that there existed some form of tradeoff in co-operative firms between income and other workplace attributes (including employment stability and security). The willingness to take wages below the market rate, the lower level of absenteeism in co-opcrativcs. and mechanisms to ensure relative employment stability reflects important differences in workplace bchaviour.

In terms of their relationship to the external market environment, indications were that the intensity of competition faced by each organisation had much to do with the geographical spread of their markets. Co-operatives were found to have stronger links with the local economy, while capitalist firms tended to be more nationally and internationally orientated in terms of sales and inputs. The signals were, however, that most co-operatives were unable or unwilling to expand beyond the boundaries of their locality. This may lead to the further marginalisation of co-operatives in the British economy.

Unexpected similarities between co-operative and capitalist firms also raised important issues. Notably, against theoretical expectations, co-

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operatives were found not to conform to the underinvestment hypothesis. The Co-operative vs time period over which investments were evaluated was longer than that Private Firms found in capitalist firms, and there was no tendency for co-operatives not to invest from internal sources. Similarly. given the different theoretical hypotheses concerning the relative decision-making, incentive and monitoring properties of co-operative and capitalist firms, it was expected that the two organisations would be distinguishable in terms of economic performance. Evidence suggested this was not the case. There was. however, slight evidence that co-operatives were a better source of employment growth than privately-owned small firms.

In conclusion. it is therefore evident that there is still much to be learned and understood about the co-operative sector. Existing theoretical models seem unable to cope with the behavioural and organisational characteristics of co-operatives, while policy-makers seem all too ready to overlook the potential of the co-operative sector. From an economic and social perspective, evidence presented here suggests there is no reason why policy-makers should not promote co-operatives to the same extent as the privately-owned small- firm sector in the UK and elsewhere.

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