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Small Business Economics
Published in: Small Business Economics 1/2013

01-06-2013

Catching a wave: the formation of co-operatives in Finnish regions

Author: Panu Kalmi

Published in: Small Business Economics | Issue 1/2013

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Abstract

This paper compares the formation rates of co-operatives and conventional firms in Finland using regional data. The Finnish co-operative “wave” that began in the mid-1990s provides a useful setting for testing the hypothesis that co-operative formation rates are higher in depressed economic conditions. The empirical results support this hypothesis. Co-operatives are formed more often in regions with high unemployment; in contrast, conventional firms are formed more often when unemployment is low and demand growth is high. Furthermore, the existence of dedicated advisory services boosts the formation of co-operatives. These results indicate that co-operatives may play a useful role in reducing unemployment and that the formation of co-operatives may be influenced by policy measures.
previous article Supplier development programs and firm performance: evidence from Chile

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Appendix
Available only for authorised users
Footnotes
1
I will use the term “conventional firm” to denote any firm that is not a co-operative.
 
2
This means that even though at any point in the economic cycle more entrepreneurial firms are likely to be established than co-operatives, the ratio of co-operatives formed over entrepreneurial firms formed should be higher in economic downturns rather than upturns.
 
3
This was later reduced to €2,500.
 
4
Due to problems of asymmetric information, it is not possible for co-operatives to operate solely on debt financing. In such cases, the debtors would bear all the operational risk while the co-operative members would reap all the potential gains, giving them incentives to choose excessively risky projects. For an applicable model, see Bowles and Gintis (1993).
 
5
However, this rule applies to co-operatives and joint-stock companies alike.
 
6
The previous wave of co-operative formation took place mostly from the 1900s through the 1930s.
 
7
Such evidence is consistent with research from other contexts showing that co-operatives have better survival propensities than conventional firms; see Ben-Ner (1988) and Perotin (2004).
 
8
The source for these data is Statistics Finland; the data source is described below in Sect. 5.
 
9
Although the sources are different, this can be expected to matter little with respect to the results and for two reasons: (1) co-operatives are likely to meet the sales and employment criteria; (2) because co-operative firm formation relative to conventional firm formation is small, the impact of deducting co-operatives from the overall number of firms is negligible.
 
10
Although some municipalities have been moved to other administrative regions during this period, these changes have been ignored in the aggregation process. Thus, if municipality X belonged to region Y in 1995 and to region Z in 2005, it has been assigned to region Z throughout. If municipality A belonged to region B in 1995, but during the observation period was annexed to municipality C in region D, then A has been assigned to region D throughout the period in which it has been observed. In other words, the composition of regions does not vary over time.
 
11
In some cases, variables potentially of interest were excluded because of issues of data availability. These include social capital (no good measures available on regional basis), density of bank branches (exist only for 4 years out of 11) and human capital, because the educational classifications change in the middle of data period.
 
12
The precise way in which density is modelled varies across studies. Staber (1989), Simons and Ingram (2004) and Perotin (2006), who all use time-series data, define density as the number of firms, while Arando et al. (2009) use as their measure of co-operative density the number of co-operatives relative to the total number of firms in the region. In this study, the measure of density which is most consistent with the overall approach and dependent variables is the number of specific type of firms relative to the labour force within the region. However, alternative definitions of density do not affect the coefficients of the main variable of interest, namely, unemployment.
 
13
Another challenge is that the co-operative densities, as defined here, exclude co-operatives formed before 1988. Most of the co-operatives established prior to 1988 have existed for decades, or at least are successors of co-operatives established in the early 20th century. Because of the many mergers among Finnish co-operatives, the mature co-operatives tend to be of a very different size (much larger) from the more recent ones; therefore, the densities of the two groups are not comparable.
 
14
With the exception of Conte and Jones (1991), who find a positive relationship between co-operative formation and the existence of specialized advisory services.
 
15
The existence of advisory projects has been measured at a higher level of regional aggregation (maakunta), since the projects typically take place at that level.
 
16
That means implicit use of the implausible assumption that the error terms of the subsequent observations from the same region are not serially correlated.
 
17
The estimations were carried out using STATA statistical software (StataCorp, College Station, TX).
 
18
Alternative measures of organizational formations (relative to the number of existing firms or relative to population) give very similar results and are available upon request.
 
19
Similar to Santarelli et al. (2009), the measure is gross entry of firms, not net entry.
 
20
The results are available upon request.
 
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Metadata
Title
Catching a wave: the formation of co-operatives in Finnish regions
Author
Panu Kalmi
Publication date
01-06-2013
Publisher
Springer US
Published in
Small Business Economics / Issue 1/2013
Print ISSN: 0921-898X
Electronic ISSN: 1573-0913
DOI
https://doi.org/10.1007/s11187-012-9424-1

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