Acknowledgements

Economies of Scale Versus Participation: a Co-operative Dilemma?

Jones, D.C.; Kalmi, P.

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JEOD - Vol.1, Issue 1 (2012)

3.2 Co-operative groups

To survive and thrive it is increasingly the case that all kinds of co-ops must network or develop 

supporting structures, creating groups of co-ops. Such groups are of foremost importance in banking co-

ops. These structures at the group’s centre typically operate as central banks for local level banks, and in 

this capacity they provide liquidity management services and also facilitate the payments within the group 

and across co-operative banks and other banks. They also develop products for local banks, undertake 

investment banking activities on behalf of local banks, and provide insurance and mutual funds. Typically 

the centres co-ordinate advertising for the whole group and provide various other services, such as iCT or 

training for employees and local directors. in some cases, the centre performs certain public services, such 

as auditing of member banks or operating a deposit insurance scheme.

10

Group structures are prominent also in areas outside financial co-operatives. in the field of consumer 

co-operatives, the British Consumer Wholesale Society was launched in 1872 (its predecessor being 

established nine years earlier). in consumer co-operatives, the centres take care of wholesale activities, joint 

marketing, strategic development, research and training, and (especially in the past) industrial production. 

The group structures are prominent also in the field of agricultural co-operatives, but they are somewhat 

less common among worker co-operatives, although such structures are present in the most successful 

cases, notably Mondragon (of which more below).

in a way that roughly parallels the discussion of individual co-operatives, for groups of co-operatives, 

two types of democratic challenges may be distinguished.

First are issues concerning appropriate  decision-making processes and structures. Various kinds of 

co-ordination issues arise when groups of co-ops are established. For example, a key issue of importance 

to all co-ops is how much sovereignty individual units are willing to surrender to the central institutions 

and yet remain democratic. The decision-making procedures in the co-operatives groups typically are 

less democratic than at the local level where members are rather natural legal persons; for instance, it is 

common to weight the voting rights in groups according to the size of member co-operatives (though not 

necessarily proportionally). Often the highly skewed voting arrangements may mean that the group level 

becomes dominated by the interests of representatives of large co-operatives, which frequently rather differ 

from the interests of members of small (perhaps rural) co-operatives. These tensions may lead to further 

consolidation within co-operatives and, in extreme cases, to the dissolution of the whole group; such 

tendencies were evident in the decay of German and Austrian consumer co-operative groups in the 1980s 

and 1990s (Brazda and Schediwy, 2001).

The centres are often dominated by representatives of managers rather than lay members, for which 

reason managerial (as opposed to member) preferences may receive excessive weight in decision-making. 

These issues may also be reflected at the local level, because policies at the central level necessarily have 

implications for local level operations; furthermore, increasingly the centres have direct control rights over 

the local units. 

it is interesting to note that sometimes increased centralization may promote democracy at the local 

level. Thus, when more advanced operations are provided centrally by the group, local co-operatives 

can concentrate on issues where they have local knowledge-for instance, in banking and their analysing 

the credit risk of local borrowers. Also enhanced centralization may lead to a smaller scale of local units 

10   

For description of various functions of centrals in financial co-operatives, see Cuevas and Fischer (2006).

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Economies of Scale Versus Participation: a Co-operative Dilemma?

Jones, D.C.; Kalmi, P.

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JEOD - Vol.1, Issue 1 (2012)

becoming economically viable.

11

Second, and related, are matters surrounding the incentives for individual co-ops or groups of co-

ops to remain in a larger co-op group. This may not always be entirely voluntary: sometimes member 

co-operatives may be required to belong to a group by law, sometimes seceding from the group may be 

difficult. The potential conflicts described above (managers vs. members, large co-ops vs. small co-ops) 

may also lead to increased pressures for secession; we will investigate these issues further in our case studies.

Some analogies to that of degeneration in individual co-ops can be drawn. For a group of coops, is 

there a point at which, by some critical measure, the co-op group is in danger of degenerating? For example, 

if a co-op group admits entities that have mixed membership (or, in some cases, no co-op presence), at what 

point might the group as a whole be considered insufficiently co-operative? in some cases co-operatives 

acquire significant capital interests.

For instance, sometimes the shares of the group or its subsidiaries may be traded in the stock exchange, 

though usually the voting majority belongs directly or indirectly to co-operative members. in such cases, 

despite the fact that co-operatives own the majority of shares, the capital interest may become dominant. 

Sometimes the owner of the minority interest may also be motivated to attempt to take the control of the 

majority of shares, which would effectively undermine the co-operative character. 

 

in addition organizational isomorphism may be attributable to training (or lack thereof) of co-op 

managers and institutional requirements for accounting and reporting that force co-ops to use practices 

that do not suit their character, and thus resulting in a “mission drift” (see, e..g, Di Maggio and Powell, 

1983).

 

 

4. Economies of scale

The economics literature often distinguishes different types of scale economies.

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 The most relevant for 

our discussion are increasing returns to scale; this means that firms have to increase their size in order to 

remain competitive. A closely related idea is that of economies of scope, meaning that firms gain competitive 

advantage from joint production or marketing of two or more related goods.  Which type of scale or scope 

economy is potentially most important may be expected to vary by co-op type. in turn, this implies that 

the particular tension between democracy and economies of scale may vary by co-op type. Changes in 

economies of scale may be driven by diverse forces, for instance by technological changes or changes in the 

competitive environment. in the balance of this sub-section we briefly provide illustrations (by sector and 

type of co-op).

One critical determining factor is that of sector. Thus in manufacturing, perhaps the most important 

type of scale economy is technical economies of scale. With manufacturing firms needing ever-growing 

scales of operations, this also requires bigger capital investments. However this does not immediately 

11

 For instance, in European tightly federated financial co-operatives the size of local unit is much smaller than it is in loosely 

federated financial co-operatives (Ferri et al, 2012).

12

 Our focus is on economies of (rather then returns to) scale.

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