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)

translate into a need for bigger individual plants or establishments.

13

  indeed, in the internet world, with 

burgeoning possibilities for what until recently were considered to be innovative arrangements, such as lean 

inventories and short productions runs, a bigger firm may establish several distinct groups/profit centers 

within it. Each of these divisions would be expected to have more distinct operations than in the past. Thus 

the minimum efficient scale may grow for the firm but not for the plant. And with quickening globalization, 

manufacturing firms also need to develop plants closer to markets (and thus often distant from the home 

base.) For co-ops these considerations suggest that the tensions between scale and democracy are most 

likely to emerge between plants and also between co-ops (rather than within a plant.)

While this firm versus plant point applies especially forcefully in sectors such as manufacturing and 

mining, in other sectors different economies of scale may dominate. Thus in retailing, arguably what is of 

most importance are marketing economies of scale as well as the ability of a bigger group to exercise bigger 

clout when buying inputs and seeking advertising.

Banking is an area where financial co-operatives, at least initially, derived competitive advantage from 

their small scale. Financial co-operatives originated in the 19

th

 century. Then typically only a small economic 

elite had any access to financial services, enforcement of financial contracts was very low, and financial 

supervision was non-existent. in this situation, both bankers and their customers could be expected to 

honor their commitments only if other types of relationships existed between borrowers and lenders. 

Credit co-operatives could function in this environment because they were created in small areas in which 

borrowers, depositors and managers knew each other well, thus being able to impose social sanctions on 

those who breached their contract (Guinnane, 2001). These advantages of being smaller continued for a 

long time, often into the 20

th

 century, but they have gradually been eroded by increased mobility of persons, 

reduced costs of exit from the community, and technological improvements that have changed the nature 

of economies of scale in the banking sector. For instance, Peterson and rajan (2002) have argued that 

advances in information technology have made borrower information quantifiable (for instance, via credit 

scoring) and reduced the returns to local, “tacit” knowledge on borrowers. in many countries the global 

deregulation of financial services, has included the removal of bank-branching restrictions. in turn, often 

this has enabled retail banks to undertake investment banking activities, and also arguably has changed 

economies of scale in banking in favor of larger units. 

in the social sector, co-operative providers have gained new ground in recent decades, especially in italy 

(e.g. restakis, 2010; Borzaga and Defourny, 2004.) This seems to be related to certain diseconomies to 

scale and/or government failures. Customers of large publicly provided organizations seem to suffer from 

the feelings of alienation and overly standardized care, leaving insufficient space for individual attention. 

This is also reflected in lower work morale and satisfaction in the public sector (Borzaga and Tortia 2006). 

Sectors such as health care and nursing services may especially benefit from smallness where client needs 

can be individually addressed. 

 

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 in terms of the formal theory of the labor managed firm, the worker maximizing firm will always under competition produce 

at the level of maximum economies of scale, whereas the capitalist firm will produce beyond that point with lesser factor 

productivity. With indefinitely increasing economies of scale the capitalist firm will tend towards monopoly and destruction of 

markets. (See, Vanek 1970.)

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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)

4.2. Evidence on Alleged challenges posed by Need for Economies of Scale

There is much evidence of co-ops merging. This increase in average size apparently suggests that, on 

average, co-ops believe that they need to grow to reap economies of scale.  Thus Schroeder (1992) reports 

how the number of US farm supply and marketing coops declined by more than 23% from 1979-1988. 

He says “….attempts to improve efficiencies of operations were likely a significant force [behind the merger 

activity].” Also Fulton and Hueth (2009) report how the behavior of many Canadian agricultural co-ops 

demonstrated a strong need for additional capital or a need to grow in order to reduce members’ risk.  

While few mergers occurred, these pressures resulted in several bankruptcies or conversions of firms into 

conventionally owned firms. in Spain Moyano-Estrada et al. (2001) report how pressures to realize diverse 

forms of economies of scale led to co-ordination and mergers among agricultural co-ops. Thus from 1994 

to 1999 the number of agricultural coops fell from 5376 to 3925 and average size increased.

However, the available econometric evidence on whether or not co-ops do reap economies of scale 

from increasing average size is surprisingly limited. in Table 1 we present a summary review of the evidence 

that we were able to uncover.

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  Since studies differ enormously in crucial respects including the type of 

co-op investigated, the size of the sample, the time period covered,  the nature of the empirical method,  it 

is likely that they will differ in the reliability of their findings  That being said, it is clear that there are no 

consistent findings. in some cases this is unsurprising-as noted earlier we would expect the importance of 

economies of scale to vary across sectors.  But other findings are more surprising. Thus, among agricultural 

supply and marketing co-ops,  it is instructive that while Schroder (1992) does find evidence of firm-wide 

economies of scale for most product groups that he examines, he does not do so for all product groups  (e.g. 

not for chemicals.) Kebede and Schreiner (1996) in their analysis of Kenyan dairy marketing co-operatives 

find evidence of economies of scale, but they also find that these economies are exhausted for average-sized 

co-operatives in the sample. 

The existence of economies of scale has often been tested in the banking industry. in this regard, the 

results from the United States are the least ambiguous. The US studies have found clear economies of scale 

for both co-operative banks (rezvanian et al. 1996; Mehdian and rezvanian 1998) and credit unions 

(Emmons and Schmid 1999; Wilcox 2005; Wheelock and Wilson 2011; Wilcox and Dopico 2011). This 

is consistent with the significant consolidation of the credit union industry that has taken place during the 

past two decades or so (Goddard et al. 2011). 

However, when one moves outside the US, the picture looks more complicated. Lang and Welzel 

(1996) study German co-operative banks during 1989-1992 and found small but positive economies of 

scale. However, in their subsequent study on the effects of mergers with data extending to 1997 (Lang and 

Welzel 1999), they do not find any evidence that mergers between co-operative banks have been efficiency 

enhancing. For Finland, Kolari and Zardkoohi (1990) find little evidence of positive economies of scale 

using data on co-operative banks from the early 1980s (an era when banking was a heavily regulated 

industry.) Jones and Kalmi (2011), using data for the first half of 2000s, actually find some evidence on 

diseconomies of scale (larger co-operative banks having poorer performance). in Japan, Deelchand and 

Padgett (2009) find also evidence on diseconomies of scale among a sample of Japanese co-operative banks; 

however, Glass et al. (2010) find evidence that larger co-operative banks were more efficient than smaller 

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in addition there is some evidence that coops can produce in the increasing returns to zone part of the production function. That 

is, co-ops can manage to attain sufficient scale economies but they do not need to grow to even the average size of firms in that 

sector (Jones-Backus, 1977). 

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