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Qiao Liang China Academy for Rural Development, School of Public Affairs, Zhejiang University, China Email:Liangqiao2323@Zju.Edu.Cn Large-and-strong or Small-and-beautiful? Exploring the Relationship Between Organization Size and Performance of Farmer Cooperatives Qiao Liang China Academy for Rural Development, School of Public Affairs, Zhejiang University, China Email:[email protected] Rongrong Bai China Academy for Rural Development, School of Public Affairs, Zhejiang University, China Email:[email protected] Selected Paper prepared for presentation at the 2021 Agricultural & Applied Economics Association Annual Meeting, Austin, TX, August 1 – August 3 Copyright 2021 by Qiao Liang and Rongrong Bai. All rights reserved. Readers may make verbatim copies of this document for non-commercial purposes by any means, provided that this copyright notice appears on all such copies. Large-and-strong or Small-and-beautiful? Exploring the Relationship Between Organization Size and Performance of Farmer Cooperatives Abstract: This paper explores the relationship between the size and performance of cooperatives. Panel data containing the census of farmer cooperatives from 2014 to 2019 are applied in the empirical analyses. The membership size, as well as its evolution, of cooperatives is mapped. Then a dynamic panel data model is constructed to study the impact of membership size on the performance of cooperatives which is indicated by profit per member. The results show that the effects of membership size on profit per member displays an inverted “U” shape. And the optimal membership size is 19 members, which is “Small and Beautiful”. The effects are heterogeneous across ages, subsidies and geographical regions. The robustness of these results is confirmed by both alternative key explanatory variable indicators and estimation methods. Key Words: Farmer cooperative; organization size; performance; dynamic panel data model; SYS-GMM 1 Introduction Among all of the organizations in the agricultural sectors, farmer cooperatives have a dominant position in many countries. Farmer cooperatives were initiated in China in the late 1980s. The development of cooperatives gained momentum after 2007 in response to the promulgation of the National Cooperative Law in China. The population of farmer cooperatives increased from 74,219 in the end of 2007 to 1.94 million in 2019.1 Particularly, they help farmers to enhance technology, obtain higher prices, and improve quality of products (Liang and Wang, 2020). In spite of the essential functions, cooperatives in China have some distinctive features compared with cooperatives in Western countries, which have led to some debates on the justification and competitiveness for cooperatives (Liang et al., 2015). Particularly, cooperatives in China are mainly small and local. Most cooperatives 1 Data source: China Rural Cooperative Economy Statistical Yearbook (2019). 1 have a membership of less than 100 and the average membership size is as small as 15 in 2019. In order to further enhance the market competitiveness of cooperatives, both central and local governments have proposed the development goal of “larger and stronger” of cooperatives since 2012. However, some scholars argue that that the expansion of membership size may cause high coordination costs within organizations and therefore result in low efficiency (Nilsson et al., 2012). This is especially true for Chinese cooperatives due to the low capacity of management. This paper seeks to map the evolution of the population and membership size of Chinese farmer cooperatives, and investigate the causal association between cooperative size and performance. The specific research questions are: First, how membership size has been evolving in the past decade? Second, does membership size affect the performance of cooperatives? And if yes, does the effect linear or non-linear? Third, what are the mechanisms of the effect? Are the effects heterogeneous across different cooperative life cycles, and across geographical regions which differ in economic, education, and technique levels? This study aims to make a couple of contributions. First, this paper is one of the first empirical studies on the complex effect of farmer cooperative size on its performance and calculating the optimal membership size, while most existing studies focus on the finance companies and industrial enterprises. The empirical results show that the effect of farmer cooperative size on its performance shows a non-linear inverted U-shaped curve relationship and the boundary of membership size at the top of the curve is 19. The results demonstrate that small membership size is desirable for farmer cooperatives currently in China, which also provides implications for other countries. The optimal membership size varies for cooperatives with different endowments and at different development stages. Second, a dataset comprised of 8,788,123 cooperative observations during 2014 and 2019 is utilized in the empirical analyses, which addresses sample-selection bias and inaccurate estimates caused by small samples. Most studies on the association between organization size and performance of farmer cooperatives are based on qualitative analysis or relatively small samples. The sample used in the current paper is the largest and most extensive one, as far as we know. The remainder of the paper is organized as follows. Section 2 analyses the 2 theoretical mechanism of the relationship between organization size and performance, and provides a literature review on related research. Section 3 introduces the model, estimation methods and data. Section 4 maps the development of Chinese farmer cooperatives and membership size. Section 5 presents the empirical results and discussions. The last section presents the conclusions, related policy implications, and limitations of this study. 2 Theories and relevant researches This section reviews the theories and relevant research regarding the association between organization size and performance. 2.1 Theories The association between organization size and performance can be discussed by various theories, e.g., traditional and neo-classical economics and transaction cost theory. Smith (2010) emphasizes in <The Wealth of Nations> that labor division can increase productivity. Afterwards, Marshall (2009) puts forward the concept of scale economy in <Principles of Economics> and specifies that the expansion of enterprise scale enhances the ability to implement a larger extent of labor division, i.e., a higher level of specialization, which results in the reduction of average cost and the increase in the profit. Neoclassical economics emphasizes the marginal cost, that is, when the marginal revenue equals the marginal cost, the enterprise reaches the optimal production scale. Generally speaking, large companies have more resources, can carry out more investments, develop more market opportunities, and thus have better market risk resistance and more sources of profit, while small companies often need to put limited resources on a certain link or a smaller market. However, the decline of average cost is not sustainable. It is widely acknowledged that individual firms have U-shaped average cost functions, i.e., which determines the inverted U-shaped marginal cost curves. When the marginal revenue equals the marginal cost, the enterprise reaches the optimal production scale. The analysis based on traditional and neo-classical economics assumes that market transaction has no cost. As the development of institutional economics, the relationship between organizational size and performance has been discussed from the perspective of transaction cost theory. Coase (1937) first proposed the concept of transaction costs and argues that market transactions incur costs, i.e., transaction costs, 3 which is used to explain the existence and the boundaries of firms. A firm emerges to save market transaction costs, while as the size of the firm expands, the marginal intra-firm transaction costs increase. The optimal size of the firm depends on the marginal trade-off between internal transaction costs (also called coordination costs) and market transaction costs. Most current analyses on the organization size and boundaries of cooperatives are based on transaction costs theory (Ma et al., 2019). This is because cooperatives are a special firm based on “people” and characterized by collective ownership and democratic decision-making, which lead to high intra-organization transaction costs. Collective action theory is also broadly applied in the analyses on size and boundaries of cooperatives. The key factors that determine the success of collective action are the size of collectivity, governance structure and mechanisms (Qin, 2018). Olsen (1995) puts forward collective action theory in <The Logic of Collective Action> and analyzes the influence of group size on collective action from the perspective of costs and benefits based on the assumption of rational economic man. He believes that it is easier to organize and carry out collective actions in small groups, and the larger of the size, the more difficult and the lower of the efficiency of collective actions. Farmer cooperatives are a typical collective action based organization. Although most cooperatives in China have the demand to increase membership size, it is easy to fall into the “dilemma of collective action” (Kong, 2015). The increase in cooperative size may improve scale economy, scope economy, and market competitiveness. However, the unique governance structure characteristics of collective ownership and benefits by members may cause high intra-organization
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