Econometric analysis of the performance of cooperatives and investor owned firms in the European dairy industry

Keywords: Cooperatives, IOFs, European dairy industry, logistic regression, stochastic frontier analysis, inter- and intra-firm efficiency, catch-up component, data envelopment analysis, hyperbolic technical efficiency, overall efficiency, scale efficiency, bootstrapping. In this study we measure the performance of cooperatives and investor-owned firms in the European dairy processing industry. Comparing the performance between cooperatives and investor-owned firms requires accounting for differences in their mission and objectives. Traditionally, cooperatives were established by farmers to gain access to markets, balance market powers and have a secured and sustainable income. Generally, there is a consensus in the economic literature that a cooperative can be defined as a (members)user-owned and (members)user-controlled organization that aims to benefit its (members)user. Cooperatives are transaction oriented, the members provide themselves with services they could not secure otherwise. In addition member are owners and determine the mission and strategy of cooperatives equally as the owners of the cooperative enterprise. Our study takes into account the consequences of members’ strategies for the cooperatives’ organizational structure and subsequently the significance of structure on (technical and economical) efficiencies. Although the theoretical literature emphasizes the difference in economic behavior between cooperatives and IOFs, the empirical studies have failed to follow up with theoretical approaches. The failure of the empirical studies to apply the models proposed by the theoretical literature seems to be due to either the inaccessibility of data, the inability to take into account the interests of all the various types of members and stakeholders of the cooperative, or the difficulty in testing the various hypotheses in practice. An empirical analysis of differences in financial indicators between IOFs and cooperatives in six European countries shows that cooperatives are less profitable but operationally more efficient, they have higher material costs and lower debts than IOFs. Furthermore, cooperatives display a substantially greater variation in financial indicators than IOFs. Stochastic Frontier Analysis is used to measure and compare the efficiency and production technology of cooperatives and IOFs. Cooperatives are found to have a more productive technology than IOFs, but they use their production potential less efficiently. A further empirical analysis of technical efficiency using Data Envelopment Analysis shows that explicit accounting for the objectives of cooperatives generates different outcomes compared with treating cooperatives as if they were IOFs. The results of the empirical analyses in this study promote the conclusion that measuring the performance of cooperatives as if they were IOFs produces misleading insights about the cooperatives’ performance suggesting performance suggesting that cooperatives’ performance is influenced by their organizational characteristics and members objectives.