impact on performance of management and ...

IMPACT ON PERFORMANCE OF MANAGEMENT AND INNOVATION CAPABILITIES: ARE COOPERATIVES DIFFERENT?

IMANOL BASTERRETXEA1 (University of the Basque Country, UPV/EHU, Bilbao, Spain) RICARDO MARTÍNEZ (University of the Basque Country, UPV/EHU, Leioa, Spain)

This is an electronic version of the accepted paper in Annals of Public and Cooperative Economics, Vol 83 Issue 3: 357-381 (2012). The definitive version is available at: http://onlinelibrary.wiley.com/doi/10.1111/j.1467-8292.2012.00467.x/epdf

Please, cite this article as: Basterretxea, I. & Martinez, R. (2012). Impact of Management and innovation capabilities on performance: are cooperatives different?. Annals of Public and Cooperative Economics, 83(3), 357-381.

ABSTRACT The principal purpose of this study is to evaluate if management and innovation capabilities differ between cooperatives and investor-owned firms (IOF). We do also want to analyze if those differences, in case they exist, cause different business performance levels. The fieldwork is based on a sample representative of the population of Basque industrial firms comprising 861 firms, 44 of them cooperatives. The results of our analysis are contrary to Social Economy literature statements. Basque industrial cooperatives are in a situation of competitive parity to investor-owned firms and don’t differ in management and innovation capabilities. Big size of Basque industrial cooperatives, environmental factors, networking and the help of the supra-structure of Mondragon Corporation are explored as possible causes of those results. KEYWORDS Business

competitiveness;

management

capabilities;

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innovation

capabilities;

cooperatives.

Corresponding author: University of the Basque Country, Faculty of Economics and Business Administration, Avda. Lehendakari Agirre 83, Bilbao 48015, Spain.

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1.- Introduction Many studies find that substantial differences remain between the performance of different firms in the same industry (Rumelt, 1991; Cubbin and Geroski, 1987; Roquebert et al., 1996; Mauri and Michaels, 1998; McGahan, 1999; Hawawini et al., 2005; Ruefli and Wiggins, 2003, Bou and Satorra, 2007; Short et al, 2009; Pereira et al 2011). Those differences in performance are due to factors that are intrinsic to the firm itself and the effect of those internal factors on profitability is known as the firm effect. This is the basis of the Resource Based View (RBV) of the firm (Wernerfelt, 1984; Prahalad and Hamel, 1990; Barney, 1991; Grant, 1991; Peteraf, 1993, etc.). From this perspective, it is each firm’s resources (and capabilities) that enables it to stand out from all others, and good management will allow competitive advantages to be obtained enabling firms from the same industry to obtain different levels of profitability. It would be impossible to address all internal factors of competitiveness in a comparative study as this one. Therefore, among the different possible internal sources of competitive advantage, in this study we are going to focus only on two: management and innovation capabilities. Management and innovation capabilities are some of the most cited internal sources of competitive advantage, and according to Martínez et al. (2010), those are the internal factors with a higher impact on the performance of Basque industrial firms. Likewise, management and innovation capabilities are widely discussed in the Social Economy theoretical literature, as factors in which cooperatives are limited. Social economy literature stresses that cooperatives generally face obstacles attracting and retaining highly competent managers, mainly due to wage limitations. This literature also describes cooperatives as less innovative because of a stronger risk aversion among cooperative worker-owners and due to a more limited access to capital. Much of this literature is theoretical or lacks of comparative data between cooperative firms and investor-owned firms. We think, therefore, that the present study can help filling this gap in the social economy research field. After the introduction to the research work, we analyse the literature that links management and innovation capabilities with business performance and we explore the social economy literature that focuses on the problems of cooperatives in developing management and innovation capabilities. In the third section, we explain the methodology followed in our study. In the fourth part, we describe the results. In the fifth part we discuss the results and explore possible explanations to those results that are contrary to our hypothesis and to Social Economy literature. Finally, we show the limitations of our research.

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For our analysis, management capabilities are defined as the knowledge, skills, and experience residing with and utilized by managers (Hitt et al., 2001; Kor, 2003; Holcomb et al. 2009). Innovation capabilities refer to the capacity of implementing a new or significantly improved product (good or service), or process, a new marketing method, or a new organisational method in business practices, workplace organisation or external relations (OECD, 2005). Performance is measured using subjective indicators, and respondents evaluate the growth in sales, profitability and trade margins of their companies as compared to reference competitors. The cooperatives analyzed are worker cooperatives from the Basque Country in the industrial sector with 10 or more employees. Worker cooperatives, according to Basque Law, are those in witch members are primarily individuals who, through their work, conduct any business or professional activity in order to jointly produce goods and services for others. According to this law, cooperatives must have a democratic structure and functioning, in line with the principles formulated by the international Cooperative Alliance2.

2.- Impact on performance of management and innovation capabilities: are cooperatives different? Management Capabilities and Performance While it is true that the great majority of the people making up the human structure of an organisation are important for the effective and efficient development of its economic activity, not all human groups within the organisation are equally important and strategic. Specifically, numerous authors (inter alia, Hambrick and Mason, 1984; Andrews, 1987; Barney, 1991; Castanias and Helfat, 1991, 2001; Mahoney, 1995; Kor, 2003; Sirmon et al. 2007, 2008; Holcomb et al. 2009; Basterretxea and Albizu, 2011a) have highlighted the fact that management resources form a particularly relevant group in the generation and maintenance of business success. Managers have the skills to understand, describe and assess the potential for generating economic performance from the firm's resources. Without this management knowledge, the firm is unlikely to achieve sustainable competitive advantage (Barney, 1991). Managers play a primary role in determining the path a firm takes, the combination of resources it deploys and encourages, and the markets in which it participates (Castanias and Helfat, 1991, 2001; Acquaah, 2003; Kor, 2003; Sirmon et al. 2007, 2008; Holcomb et al., 2009). In the RBV perspective, the firm must choose its strategy for generating income based on its resources and

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Law 4/1993, 24th of June, of Basque Cooperatives, modified by Law 1/2000, 29th of June.

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capabilities, making a “dynamic fit” with the opportunities of the setting (customers, competitors and technology), an area in which management has the greatest responsibility (Mahoney, 1995). Empirical studies evidencing the positive influence of management capabilities on business performance include Hitt and Ireland (1985), Finkelstein and Hambrick (1990), Thomas et al., (1993), Markides and Williamson (1994), Robins and Wiersema (1995), Mehra (1996), Russo and Fouts (1997), Boeker (1997), Carmeli (2001), Lerner and Almor (2002), Acquaah (2003), Kor (2003), Carmeli and Tishler (2006), Sirmon et al. (2008) and Holcomb et al. (2009). All of the above leads us to pose the following hypothesis: H1: Firms with superior management capabilities achieve superior performance.

Constraints upon the attraction and retaining of valuable managers in cooperatives In the struggle to attract and retain talented management, cooperatives face several problems that put them at a disadvantage when compared to investor-owned companies. One of the main reasons of the difficulty to attract and retain valuable managers in social economy firms is the salary limitations of these type of businesses, where management salary is below the market average (Altzian and Demsetz 1972; Thomas and Logan 1982; Whyte and Whyte 1988; Cornforth and Thomas 1990; Bartlett, et al. 1992; Morris 1992; Kasmir 1996; Spear 2004; Morales, 2004; Basterretxea and Albizu, 2011a). Besides earning less than their peers in other companies, these authors highlight that cooperative managers earn slightly more than other cooperative members with less responsibility in the company. Those small differentials can make it even more difficult to attract and retain managers. The fact that the majority of Western cooperatives are of a small size prevents them from solving the problem of low salaries by offering an attractive professional career with promotion prospects (Basterretxea and Albizu, 2011a). In addition to this, managers of cooperative firms must deal with continuous and critical internal control by cooperative members. It is the combination of this greater control and the low differential salaries between workers and managers that imposes limitations on the amount of managers that can be recruited (Bradley and Gelb 1985; Morales 2004; Basterretxea and Albizu, 2011a).

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Many authors also highlight that most managers coming from investor-owned firms find it difficult to adapt to the culture and values of the cooperatives. As a consequence, they have worse attitudes and lower degrees of collaboration with the cooperatives’ Steering Committee (Bataille-Chedotel and Huntzinger, 2004); they have a greater tendency to leave the cooperatives and they are more aware of better paid professional opportunities (Chaves and Sajardo, 2004); they shun worker participation, undermine the influence of workerowners and are the most significant impediment to cooperative success (Meek and Woodworth, 1990); have a degenerative effect on the distinct values and practices of democracy-based firms (Spear, 2004) and, in some cases, are the main cause of cooperative failures (Münkner, 2000; Davis, 2001). Accordingly, we predict the following: H2: Management capabilities are lower in cooperative firms than in investor-owned firms.

Innovation Capabilities and Performance There appears to be a degree of consensus, in both academic and business spheres, that one of a firm’s most important resources is its technological knowledge and its capacity to generate innovation (Galende, 2006). The technological factor, together with the ability to innovate is a critical source of competitive advantage (Galende and Suárez, 1999). Despite the great increase in the number of studies addressing the role and nature of innovation, no widely adopted definition has yet been achieved of the concept. Innovation, therefore, is a complex and vague notion; however, all definitions share a common denominator: the concept of novelty (Damanpour, 1991; Nohria and Gulati, 1996; Johannessen et al., 2001 etc.). The Oslo Manual (OECD, 2005) defines innovation as “the implementation of a new or significantly improved product (good or service), or process, a new marketing method, or a new organisational method in business practices, workplace organisation or external relations”. The RBV stresses the importance of innovation as a source of competitive advantage (Hall, 1993; Carmeli, 2001; Gopalakrishnan and Bierly, 2001). Prahalad and Hamel (1990) suggest that, in the long term, competitiveness derives from the possibility of creating, more quickly and at less cost than competitors, essential technologies and skills that give rise to absolutely innovative products. In the case of manufacturing firms, there is a host of evidence in the academic literature to suggest a positive relationship between innovation and business performance (e.g. Griliches and Mairesse, 1983, 1990;

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Crépon et al., 1998; Wakelin, 2001; Lööf and Heshmati, 2001, 2002; Mairesse and Mohnen, 2003; Kafouros et al., 2008, etc.). Studies on the relationship between innovation and performance in the services sector are less plentiful, although empirical evidence exists of a positive relationship here too (e.g. Cainelli et al. 2004, 2006). The Oslo Manual (OECD, 2005) also clearly links innovation to performance: “the ultimate reason [why firms innovate] is to improve firm performance, for example by increasing demand or reducing costs” (paragraph 77). All of the above leads us to pose the following hypothesis: H3: Firms with superior innovation capabilities achieve superior performance.

Managers as catalysts of innovation capabilities A firm can obtain earnings, not because it has superior resources, but because the central competence of the firm involves making better use of its resources (Penrose, 1959). Fiol (1991) supports Penrose’s idea, considering that the managers in a firm analyse their stock of assets and direct the process through which these resources are used and renewed. Mahoney (1995) conceives management resource as a catalyst for all other resources. Management capabilities in combination with other firm resources can jointly produce earnings. Likewise, Lado and Wilson (1994) identify management competencies as being the point of support from which all other competencies are developed, while Castanias and Helfat (1991, 2001) argue that management capabilities combined with other resources and capabilities of the firm, have the potential to generate income. This leads us to pose the following hypothesis: H4: Firms with superior management capabilities have superior innovation capabilities.

Constraints upon innovation in cooperative firms According to the literature on Social Economy, risk aversion among the worker-owners is higher than among owners in investor-owned firms (Jensen and Meckling, 1979; Bonin et al., 1993; Dreze, 1993; Doucouliagos, 1995; Hindmoor, 1999; Dow 2001, 2003; Park et al., 2004; Melgarejo et al. 2007, 2010; Van der Krogt et al., 2007; Chevalier, 2011). Worker-owners put much or all of their wealth into a single firm and also invest their human capital in the same venture, foregoing the benefits of diversification in coping with risk (Dow, 2003). The concentrated risk to which worker-owners are exposed discourage them from taking

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avoidable risks and favours projects that have a lower ex ante probability of failure (Jensen and Meckling, 1979, Hindmoor, 1999; Doucouliagos, 1995; Dreze, 1993; Dow, 2003). As innovation requires the willingness to take risks in the pursuit of an uncertain outcome, the higher degree of risk aversion of cooperative members is an important obstacle for innovation. Even the low failure rate of employee-owned firms, a factor that has been considered as a strength of cooperatives such as those of Mondragon, is conceived by Hindmoor (1999) as a sign of risk aversion and low innovativeness. Innovation capabilities can also be constrained in cooperatives, due to their limited access to capital (Ben-Ner, 1988; Bonin et al., 1993; Dow 2003; Chaddad and Cook, 2004; Novkovic, 2007; Van der Krogt et al., 2007; Maietta and Sena, 2010). Worker-owners often cannot finance desirable investments of the firms which they themselves own (Dow, 2001; Melgarejo et al. 2007). Besides, social economy literature also identifies a disincentive to finance capital with internal funds when worker-members do not have individual and transferable ownership rights in the firm’s assets (Jensen and Meckling, 1979; Bonin et al., 1993; Dow, 2001; Mosheim, 2002; Maietta and Sena, 2010; Martín, et al., 2010; Bahia, 2011). Another factor that leads to underinvestment in cooperative firms is credit rationing. Financiers prefer to invest in firms in which they can exercise more control (Gintis, 1989). According to Bonin et al. (1993), if nonworker financiers are denied control rights but must bear a substantial portion of the financial risks, they may be willing to do so only on terms that are relatively unfavourable to the cooperative. Those authors also highlight that information and knowledge about cooperatives in financial markets is scarce and inaccurate. As a consequence, financial markets are reluctant to finance cooperatives. The small size of cooperative firms and their more difficult access to capital, reduce their ability to invest in R&D, and make them less concentrated on technical innovations than investor-owned firms (Novkovic, 2007). As a consequence, cooperatives are more prevalent in low-innovation, labor intensive industries (Hindmoor, 1999; Dow, 2003; Novkovic, 2007). This prompts the following hypothesis: H5: Innovation capabilities are lower in cooperatives than in investor-owned firms.

The same theoretical explanations of the factors that make management capabilities lower in cooperatives (lower wages for managers, small size, control of managers by cooperative members) and limit 7

their innovation capabilities (risk aversion, small size, limited access to capital and underinvestment) are used to explain why so few producer cooperatives exist in Western market economies. The implicit argument is that those limitations can negatively affect the performance of cooperatives. In coherence with the previous five hypotheses, we pose the following one: H6: Investor-owned firms achieve better performance than cooperatives.

Proposal for an Explanatory Model of Firm Competitiveness In addition to the six hypotheses posed above, we add an additional seventh hypothesis related to the managers’ perception of their firm’s future performance, which is a measure of their confidence in the sustainability of their firms’ current competitive situation: H7: Managers perceive that firms with a higher current performance will also achieve high performance in the future.

Figure 1 shows the proposed model: [Insert Figure 1 here]

3.- Methodology. Design of the Research Following an analysis of a previous qualitative study about the key factors for competitiveness of Basque industrial firms developed by Aguirre et al. (2006), we chose the variables characterising management and innovation factors. These variables were measured through a quantitative study and a statistical analysis was made in order to test the model and the hypotheses. (see Table 1) The information-gathering technique used was a telephone survey of managers from a representative sample of 861 firms out of a population of 3,275 Basque industrial companies of 10 or more employees. The specific technique of statistical analysis used to test the model was structural equation modelling.

Measurement Scales of Competitiveness and its Determining Factors 8

The concept of competitiveness or competitive success is closely linked to the concept of organisational performance; indeed, earnings generated by competitive advantages will result in better performance and therefore in better relative positioning of the firm vis-à-vis its competitors. Measuring business performance therefore makes it possible to measure competitive success. However, there is no consensus as to how competitiveness should be conceptualised and measured (Venkatraman and Ramanujan, 1986; Hitt, 1988; Camisón, 1999; Dorronsoro et al., 2001). Similarly, there is an open debate as to whether it is better to use objective indicators (Hatten and Schendel, 1977; Miller and Friesen, 1978; Ghapman et al, 1997; Hendricks and Singhal, 1997; Leal, 1997) or subjective ones (Venkatraman and Ramanujam, 1986, 1987; Dess, 1987; Powell, 1992; Camisón, 1999). Subjective indicators are recommended when inter-sector samples are being used (Powell, 1996) or samples formed mostly of SMEs (Covin et al., 1990). Those two conditions are present in our study. On the one hand, industrial firms of our sample, according to the total population, are mainly SMEs. On the other hand, the use of an inter-sector sample was required in order to have a higher number of cooperatives in our sample. Additionally, prior research has shown that subjective measures of firm performance are well correlated with objective measures (Dess and Robinson, 1984; Venkatraman and Ramanujam, 1986; Smith, Guthrie and Chen, 1989; Geringer and Hebert, 1991; Powell, 1992). For all of these reasons, this study uses measurements of subjective perception of competitiveness. There is also an ongoing debate as to the best indicators to be used. Dorronsoro et al. (2001) state that the most common indicators are growth in sales, growth in jobs, profitability in its different forms and growth in share value. Taking all of the above into account, this study uses the subjective scales for measuring competitiveness formed by a 5-point Likert-type scale whose items are shown in Table 1. As already stated, for measuring the determining factors of competitiveness that form the object of study, we have developed two subjective scales comprising 5-point Likert-type scales, based on the qualitative study developed by Aguirre et al. (2006). These scales are shown in Table 1.

Technical Information

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The population to be studied comprises firms with 10 or more employees in the manufacturing industry of the Autonomous Community of the Basque Country (ACBC)3, according to the Bureau van Dijk SABI database (February 2006 version). From a population of 3,275 firms (77 of them cooperatives), 861 were randomly selected for making up the sample, with a random error of less than 2.87% (for a confidence interval of 95%). The sample used represents 26.29% of the firms in the population under study. 44 of the 861 firms of the sample are cooperatives

(57.14% of the cooperatives in the population). The fieldwork, consisting of computer-assisted telephone surveys of managers, took place between 24 April and 10 May 2006. It was outsourced to a company specialized in socio-economic surveys (Gizaker). The order of preference of the person to be interviewed used was: (1) Director/Manager; (2) General Manager; (3) Sales Manager; (4) Operations Manager; (5) Managing Director; (6) Chairman; (7) Sole administrator; (8) Others. Previously, the companies had received a letter encouraging them to give answer to the survey.

4.- Results. Tests of reliability (Cronbach  calculation) and validity tests (Confirmatory Factorial Analysis with EQS 6.1)4, conducted to determine the measuring model, suggested the need to remove 4 items – P24, P46, P50, P18, (see Table 1) – in order to improve the fit of the model, thus allowing all factor loading coefficients to be greater than 0.600 (Marsh and Hau, 1999). In turn, the Lagrange Multiplier Test recommends double-loading 2 of the items (P8: investment in employee training, and P9: innovation in management and administration) to 2 factors (F2: quality capabilities and F4: innovation capabilities)5 6, allowing an important improvement in the statistics 2.

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The manufacturing industry accounts for 98.09% of employment and 88.66% of the gross added value of all Basque industry (Eustat, 2008). 4 This version of the program allows specific treatment for category variables. The distribution of variables with a small number of categories (5 categories in our case) is supposed to be non-normal (Kline, 2005). That is why we used the robust estimation, whose statistics correct the effect of the non-normality of the Maximum Likelihood (ML) estimation (Satorra and Bentler, 1988). Post analysis difference of 221,4227 between χ2 of the ML estimation and the corrected Satorra Bentler χ2 confirmed the supposed multivariate non-normality. 5 This double load was agreed upon once its theoretical sense had been verified. 6 Certain degree of controversy there exists in the SEM literature about letting the variables charge in multiple factors. Cattell (1978) upholds the possibility of some variables measuring more than one domain (i.e. factorially complex variables). On the other hand, Anderson and Gerbing (1988) argue that uni-dimensional models are more useful for permitting more precise convergent and discriminant validity tests. Our measurement model shows good results of discriminant validity with a factor correlation value of 0.394 between management capacities and innovation, far from the value of 0.850 considered as indicative of poor discriminant validity (Kline, 2005, p. 73).

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Table 1 shows the result of these tests. Specifically, we show the Cronbach  coefficient of each factor, an estimation of the factor means7, the factor loading coefficients of each variable in its factor and the mean of each variable8. [Insert Table 1 here] The causal model (Figure 1) was tested using EQS 6.1, specifying the variables as categorical and using the robust estimate that corrects the lack of multivariate normality associated with it. The fit indices (NFI=0.939; CFI=0.960; RMSEA=0.045, with a confidence interval at 90% of between 0.038 and 0.051) indicate a good fit (Kline, 2005, p. 139). The standardised solution of the model is shown in Table 2. Figure 2 shows the standardised and non-standardised solutions of the model at factor level. [Insert Table 2 here] [Insert Figure 2 here] The data in Figure 2 enable us directly to verify the hypotheses, H3 (Firms with superior innovation capabilities achieve superior performance), H4 (Firms with superior management capabilities have superior innovation capabilities) and H7 (Managers perceive that firms with a higher current performance will also achieve high performance in the future). In the case of the relationship between management capabilities and current competitiveness (H1) we need to calculate the total effect of F2 on F9. The total effect of one factor on another is the sum of all the direct and indirect effects, where the indirect effects are estimated statistically as the product of the direct effects (Kline, 2005, pp. 128-129) and its standard error is calculated using Sobel's test (1986), which allows the level of significance of this estimate to be determined. Using the above data, one can obtain a non-standardised value of the total effect of 0.130 and a standardised value of 0.164, with a significance level of 10%. In order to test the hypotheses H2, H5 and H6, analysis of variances (ANOVA) is used in comparing cooperatives and investor-owned firms (see tables 3 and 4). [Insert Table 3 here] [Insert Table 4 here]

7 The factor means were estimated considering that all items making up the factor have the same weight (Kline, 2005, p. 204), after eliminating the items suggested by the reliability and validity tests. 8 For the sake of economy, typical deviations, typical errors and limits of the confidence interval associated with the estimation of the averages are not shown.

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According to our results, hypothesis H2 (Management capabilities are lower in cooperative firms than in investor-owned firms), H5 (Innovation capabilities are lower in cooperatives than in investor-owned firms) and H6 (Investor-owned firms achieve better performance than cooperatives), are rejected. A further analysis item by item, only shows significant differences in two questions, and those differences also go in the opposite direction to hypothesis 5 (see Table 5) [Insert Table 5 here] Basque industrial cooperatives invest a higher percentage of their turnover in Research and Development than investor-owned firms (a difference significant to 5%), and work more regularly with Technology Centres and Universities (a difference significant to 1%)9.

5.- Discussion. Using the contrasted model, we can state that industrial firms with superior management capabilities and superior innovation capabilities achieve superior performance, which manifests itself in greater growth in sales and greater profitability in comparison to its reference competitors. Similarly, industrial firms with superior management capabilities show superior innovation capabilities, leading to superior performance. Management capabilities are therefore a decisive factor for the development of innovation capabilities. Among the two internal factors of competitiveness examined, innovation capabilities were the factor with the greatest explanatory power on the firm's performance. Contrary to the negative predictions of most of the Social Economy literature, we find that management and innovation capabilities in Basque industrial cooperatives are not lower than in investor-owned firms. Basque Industrial Cooperatives neither differ in overall performance when compared with IOFs. In our opinion, those findings don’t invalidate the Social Economy literature framework. In fact, industrial cooperatives still have a low relative impact in most Western economies. Likewise, the small average size of industrial cooperatives in most countries and many cooperative failures make us think that the constraints upon management and innovation capabilities are still valid for cooperatives in most economies. Among the different possible reasons for our results, we consider the following ones: 9

Those differences are still significant to 5% and 1% filling in or imputing missing values, via mean imputation.

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The big size of Basque industrial cooperatives.

Average employment in Basque cooperatives (49.1) almost triples average employment in Spanish cooperatives (17.17) (Barea and Monzón, 2011). Average employment per industrial cooperative in our sample was 376, a figure much higher than in the surrounding European production cooperatives (81.8 in the Csezh Republic, 22.27 in France, 10.65 in Portugal, 10.68 in Spain and 3.37 in UK, see Chaves and Monzón, 2007) and higher than average employment in the total sample (11110). As it has been stated in the literature analysis, the small size of cooperatives is considered a barrier to the development of management and innovation capabilities. This problem is not present in Basque industrial cooperatives, and can be an explanation of our results.

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A favourable environment.

The literature on social economy argues that producer cooperatives face limitations to finance their innovations because financial markets are reluctant to finance cooperatives, due to their lack of knowledge about the cooperative form. The strength of cooperatives in the Basque Country, and the existence of supporting organizations, both in the public and private sphere (cooperative associations, mutual guarantee institutions,…) create information externalities and make the access to financial markets easier for cooperatives. 11 Socio-political support also helps to reduce some of the limitations to innovation in cooperatives. For example, the disincentive to finance capital with internal funds cited by literature, is partially solved by a taxation system that make taxes lower if the cooperative reinvests a bigger portion of its earnings in the Mandatory Reserve Fund. Cooperatives in countries where there is not a strong socio-political support for those firms will have a disadvantage, and we can predict that this disadvantage will grow with time. In fact, the higher the strength of

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There are three big cooperatives (Fagor Electrodomésticos, with 5,835 employees, ULMA C y E with 1,373 and Maier with 1,020) that raise the average employment in cooperatives. But even not considering those large cooperatives, average employment in cooperatives of the sample more than doubles that of non cooperatives. 11 This is true not only for the Basque Country, but also for other Spanish regions. Contrary to the literature predictions of nonworker financiers not willing to finance cooperatives, or financing them on unfavorable terms , Amat et al. 2011 find that cooperatives and mercantile companies from Catalonia have similar levels of debt, and that the former have lower financial costs.

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cooperatives in a certain region, the higher the possibilities they will have to lobby to get an even more favourable environment.

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Networking and help of the supra-structure of Mondragon Corporation.

According to authors as Smith (2001) or Novkovic (2007), a high degree of networking and intercooperation can help cooperatives to overcome barriers to develop innovation and management capabilities. The more developed form of intercooperation among Basque cooperatives is Mondragon Corporation. 31 out of the 44 cooperatives of our sample belong to this corporation, something that can also explain some of our results. In fact, the two innovation items in which cooperatives perform better than investor-owned firms (a higher percentage of turnover invested in Research and Development and a more regular work with Technology Centres and Universities) are explained solely by the responses of cooperatives belonging to Mondragon. Many researchers of the Mondragon Corporation consider the supra-structure of Mondragon, with its corporate bank, Training Centres and Research Centres, as a key factor of this cooperative success (Thomas and Logan, 1982; Ellerman, 1984; Whyte and Whyte, 1988; Hoover, 1992; Morris, 1992; Cheney, 1999; Smith, 2001; Bakaikoa et al., 2004; Irizar and MacLeod, 2008; Basterretxea and Albizu, 2010, 2011a, 2011b; Basterretxea, 2011). Mondragon has created a training supra-structure, including a University (Mondragon University) and a Management Training Centre (Otalora), instrumental in enabling the creation of competent managers and their socialization in cooperative values (Bradley and Gelb, 1985; Ellerman, 1984; Hoover, 1992; Meek and Woodworth, 1990; Thomas and Logan, 1982; Whyte and Whyte, 1988; Basterretxea and Albizu, 2011a). Those training centres have been valuable to overcome constraints upon the attraction and retaining of valuable managers in Mondragon cooperatives (Basterretxea and Albizu, 2011a), and have been probably valuable also to non-Mondragon cooperatives in the near surroundings. Some of the financial limitations to innovation in cooperatives have also been solved due to the suprastructure of Mondragon. In fact, financing is facilitated for Mondragon cooperatives by the corporate bank, Caja Laboral, and by many corporate investment funds as Mondragon Inversiones. Risk aversion of cooperative members is also reduced due to the high diversification of the corporation. Internal rules in this corporation also make retaining earnings for investment compulsory. In order to overcome innovation barriers, Mondragon has also created a network of 14 Technology Centres (see Bakaikoa et al. 2004; Irizar and MacLeod, 2008) and 14

implements a coordinated Science and Technology Plan. All those tools and mechanisms of intercooperation have been progressively developed by Mondragon cooperatives during many decades. Any potential attempt to copy similar intercooperation mechanisms between cooperatives in other regions, should take in account that time compression diseconomies will exist and that the levels of mutual trust and compromise needed are only achievable after many years of experience. Even if the intercooperative supra-structure of Mondragon is intended to help its cooperatives, the corporate bank and the Technology Centres have probably been helpful for non-Mondragon cooperatives also overcoming innovation barriers. Basque industrial cooperatives tend to be geographically concentrated in some specific areas. This geographical concentration makes it easier to apply the inter-cooperation principle and helps to create and maintain cooperative culture and values. Isolated cooperatives in other countries will probably find more problems in applying the principle of inter-cooperation and benefiting from it. Furthermore, they will probably find less potential employees and managers socialized in cooperative values. Inter-cooperation between Basque cooperatives can also be easier than in other regions because of the presence of cooperatives in too many different industries. In regions or countries where cooperatives are too concentrated in only one or few sectors (as in France with agriculture and banking cooperatives), fierce competition between cooperatives in the same industry can make trust and collaboration much more difficult.

6.- Limitations and future lines of research. Before embarking on any study of the sources of a firm's competitiveness, it is first necessary to decide which sources to include and which to leave out. An overall empirical study would be impossible to tackle, especially in the case of research such as ours which is causal in nature. The main limitation therefore may be considered to be an essential part of the study itself, which examines only management and innovation capabilities. On the other hand, the characterization of the measured factors is limited to a small number of items per factor (between 3 and 6) in order to reach a good answer ratio to all the questions of the questionnaire. This constraint hasn’t allowed us to use previously developed scales, with a probed liability and validity. However, the easy to answer questionnaire, developed ad-hoc in a previous qualitative study (Aguirre et al., 2006)

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guarantees its extensive use in a heterogeneous sample of industrial firms (cross-sectorial and with differences in size). As already stated, subjective scales have been used to measure competitiveness. It could be beneficial to use mixed scales with objective and subjective indicators, including not only indicators related to profitability and sales, but also others related to productivity, for example. As in many other quantitative and comparative studies between investor owned firms and cooperatives, it is easier to get answers of a representative sample of the total population under study, than getting a representative sub-sample of the cooperatives. Even if cooperatives in the main are ready to cooperate with researchers, it is also true that there is a growing response fatigue among cooperative managers. That’s why we consider the response rate of 57.14% of the cooperatives in the population under study as a reasonably good response rate Further research is necessary in order to evaluate causal relationships between size, networking and environmental factors and the ability of Basque industrial cooperatives to overcome the innovation and management limitations predicted by Social Economy literature. Even if we found a mismatch between Social Economy literature and our results, those results must be considered valid for the very special case of the Basque context. Further research could help to understand the barriers within the cooperative movement that are preventing the transfer or adaptation of a model that has been successful, not only for the cooperatives of the Mondragon Group, but also for other industrial cooperatives in the area.

Acknowledgments: Even if cooperatives are usually ready to cooperate with researchers, it is also true that there is a growing response fatigue among cooperative managers. That’s why we are grateful to the 861 firms that answered our questionnaire, and especially to the 44 cooperatives. We would also like to thank the reviewers for their revision and comments, which have been very helpful to improve the paper.

16

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FIGURES Figure 1: Explanatory model of business competitiveness

Management capabilities

Innovation capabilities

Current competitiveness

Future competitiveness

Figure 2: Solution of the causal model at factor level

Non-standarized: Direct effect: 0.087 Standard error: 0.108 z: 0.802 (non-significant) Standarized: Direct effect:0.111 Non-standarized: Direct effect: 0.224 Standard error: 0.056 z: 4.017 (sig. 0.1%)

Non-standarized: Direct effect: 0.360 Standard error: 0.039 z: 9.237 (sig. 0.1%)

F2: Management capabilities

F4: Innovation Standardized: capabilities Direct effect: 0.441

F9: Current competitiveness Standardized: Direct effect: 0.232

Non-standarized: Direct effect: 0.520 Standard error: 0.076 z: 6.803 (sig. 0.1%)

F10: Future competitiveness Standardized: Direct effect: 0.538

TABLES Table 1: Factors and variables and results of the reliability and validity tests Factor

Cronbach 

F2: Management capabilities

0.768

Factor mean 3.5696

F4: Innovation capabilities

0.822

3.1619

F9:Current competitiveness

0.719

3.2087

F10: Future competitiveness

0.728

3.3064

Variable P7: Managers’ qualifications P6: Managers’ strategic vision P9: Innovation in management and administration P8: Investment in employee training and development P16: Radical innovation in product P15: Incremental product innovation P17: Innovation in production and commercial process P9: Innovation in management and administration P8: Investment in employee training and development P18: Investment in RDI P24: Collaboration with Universities and Technology Centres (as a path to innovation) P43: Growth in sales in the last three years as compared to reference competitors P44: Profitability in the last three years as compared to reference competitors P46: Trade margins in last three years as compared to reference competitors P48: Forecast profitability over next three years as compared to reference competitors P47: Forecast growth in sales over next three years as compared to reference competitors P50: Forecast trade margins over next three years as compared to reference competitors

Factor Mean Loading variable 0.753 3.7760 0.687 3.6807 0.579 3.4522 0.560 3.3695 0.849 2.6275 0.818 3.1625 0.785 3.1979 0.373 3.4522 0.265 3.3695 3.0605 2.2967 0.823

3.3245

0.738

3.0929

-

2.5673

0.836

3.2526

0.812

3.3603

-

2.9815

Table 2: Standardized solution of the model STANDARDIZED SOLUTION:

P2 P7 P8

= = =

.652*F1 .749*F2 .241*F4

R-SQUARED

+ .758 E2 + .663 E7 + .566*F2

+ .707 E8

22

.426 .560 .499

P9 P15 P16 P17 P43 P44 P47 P48 F4 F9 F10

= = = = = = = = = = =

.348*F4 .818 F4 .846*F4 .788*F4 .788 F9 .758*F9 .760 F10 .893*F10 .441*F2 .023*F1 .538*F9

+ + + + + + + + + + +

.581*F2 .576 E15 .534 E16 .616 E17 .616 E36 .652 E37 .650 E39 .450 E40 .898 D4 .232*F4 .843 D10

+ .602 E9

+ .109*F8

.637 .669 .715 .621 .620 .574 .577 .797 .194 .137 .290

+ .111*F2 + .929 D9

Table 3: Differences in management and innovation capabilities and actual and future competitiveness between cooperatives and non cooperatives (Descriptives)

Differences in management and innovation capabilities, atual and future competitivines between cooperatives and non 95% Confidence interval for the mean Standard Standard Lower limit Upper limit N Mean deviation error Minimum Maximum 817 3,5664 ,67000 ,02344 3,5204 3,6124 1,00 5,00 Management Non coops ,63655 ,09596 3,4353 3,8224 1,50 5,00 44 3,6289 capabilities Cooperatives Total

Non coops Cooperatives


Total

Actual competitiveness


861 817 44 861 817 44

3,5696 3,1594 3,2081 3,1619 3,2043 3,2901

,66812 ,82816 ,67867 ,82091 ,68099 ,68021

,02277 ,02897 ,10231 ,02798 ,02382 ,10255

3,5249 3,1026 3,0018 3,1070 3,1575 3,0833

3,6143 3,2163 3,4145 3,2168 3,2511 3,4969

1,00 1,00 1,00 1,00 1,00 1,50

5,00 5,00 4,40 5,00 5,00 4,50

Table 4: ANOVA (Management and innovation capabilities and actual and future competitiveness between cooperatives and non cooperatives) Sum of squares Management capabilities


Actual competitiveness

Future competitiveness

df

Mean square

F

Between groups Within groups

,163

1

,163

383,724

859

,447

Total

383,887

860


,099

1

,099

579,453

859

,675

Total

579,552

860


,308

1

,308

398,312

859

,464

Total

398,619

860


,123

1

,123

253,542

859

,295

Total

253,665

860

Sig. ,365

,546

,147

,702

,663

,416

,418

,518

Table 5: Differences in investment in R&D and in collaboration with Technology Centres and Universities.

Mean

N P18 .- "Approximately, what percentage of the total turnover of your company is invested in R & D?" (1=nothing; 2=less than 1%; 3 = between 1 and 2%; 4= between 2 and 3%; 5= more than 3%) P24 .- "Our company often works together with Technology Centres and Universities"

Standard deviation

Standard error

the mean Lower limit Upper limit

Min Max

754

3,04

1,313

,048

2,94

3,13

1

5

40

3,48

1,240

,196

3,08

3,87

1

5

Total

794

3,06

1,312

,047

2,97

3,15

1

5

Non coops

812

2,25

1,302

,046

2,16

2,34

1

5

44

3,16

1,462

,220

2,71

3,60

1

5

856

2,30

1,325

,045

2,21

2,39

1

5


Cooperatives Total

23