A Study on Determinants of Cooperatives’ Organization Forms in Neijiang Sichuan: A Property Right Perspective

With China’s rapid economic development and persistent institutional reform in the agriculture sector, the contradiction between small-scale farming and intense market competition faced by the single peasant has emerged. Under this condition, as an organization capable of linking farmers to the market, cooperatives might be one of the effective solutions to this problem. In the ideal model, cooperatives are organizations formed by farmers, which provide technology and marketing services for them. Therefore, there are two ways for farmers to gain from cooperatives, one is production delivery; the other is profit sharing. Cooperatives in essence have the same structure as corporations which pursue to maximize profits; however, there exist differences between these two forms of organization. Contrast to corporations; cooperatives have multiple goals. Moreover, besides capital, labor and land owned by farmers also share profits in the cooperative. Accordingly, when studying the organization forms of cooperatives, in addition to applying the methods of corporation research, it would be even more important to take into account the distinctive characters of the cooperative and the agriculture sector.
In practice, it could be easily observed that the organization forms of cooperatives, which are different from the ideal model, play important roles in the operation of cooperatives. The different forms of cooperatives not only are the consequences of horizontal and vertical coordination choices; they also have significant impact on the performance of cooperatives. Based on a survey of five cooperatives producing different products in the Dongxing district of Neijiang city in Sichuan, this study attempts to explain why the organization form of cooperatives is not homogeneous and how the internal and external factors affect the organization. In our analysis, the property right approach is used to discuss the significance of these determinants.
The determinants of cooperatives’ organization form are divided into two parts including internal and external ones. The internal determinants are composed of the specific right brought by contracts, the residual right and problems resulting from vague property right arrangement. Because of incomplete contracts, some sorts of right cannot be well defined; this vagueness in property right thus leads to free rider problem, reinvestment problem, opportunistic behavior and hold-up problem in the operation of cooperatives. By means of influencing profit distribution between farmers and cooperatives, the internal determinants affect cooperatives’ strategy of horizon and vertical coordination, thereby lead to the emergence of various organization forms. In terms of external determinants, behavior of local government, collective land ownership in the rural area, low income of rural labor and other elements of the society and economy, all have great effects on the organization form of cooperatives.
As the cooperatives are small in scale and not in ideal conditions, our analysis finds relative to the internal determinants, external ones are more important in shaping the form of cooperatives. The external determinants dramatically change the arrangement of residual between the leader and farmer in the cooperative. In addition, among these external determinants, government’s behavior is the crucial one. The local government gets involved in all processes of cooperatives operation. In the beginning of establishment, extra benefits cooperatives receive from government are beneficial to their competition in the market. Nevertheless, these benefits are not sustainable because of the financial and promotion motivation of local officials. Therefore, if a cooperative is accustomed to relying on these benefits, it may be financially in danger when the policy alters; even a change in the government official can have an effect. Land ownership and the quality of members are the other two major determinants significantly influencing the strategy of cooperatives.
Under conditions mentioned above, it is difficult for cooperatives to build close relationship with farmers. If so, the cooperative is less attractive to the farmers and it would be hard to improve the quality of products or to realize cooperatives’ plan for vertical coordination. As a result, solving these problems is an inevitable step to take for cooperatives’ future development. The suggestions of this work are two-folded. First is that as far as external determinants concern, a reorientation of the government’s behavior and the reform of land ownership are needed. On the other hand, strengthening the link between cooperatives and farmers by encouraging farmers to participate in the decision-making processes so as to share more profits from cooperatives are strongly suggested.