The Evolving Finnish Economic Model: How Cooperatives Serve as “Globalization Insurance”

Samuli Skurnik** Lee Egerstrom*

May 29, 2007

A paper presented at the joint conference of The Canadian Association for the Study of Co-operation (CASC)

The International Co-operative Alliance Research Committee (ICA) The Association of Cooperative Educators (ACE)

University of Saskatchewan Saskatoon, Saskatchewan

* Authors: Samuli Skurnik, D.Sc. (Econ. & Bus. Adm.) and Licensed Economist Helsinki School of Economics (HSE), Skurnik Consulting and former chief executive of Pellervo, the Confederation of Finnish Cooperatives Telephone: +358 400 502 426 Email: samuli@skurnik.fi Lee Egerstrom U.S. researcher and writer, author of books on cooperative development, and economic development fellow, Minnesota 2020, St. Paul, Minnesota (USA). Telephone: +651 770 1206 Email: EgerstromLL@msn.com

** The writing and presentation of this document to the international cooperative research community was made possible by grants from the Finnish Cultural Foundation and The Cooperative Foundation (US). Their support is greatly appreciated.

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Abstract. Major errors in economic policy in the 1980s and the collapse of the Soviet Union in the early 1990s threw Finland’s economy into severe recession and caused, along with joining the European Union in 1995, a dramatic economic transformation. The Soviet Union had been Finland’s largest trading partner. That economy activity crashed. This preceded Finland’s deci-sion to join the European Union that required lowering national economic protections to gain en-trance into a more liberalized trading community. Finland’s shift towards a liberal market econ-omy (LME) produced severe economic and sociological “shocks” across Finnish society. Do-mestic safeguards in place from Finland’s previous coordinated market economy (CME) were dismantled. While major parts of the Finnish economy liberalized and globalized, the people of Finland also turned inward and built on the national tradition of cooperative enterprise, finding new le-gitimacy for the cooperative movement. They began modifying, or adjusting business plans for existing cooperatives. Also, more than 2,900 new cooperatives have been created in response to the changing economic and political climates. What has emerged is a bipolar economy heavily influenced by cooperative enterprise. This paper returns to a central argument in Skunik’s Ph.D. dissertation, The Transformation of the Finnish Business System – From a Closed Regulated Economy into a Bipolar Globalised Economy (HSE 2005). That point is that the bipolar economic structure now evolving serves as “globalization insurance” for the small and open Finnish economy. One pole is the silicon and forestry export-oriented pole that must compete in global markets. The other pole is the Finnish home market-oriented pole in which cooperatives, mutuals and customer-owned industries pro-vide quality and reliability of services near the member-owners that outweigh low-cost produc-tion pricing, The authors of this paper believe the new Finnish model, different from the New Generation Cooperatives (NGCs) model from North America, represents a blend of both defensive and of-fensive strategies to gain entrance to markets. Even though successful cooperatives elsewhere employ similar business strategies and practices in response to competition, the Finns have de-veloped a strategic model coexisting with global markets. As such, the authors believe the Fin-nish model merits study and adaptation for cooperative development in remote areas of North America, the Third World, and Eastern Europe, as well as by employee cooperative groups, in-cluding the “fabrica recuperada” movement in South America.

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The Transformation of the Finnish Business System

– From a closed regulated economy into a bipolar globalized economy

COORDINATEDMARKET ECONOMY(CME)

LIBERAL MARKET ECONOMY(LME)

Nordic Mixed ModelFinnPole

GlobalPole

Old New/Present

The new bipolar Finnish business model

for national cooperation and global competition

1980’s

and 1990’s

4

Creating a New Economy

Cooperatives as such had no active role in the changing of the political and economic climates that swept through Finland in the 1990s. Finns had no influence on the events next door that ended the Soviet government, and, in the near term, their large market for exports into the Soviet Union. Despite the adverse economic climate caused by the cessation of trade with the largest trading partner, Finland was also in the middle of an evolving process of liberalization that started with the deregulation of the capital markets and spread to nearly all facets of business life. This transformation had Finland moving from a coordinated market economy (CME) to a more liberal, or near liberal market economy. Like all Finnish organizations and groups of peo-ple, cooperatives were left to fend for themselves to find ways to survive the social and eco-nomic “shocks” that marked the last decade of the Twentieth Century. This did not mean, however, that cooperatives were ignored in the shaping of the new Finnish economy. Cooperatives proved to have a significant role in the transformation of the economy and in shaping the new bipolar economic structure. Finns returned to their strong cooperative roots. Together with some other established elements of the national economy, specifically the strong role of state-owned enterprises (SOEs) and the influential role of the trade union move-ment, co-ops helped Finland adapt to economic change. What emerged was not a full-fledged LME economy but a bipolar economy in which cooperatives play a large role in the domestic market, or Finn pole. All enterprises had to become more competitive in recognition of the global economy. Existing cooperatives did this by adapting to the global market through changing business structures and using supply-chain and value-chain strategies to serve long-term customers and niche markets. In addition, Finns created more than 2,900 new cooperatives aimed at using competitive advantages to serve the Finnish domestic market. In addition, some of the latter cooperatives were formed to create marketing and quality advantages for professional and technical people to sell their talents and services in global markets. New Cooperatives Finns refer to the new cooperatives as “new wave” cooperatives. This is a translation from Finnish words that are not likely to gain usage outside the unique Finnish language. The Finnish reference to “new wave” reflected a surge in new starts after a quiet period in cooperative devel-opment, and it also bore a reference to cooperative roots. A reference to them published in the United States calls them “Finlandia model” cooperatives (Faber and Egerstrom), giving them a musical image that rests easy on the tongue for North Americans. The name is important, how-ever. The new Finnish cooperatives are different creations than the cooperatives and community developments called “new wave” enterprises in other countries. Pellervo, the Confederation of Finnish Cooperatives, tracked the creation of 2,921 such enter-prises between 1987 and 2006. They included 696 worker, service and expert cooperatives, 312 marketing cooperatives, and 152 publishing and media co-ops. (See Figure 1)

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Figure 1 There is a secondary and perhaps greater significance of this cooperative development than just the quantitative increase in the number of companies. It is bringing more Finns into the coopera-tive movement from professions and fields of commerce that were not historically a part of the cooperative movement. A case in point is the Finnish architects who now market their profes-sional talents around the globe through “expert” cooperatives. These were formed when the do-mestic design and construction industries were in recession and Finns needed to reach out to wherever they could find work.

What this has done is create a new burst in cooperative development largely led by people who are discovering cooperation for the first time or were only passively involved with coopera-tives in the past. Today, an estimated 3.5 million Finns out of a total national population of about 5.3 million are members of cooperative enterprises. That only involves membership in firms incorporated spe-cifically as cooperatives. Nearly all Finns are actual cooperative members when mutual insur-ance companies are included, which make Finland today as one of the most – if not the most – cooperative nations of the world. These cooperatives provide employment for more than 90,000 Finns and total revenue, or turn-over, of about 30 billion euros ($45.4 billion CAD, $40.9 billion USD). There has been a burst in cooperative development and in memberships since the mid-1990s. This comes after a steady decline in membership and in cooperation organisations that started in the 1980s and continued into the early years of the 1990s. This was not a unique Finnish experience; the same trends were found throughout the developed or industrialized nations and were brought about by consolida-tions of industries, consolidation of multinational companies, wider participation in stock mar-kets by citizens, Third World debt problems and a host of other external and internal influences.

Number of established co-operatives in Finland

5736

5283 77

61 69 76

123

174

262

221

257

131142

243

201186

198

272

0

50

100

150

200

250

300

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Total 2.921

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Figure 2 The two largest cooperatives in Finland are not new companies. Rather, they are existing firms that have grown and prospered by the cooperative renewal in the country and from making ad-justments to better serve their members in the face of global competition. One of these leading cooperatives is the consumer cooperative S Group. The other is the forest owners’ Metsäliitto. Both have turnover, or total revenue, of about 9 billion EUR ($13.6 billion CAD, $12.3 billion USD). That makes them equivalent in size to the largest North American co-operatives – a remarkable fete given that Finland is a small country.

Finnish Cooperative History It is safe to assume that participants at this conference did not journey to Saskatoon for a short course on Finnish history. At the same time, it is difficult to understand the recent surge of coop-eration in Finland without understanding how Finns got to this point in their history, and the cul-tural underpinnings that shape their responses to internal and external pressures. Cooperation and the quest for national identity, specifically independence, are closely aligned. At the end of the 19th Century, leaders of different ethnic communities and class strata within Finland were responding to a call for a national identity promoted earlier by the Finnish national philosopher J.W. Snellman. Finland was part of the Russian Empire at the time and known as the Grand Duchy of Finland. Legitimizing Finnish as a legal language was high among the Finns’ goals for bringing about a national identity and for pursuing independence. Snellman argued that economics and culture needed to be connected to foster independence. With this effort in the background, Finns also began exploring the cooperative movement that was bringing about social and economic reforms elsewhere in Europe. This movement gained momentum in the last years of 1890s when Hannes Gebhard came back from travels and wrote a

2002

www.pellervo.fi

TOTAL NUMBER OF MEMBERS IN PRIMARY CO-OPS in 1902–2001 in Finland

0

500 000

1 000 000

1 500 000

2 000 000

2 500 000

3 000 000

3 500 000

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2001

per

son

s

Forestry co-op Meat co-ops Co-op dairies

Co-op banks Consumer co-ops (S Group) Consumer co-ops (E Group)

Other cooperatives

7

book promoting cooperative development (Agricultural Co-operatives in Other Lands). Co-operatives were off and running with Finns using their autonomy status as a duchy to bring about reforms that would not be tolerated in Tsarist Russia. The co-ops promoted the national identity as well, they adhered to cooperative democracy and promoted democracy within Finnish society, and they were promoters of universal suffrage. One additional footnote is offered here because the authors of this paper believe the Finnish model should be adapted and followed in many developing areas of the world. Gebhard also had an historical giant of a wife. Hedvig Gebhard was from the one-quarter of the Finnish population that was ethnically Swedes, but she conquered the Finnish language to aid her own community organizing work and support her husband’s cooperative development efforts. After independence from Russia (1917), both husband and wife were elected to the Finnish Parliament in 1907 – the world’s first married couple to serve in a national parliament. Hannes is remembered as the “fa-ther of Finnish cooperatives.” Many people credit Hedvig as the “mother of Finnish coopera-tives” as well as one of the pioneers of Finnish feminism. Regardless, the Gebhard family lives on as testament that cooperation involves democracy and empowerment – a lesson that still needs to be learned in many parts of the world. Top-Down or Bottom-Up? In most parts of Europe and, indeed, in the Prairie Provinces and Great Plains states of North America, most early cooperative development was triggered from the ground up. This “bottom-up” approach came from community leaders seeking to correct market imbalances brought by either total market failures or from their absence of market power. Those elements were present in rural Finland at the start of the 20th Century as well. But looking back, Finnish historians tend to find that because of historical reasons Finland was obliged to follow a different course in which intellectuals such as Gebhard led a “top-down” strategy for accelerated cooperative (and entrepreneurial) development. The importance of this should not be lost on anyone involved with ICA, CASC, ACE, or any of the governmental and non-governmental organizations involved with economic development around the world. Finland proves that cooperative development can start in either direction – top or bottom. More important than the direction is the spirit in which all this is done. Finns adopted a comprehensive strategy for cooperative development the year (1899) that Gebhard wrote his tome on agricultural cooperatives around Europe. The strategy was built around three main pillars:

I. A federal organization model II. Cooperative legislation III. An ideological umbrella organization

These pillars were put into practice in slightly different order:

I. An ideological umbrella organization was founded in autumn 1899 with the start of Pel-lervo Society

II. The Cooperative Law came into force in 1901 III. The making of a federal organization began in 1902 with the founding of OKO and co-

operative banks

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From the pillars, cooperation would later play a decisive role in building the modern food in-dustry, in developing the retail trade, in securing food supplies during wars, and rebuilding the Finnish economy after the wars. In fact, cooperatives have played an integral part in all major structural changes that occurred in Finland as it progressed from an agrarian nation to an indus-trial nation and ultimately into a post-industrial welfare state (see figure 3). These changes in-volved the migration of masses of people – as well as of their cooperatives – from the country-side to towns and cities in search of work. Cooperatives were involved with the everyday lives of people through all these dramatic changes. Without exaggerating, it can be said that cooperation has contributed as much or more to Finnish society and economic life than the private corporations that attract more media atten-tion internally and abroad. Figure 3

In the early days, cooperation could be viewed as a school of democracy for the people. Uni-versal and equal suffrage was introduced to the country in the principle of one-member, one-vote, embodied in the Cooperative Law of 1901. It included women, and later applied to national elections in 1906 and to local elections in 1917. A control system (statutes and model rules) was introduced, communications were expanded throughout memberships by Pellervo and other group publications, and education and training programs were started by Pellervo Society (today the Confederation of Finnish Cooperatives Pellervo), Consumer Cooperative Union KK (abol-ished in early 1990s) and other sector-based organizations. This system trained men and women in managing cooperatives, from which experience they grew to hold a variety of offices up to the highest elected positions in the country. Cooperation in Finland pioneered consumer education through cooperative societies, new retail concepts through department stores, chains and customer-ownership, established numerous stan-

2006

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Pellervoadministration

Founders Cooperative societies / Central societies Members

Import protection

Export subsidies

War economy / Agricultural Incomes Act

Origins

Growth

National welfare /Postwar reconstruction /Regulations

Growth/Consensus/Regulations

Internationali-sation/Competition

Phases in the Development ofFinnish and Pellervo cooperation

First world

war

Finnish

independence

Second

world

war

East-West

”Peaceful

coexistence”

West w

ins

GA

TT, ETA,

EU

Russian

oppression

WTO

,

Euro

9

dards and new operating models (Valio and Hankkija), and promoted scientific research (high-lighted by Nobel laureate A.I. Virtanen at Valio). The typical organizational principles of cooperation, such as working together and the federal, or federated structure in which a combination of different companies in a certain value chain work together, can be considered the originator of the modern concept of networking. This is not uniquely Finnish, but it is true of Finland’s cooperatives as well. Given its wide membership in-volvement, this networking in Finland is clearly from the bottom-up.

Bipolar Economy Entering the 1990s it was clear that Finland was going to join the European Union even though in doing so the nation would need to dismantle its protections for agriculture and industry that had been part of the coordinated market economy (CME). There were a lot of social elements at play in the Finnish economy and business structure, including a major role of the state-owned enterprises. There were widespread protections for labour and the workers’ organisations, and there were protections for agriculture, forestry and the mineral extraction industries. Regionally, this variety of CME was called the Nordic Mixed Model.

Questions arose inside the cooperative movement about ways to adjust to the pending threat of competition that would come with dismantling safety net domestic programs (see Valio and Finn Coop Pellervo case studies at Harvard Business School from early 1990s; Skurnik was chief ex-ecutive officer of the Pellervo confederation at the time.) True to the early fears, competition did increase as Finland opened its borders and “harmonised” its domestic economy policies with those of the EU. All sectors of the Finnish economy went through the same soul-searching and explored ways they could make themselves more competitive. All cooperatives, public stock companies, privately owned firms and multinational companies doing business in Finland had to make adjustments to the economic environment at the time. As a result, all contributed in their own ways to reshaping the Finnish economy and creating what is now a bipolar economic sys-tem. A common denominator in this unofficial exercise (researchers now call it “Schumpeterian de-struction,” a concept that Harvard Economist Joseph Schumpeter developed to describe the mi-croeconomic transformation processes that all economies experience every now and then) was seeking ways to adjust the company to two competitive environments – one being the internal Finnish market and the other was the external global market. A few companies, with the best known worldwide being telecommunications and equipment giant Nokia, were large enough players on the world scene to adjust to the individual markets they were entering. Most other pri-vately-owned and investor-owned firms were smaller players against their international competi-tion. They pursued competitive advantages in niche markets where they found their strengths. Most tried to do this by defining their enterprises’ product categories and geographical markets in such a way that would make them either No. 1 or No. 2 in their respective market fields. The farmer and forest owner’s cooperatives did the same, focusing on value chains to strengthen their positions in what were also often niche markets. What emerged were three stra-tegic dimensions to building competitive advantage.

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Figure 4 Source: Koski 1988.8 This is where cooperative theory and cooperative practice intertwine. Keep in mind that in prac-tice, cooperatives have to be as organizationally and operationally effective as their competitors, including use of modern business practices that include logistics and supply chain management. Working in the global sphere, or pole, farmers and the forest owners have to meet competition outside Finland to market their foodstuffs and value-added forest products. Consumer coopera-tives need to go into global markets to source products to remain competitive in their markets, and then deliver them in an efficient manner. Within the Finnish market, all companies needed to adjust or strengthen their business strate-gies and their organizational strategies to be able to preserve or gain back their lost legitimacy (See Box 1). Cooperative retailers and service providers have to meet or exceed the service and quality provided by multinational companies. On the theory side, however, cooperatives should have an inherent advantage from their own-ership structure as they help members and their customers make choices based on the value proposition. This point is argued negatively in some business school literature around the world where there is a perception that democratically formulated business strategy is necessarily slow and inefficient. The theory has proven itself again in Finland, with the ownership structure tip-ping the balance for cooperatives _____________________________ Box 1

Legitimacy A thriving enterprise included a cooperative, approaches the market and public with two preconditions: 1) It must have clients in its markets that need and value its products or services. 2) The market and public – or society - must understand and accept the way the enterprise is doing its business.

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The latter point establishes the legitimacy of the firm. Historically, this has been a problem for coopera-tives where the co-op form of organizing business is outside the mainstream of business, is not well un-derstood, and not a part of business education. (See Appendix 1)

____________________________

Membership, Entrepreneurship and Trust The S Group consumer cooperative makes a case in point. Only the most efficient firms can survive in the highly competitive field of retailing. Efficiency, or effectiveness, derives from volume in retailing and that is difficult to achieve for customer-owned enterprises. The consumer cooperative can buy and sell those goods its members want, but it has trouble entering the market with the volume strength of such companies as Wal-Mart, Target and Kmart. Moreover, a con-sumer cooperative has difficulty expanding internationally just to gain benefits from volume pur-chasing. Figure 5

3.5.2007 S-ryhmä1

S Group: Key figures 1990-2006

Market share and number of customer owners

0

200

400

600

800

1000

1200

1400

1600

1800

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

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2001

2002

2003

2004

2005

2006

1000

0

5

10

15

20

25

30

35

40

45

%

Number of customer owners Market share % of Finnish retail groups

Bonus sales and bonus paid to customerowners

0

50

100

150

200

250

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

EU

R M

illi

on

0

10

20

30

40

50

60

70

%

Bonus paid to customer-owners Bonus sales from S Group sales

12

The solution for S Group was to expand horizontally to gain volume economies with greater penetration of markets through more store sites and through multitude of markets served (also domestic market leader in hotels and restaurants, farm inputs, car sales, etc.). This did strengthen S Group’s business and organisational strategies, and second, it modernized and strengthened the ownership strategy as well. The co-op has grown in business volume and its market share in the Finnish retail business increased from less than 16 percent in early 1990’s to more than 40 per-cent in 2007 (see figure 5). At the same time, it continues to generate more than 80 percent of its retail sales with member-owners (at Group level 60+ %). Part and parcel with building on the ownership strategy has been the rediscovery of strengths in cooperative theory. Van Dijk and Klep (2005) remind us that cooperative enterprises have two simultaneous objectives at work while investor-owned firms (IOFs) and privately-owned compa-nies can focus on one – profits (returns on investment). The co-op must be entrepreneurial in its own right to meet and survive competition. At the same time, it must add value to transactions by making the cooperative members more entrepreneurial in their individual endeavours. The Dutch economists acknowledge that this is not an easy management and governance task. The reward, however, is member solidarity built on shared socio-economic goals and the benefi-cial delivery of goods and services. The transformation underway in Finland offers case study evidence to support the Van Dijk-Klep theoretical argument. For instance, S Group has realised this by introducing an electronic membership card, “green card”, which accrues membership benefits progressively in the individual membership (savings) account. Approaching the global markets and cooperation from another academic discipline, Harvard Business School professors Casadesus-Masanell and Khanna have found recently that there is a far greater level of trust and greater wage equality within cooperatives. They key their 2003 study off northern Spain’s Mondragon Cooperacion Cooperativa (MCC) workers’ cooperative. We believe that they would find similar results in most cooperatives in Northern Europe and, most likely, throughout the world. A key element supporting both entrepreneurship and membership is trust. Internally and to ex-ternal, or non-member customers and trading partners alike, the cooperative structure takes on an important “brand” identification, or attribute that provides a marketing advantage for the coop-erative. (See Box 2) ________________________________ Box 2

Cooperation: a ‘brand’ attribute Cooperation is evolving broadly as a “brand” attribute in Finnish society, mostly because consumers themselves make value decisions about competitive goods and services. It is gaining momentum now because of value-chain marketing by some enlightened managers For instance, look at this value chain for a cooperative bank or cooperative retail society: - Local, close to the consumer - Domestic, interested and aware of its own neighborhood - Works for and only for its members - Members have real say in governance of the enterprise - Help consumers with life-management by making intelligent and moral consumption decisions – thus

enhancing their neighborhoods by their consumption choices. (See Appendix 2)

__________________________

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Globalization Insurance

“In the beginning, there was the swamp, the hoe – and Jussi.”

With that biblical paraphrasing, epic Finnish novelist Väinö Linna started his Under the North Star trilogy (1959) that chronicles the hardships of three generations of a family during painful moments in Finland’s modern history. It is great literature, translated into numerous languages and published around the world. It is historical fiction. At the same time, it is revealing of Fin-nish character traits that make Finns extremely independent and entrepreneurial people who at the same time are willing to cooperate in pursuit of common objectives. Those characteristics are evident today as Finns develop the bipolar economic model to con-front external influences from the global market. Skurnik argues that Finns are rebuilding a new, modern and distinctive mixed approach to capitalism after a long period of a closed, regulated economy. The first, globalized pole with increasing liberal market economy (LME) features continues to generate a major part of national growth and material well-being. It accepts the reality of the global market in the 21st Century. It does so even though global participation contributes a di-minishing part of the employment within Finland’s borders. Finland’s corporations continue to make larger portions of their turnover and profits from operations abroad. With this penetration into the global market, the global pole of the Finnish economy finds itself facing greater risks beyond their control, greater vulnerability to the behaviour of others, to out-side shocks, and to the lessening of national sovereignty, something that the Finns tried to protect themselves from with safety nets interwoven in their earlier CME-model. The second, domestic pole has taken over part of what had been coordinated market economy (CME) protections, although it has done so haphazardly at times and without that specific goal in mind. Cooperatives use their domestic orientation and risk-aversion strategies, including use of international cooperative principles, to stabilize the domestic economic environment. Two out of three Finns are members of one or more cooperatives. Patronage relationships, or usage of those cooperatives’ goods and services, are the glue that holds Finnish society together and brings about stability – the globalization insurance. Data show the cooperative sector’s importance in the restructuring of the Finnish economy along the LME line. Unfortunately, statistical definitions trip up the data and thus cooperation’s contribution is greatly understated. What the statistics show are that cooperative contributions to Finland’s Gross Domestic Product dropped from about 30 percent in 1979 to about 16 percent in 2002 while direct employment created by cooperatives increased from slightly more than 1 per-cent to more than 6 percent in that same period of time. What the statistics do not show is the number of positions secured, stabilized and created by many of the 2,900-plus new cooperatives that are “expert” co-ops and service co-ops. Their members are counted as private professionals and entrepreneurs. North Americans would likely refer to these co-ops and their members as producer cooperatives, and the self-employed positions these co-ops secure would also be ex-cluded from employment figures. Finlandia, NGCs and Developing Economies When cooperative leaders and writers met for a lunch in1994 to discuss the new cooperatives forming in Minnesota and North Dakota, all recognized a new strategy had been born. None then knew the definitions of “agency theory” problems that were being refined and passed from busi-

14

ness school professors to the agricultural and applied economists who worked with cooperatives. Nevertheless, there was recognition that third generation co-op members did not recall or appre-ciate the reasons why their grandparents started their existing cooperatives. Markets were working, although not as well as members would like, so market failure prob-lems had disappeared. The price spread between farm product values and consumer food prices was growing wider. An offensive strategy was launched with the New Generation Cooperatives (NGCs). It allowed members to pool resources, move cooperative processing and manufacturing farther up the food chain, and allowed the members to recover a greater share of the consumer’s food expense. The name itself was selected as a generational reference to what we now call the horizon problem. Economists in Canada, the U.S. and Europe would later conclude that the structure and strategy of the NGCs offset most if not all of the agency theory problems that confront cooperatives and all corporate structures (Egerstrom 2004). Finland’s “new wave,” or Finlandia cooperatives, may employ all of the offensive strategies involved with NGCs and with community economic development investments, often called “new wave” enterprises in North America. But make no mistake. They are defensive business organi-zations inspired by both economic hardship and by the threat of even greater competition from globalization. The earlier mentioned collapse of the Soviet Union ended trade with Finland’s largest trading partner. Meanwhile, Finnish companies were already expanding abroad in search of new market opportunities. Unemployment in real terms – those without jobs – soared to nearly 17 percent of the Finnish population in the early 1990s. Finns know market failure. Finns also know cooperatives are the tools needed for making mar-ket corrections. Like the literary figure Jussi, they grabbed their tools and went to work. The authors of this paper hope that researchers and scholars will work with economic devel-opment agencies and organizations to use and adapt the various cooperative strategies to assist people with economic development and the pursuit of their dreams throughout the world. Models now exist with both defensive and offensive market strategies, and they can be adapted to com-munity, regional and national uses by either top-down or bottom-up creativity. A further observation is this: Just as market conditions constantly change, the need for research is also unending. Nobel laureate Virtanen made that point in a grant proposal during the 1930s that has been shortened and best remembered to this day as:

“We don’t have Rockefellers …but we have cooperatives.”

Community leaders and their academic supporters in developing regions throughout the world should remember the Finn’s words, and ask themselves, “Which would we prefer?”

15

Appendix 1

Legitimacy

We argue that all enterprises face two preconditions. The first is that the enterprise must have clients that see need and place value on its goods and services. The second is that society must understand and accept the way in which the enterprise does its business. The latter point – legitimacy – has historically been the weaker for cooperatives in most countries. Cooperatives often find themselves outside the mainstream of organizing business. Both the society and a majority within the business community fail to recognize and understand the principles involved with cooperation and what they mean for organizing business. This lack of understanding involves ignorance and suspicion and can even lead to malevolence towards cooperatives. Reasons for this condition reside both inside and outside the cooperative movement. The structure of education in many countries plays into this problem as business schools and main depart-ments of economics tend to ignore cooperatives. Agricultural and applied economists are usually the main academic researchers and educators about cooperation, given agriculture’s historic use of cooperatives. The less rural societies become, the less the countries’ education system do to prepare people professio-nally and mentally for cooperative management leadership. This contributes to problems inside cooperatives, especially during periods of economic difficulty. Co-operatives have to keep their members and directors involved, motivated and convinced of the value of the cooperative way of organizing business during periods of stress. When cooperators lack self-confidence and cooperative managers lack profound knowledge and understanding of the company’s co-operative form, they have difficulty convincing the public and lobbying the merits of their firm. These efforts consume energy and self confidence of members as well as management – energy that could be otherwise used in productive business development. Cooperative representatives must begin dealing with outside stakeholders by justifying their way of doing business before getting down to real business matters. Put in conceptual form, this is an effort to gain business legitimacy. Gaining such legitimacy has be-come an important part of doing business and business strategy, regardless of ownership structures. Mul-tinational companies consume large fortunes in what they call institutional relations, and others might call lobbying. Investor-owned firms consume huge resources in what they call investor relations. In any form and by any name, all are engaged in securing the legitimacy of their business. The legitimacy of cooperatives has varied during the centenary history of Finnish cooperatives. The social climate for cooperatives was initially receptive because they were an innovation that fit the Finnish goals of gaining independence and uniting entrepreneurship and culture, as advocated by the Finnish phi-losopher Snellman. Cooperatives, however, lost much of their goodwill after World War II when they became an integral part of the nation’s regulated economic machinery for a too long period. This meant that cooperation had to win back goodwill and regain legitimacy in an unfavorable social climate. This environment has changed dramatically again in the last two decades that are bringing about a pro-found transformation in the Finnish business system. Cooperative members and society in general are finding common interest in a strong and thriving cooperative sector. This comes from the stabilizing role in the national economy, with its added benefits to Finnish society that come from cooperatives playing a large role in shaping the bipolar Finnish economy. This is new legitimacy.

16

Appendix 2

The Brand Attribute

In modern societies, competition is all about efficiency. At the same time, consumers temper what they see as efficiency in delivering goods and services against a wide background of moral, socially conscious and community standards. This means that consumers, in effect, “vote” every day in the markets for goods and services. All firms, regardless of ownership structures, must constantly ask themselves, “What do consumers want?” to remain competitive in markets. Cooperation, however, remains the main alternative market provider to privately-owned and investor-owned firms. Therefore, the cooperative has a value-chain es-tablished by the members that clearly establishes what they want within a broader market context. This democracy then becomes a living “brand” attribute that distinguishes the cooperative’s goods and services from rival products in the market. It is a brand attribute that channels consumer information about the way the value chain is organized in the company, what it means for the products and services offered, and what it means for the neighborhood and society. It is, and should be, a competitive advantage for cooperatives to allow consumers each day to “vote” on goods and services that fit best within the individuals’ won hierarchy of values. The good message for cooperatives is that it makes a powerful marketing argument for cooperation. It places choosing values high in the individuals’ hierarchy and constitutes cooperative enterprise’s genuine and enduring competi-tive advantage.

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