Less Discussed Dynamics in the Czech Farm Structure Development. Jarmila Curtiss. Tomáš Ratinger. Tomáš Medonos - PDF

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Less Discussed Dynamics in the Czech Farm Structure Development Jarmila Curtiss Leibniz Institute of Agricultural Development in Central and Eastern Europe (IAMO) Theodor-Lieser- Straße 2, Halle

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Less Discussed Dynamics in the Czech Farm Structure Development Jarmila Curtiss Leibniz Institute of Agricultural Development in Central and Eastern Europe (IAMO) Theodor-Lieser- Straße 2, Halle (Saale), Germany Tomáš Ratinger Institute for Prospective Technological Studies, Joint Research Centre Edificio Expo c/ Inca Garcilaso, E Sevilla, Spain Tomáš Medonos Research Institute for Agricultural Economics Mánesova 75, Praha 2, Czech Republic Contributed paper prepared for presentation at the International Association of Agricultural Economists Conference, Gold Coast, Australia, August 12-18, 2006 Copyright 2006 by Jarmila Curtiss, Tomáš Ratiger, Tomáš Medonos. All rights reserved. Readers may make verbatim copies of this document for non-commercial purposes by any means, provided that this copyright notice appears on all such copies. 1 Less Discussed Dynamics in the Czech Farm Structure Development Jarmila Curtiss, Tomáš Ratinger, Tomáš Medonos 1 Abstract The paper provides an empirical study on the dynamics of ownership changes in Czech agricultural companies, which are assigned by unique heterogeneity in ownership forms. Since employee ownership has retained a relatively important place in these structures, neoclassical, as well as institutional theories of labour-managed firms are considered. Building upon efficiency arguments, both approaches suggest the dissolution of labour-managed firms. The empirical analysis utilized detailed survey data from 2004 and accountancy data from 1997 to We used a cluster analysis to classify companies into homogeneous groups with respect to their ownership structure and stage of restructuring, and analysed these characteristics in relation to performance indicators. The companies were found to be in various transition stages. The results reveal that the most progressed and the most profitable companies have significantly higher capital concentration, a low number of owners and a low share of employee and external ownership. The least restructured companies with higher employee and external ownership show markedly worse performance figures. The restructuring process is complex and farms have adopted different strategies; only restructuring the firm s liabilities by capitalising transformation debts appeared insufficient for improving performance. JEL classification D2, L1, L2 Keywords Cluster analysis, Czech agriculture, Ownership, Large-scale farms, Performance, Principal component analysis. 1 The authors would like to acknowledge the financial support of the data collection from The Leibniz Institute of Agricultural Development in Central and Eastern Europe (IAMO) and the National Agency for Agricultural Economics of the Czech Republic (NAZV CR). Furthermore, Jarmila Curtiss was a Marie Curie Fellow of the European Community Programme Improving the Human Research Potential and the Socio-Economic Knowledge Base under contract number HPMD-CT The results presented are a part of the Marie Curie Project results. The authors are solely responsible for the information communicated, published or disseminated; it does not represent the opinion of the Community, and Community is not responsible for any use that might be made of the data appearing herein. 2 1 Introduction The wide variety of ownership configurations in the transition economies of Central and Eastern Europe has been viewed as a unique opportunity by many researchers to empirically investigate the ownership/performance relationship and the factors of ownership structure development. However, very few studies considered the dynamics of ownership changes and their relationship to economic performance in agriculture. This is despite the fact that large-scale farming has retained its dominance in many transition countries and allowed a formation of various ownership forms. Large-scale farms have been analysed in various contexts, such as efficiency and economic growth or structural changes and property rights development (e.g. Schlüter 2001; Brem 2000). In the context of efficiency and economic advantage, large-scale farms have mostly been analysed in comparison to smaller family type farms, or the effect of their size and legal form on technical efficiency have been discussed (e.g. Latruff et al., 2005; Curtiss 2002). This study will consider the dynamics of the ownership structure in Czech agriculture, which is characterised by heterogeneity in investor and employee ownership, various levels of ownership concentration, and a distinct degree of separation of production control and ownership. The objective of this study is to empirically explore the ownership structure/performance relationship and explain the dynamics of this ownership structure development. We structure the paper as follows: In the second section, we describe the structural changes in Czech agriculture. In the third section, we present theoretical models and derive hypotheses. In section four, we describe the survey and accountancy data. In section five, we discuss the empirical results from principal component and cluster analyses. We conclude in section six. 2 From Cooperatives to new forms empirical background The study focuses on agricultural companies, of either a cooperative or any other legal entity, that have come about through transformation (CRTs), primarily from former collective farms. The privatisation scheme for former collective farms (a) restored original property rights of so-called 3 eligible persons to the extent of the originally-collectivised assets, with the aim of correcting injustices brought about by collectivisation, and (b) distributed assets acquired after collectivisation among eligible persons and persons once employed in the collective farm. Therefore, newly-formed companies mostly recruited labour that simultaneously held ownership rights; the companies were thus primarily established as labour-managed firms (LMFs). Employed owners (currently working and retired) held an important proportion of assets (on average 73.2% of net equity of the CRTs, currently working 27.8%, in 1994, (Divila 1996)), and thus likely had large influence on the management of the business. However, a large share of the equity was assigned to a number of external eligible persons who for various reasons opted for membership/shareholding (26.8% of the net equity of the CRTs in 1994) And finally, there were residual eligible persons (REPs) 2, who did not join the new companies owning 35% of the assets of the CRTs (Divila 1996). They requested to receive their transformation claims predominantly in monetary terms, while CRTs would have preferred the settlement in physical terms. Settling REPs claims has been pursued slowly and has exceeded the end of 1999 deadline 3 set by the transformation law. Thus the REPs decided to become informal creditors with significantly restricted property rights and no control over their assets for seven years, rather than becoming members in cooperatives or shareholders in other legal entities. The term informal credit refers to the lack of formal contract between parties - CRTs and REPs or the imperfections in contract specification which relate to lacking important components like duration, principals, rental rates, safeguards, etc. It also comprises imperfect institutional environments surrounding these transactions. Both parties expect the state to guarantee their rights by amending the transformation legislation, but political discourse has thus far yielded nothing but uncertainty. 2 The average value of the assets assigned to REP is, on average, small. Two-fifths of the REP own assets below 10,000 Czech Crowns (330 Euros), with the richer fifth owning over 100,000 Czech Crowns (3,300 Euros) (Divila 2001). 3 The ownership was restored but a range of property rights attributes (like generating income, control over the assets) was not enforceable for 7 years after the adoption of a transformation project i.e. before the turn of the years 1999 and In contrast, the terms transformation debt or transformation liability refer to all liabilities to REPs, either formal or informal. Initially, most of the transformation debts were just informal credits of REPs. The share of transformation debts on total assets 4 in 1995 was 37% in Coops, 56% in Limited Liability Companies (LTDs), and 13.6% in Joint Stock Companies (JSCs), respectively; in 2003 these numbers were 25% in Coops, 29% in LTDs, and 3.6% in JSCs. The amount of unsettled transformation claims in the sector was 55 billion Czech Crowns in 1992, 44 billion in 1996 and 15 billion in 2002 (MA 2003). It is supposed that a significant proportion of the transformation debt settlement, however, occurred through capitalisation in which case cooperatives transformed into JSCs, and the REPs joined the company in its new legal form. This led to an extension of the number of owners through external ownership. Therefore, the CRTs are assigned by a high degree of employee ownership and simultaneously high share of external ownership. The rest (29 billions CZK) of the settled transformation liabilities was either paid-off or returned with full title but consequently often rented back by the agricultural company. Under these conditions, the structure of legal entities evolved as illustrated in Table 1. TABLE 1 Structure of legal entities in Czech agriculture Coops JSCs LTDs Coops JSCs LTDs Coops JSCs LTDs Total number Share on total ag. land (%) Transform. indebtedness (CZK billions) Source: MA 1996, 1999, 2003; FADN-CZ 1998, 2003; Divila (2001). The main shift in the structure happened between cooperatives and JSCs. The number and the area cultivated by cooperatives dropped by around 40 percent, while number of JSCs doubled and the area tripled between 1995 and Nowadays, all three legal forms occupy more or less similar areas. LTDs are on average almost three times smaller than the other forms and least labour 4 FADN-CZ data 1995, intensive (2.3 persons per 100 hectares comparing with 4.1 and 5.8 in Coops and JSCs respectively). In spite of the inflow of the converted cooperatives the volume of transformation indebts fell by 74 percent in the group of JSCs. 3 From Cooperatives to new forms theoretical discussion Our notion is that there are three sources/underlying processes of structural change 1. Maximising members utility leading to a gradual conversion of LMF in a profit maximising firm (PMF); 2. Eliminating agency problem if ownership concentrates; 3. Reducing indebtedness by capitalising transformation liabilities to REPs which requires a more flexible business form (conversion of cooperatives into JSCs) The theoretical discussion considers neoclassical and institutional theory of the evolution of producer cooperatives as a representative for LMFs. The former builds upon Miyazaki s (1984) model. 3.1 Neoclassical theory of the labour managed firm The neoclassical theory assumes that behaviour of a firm can be explained through its objective and production function, which is subject to a given technology. The existence of various firm objectives interprets the evolution of different organisational forms. A capitalistic firm is traditionally described though the objectives of profit maximisation. An objective of a producer cooperative or LMF has, in the neoclassical theories, been defined in various ways. For example, Domar (1966) and Vanek (1970) build upon the assumption that producer cooperatives maximise the per member income, while Miyazaki (1984) argues that LMFs maximise members utility, which is a function of income and job security. The latter approach is discussed below in more detail. 6 The Miyazaki (1984) model considers LMF as a production coalition of member workers with mutually-binding contracts with the above-described objective. Further, it supposes that LMF deals with two capital markets: the internal wage fund and the external capital market. If the LMF needs to lay off some labour temporarily, it may be acceptable if furloughed members are compensated (in agriculture also in kind ). This compensation must be available for all members, otherwise working members will opt for another job. In the case that the LMF has access to the perfect capital market, enabling it to optimally schedule the payments of the rental cost of capital, the Miyazaki (1984) model suggests that, if the LMF operates profitably, it will in the long-run optimise members remuneration as the subject of their utility function if it replaces all the member-workers by hired workers and gradually reduces membership. This means that the LMF dissolves into a profit-maximising firm. On the other hand, under the threat of bankruptcy the optimal strategy is to expand membership, which will reduce the per member risk of losing one s job, but of course members must occasionally accept lower-thanopportunity income. If the capital market is imperfect, LMF which operates profitably at each stage of the path will tend to convert to profit maximising firm, while LMF expecting only long-run profitability to be positive will continue to exist in a labour managed form. In the other cases, the LMF cannot survive. Miyazaki s results thus suggest that a LMF will inevitably convert into a profit maximising firm when its long-term performance and capital market improve. 3.2 Institutional theory of the labour managed firm Institutional theory views a firm as a contractual coalition of resource owners who decide to join an economic undertaking because of expected economic advantages. The contract between the coalition participants sets their disposal rights to the firm resources, where firms can vary with respect to the internal institutions which define disposal rights. Institutional economics assumes that the firm internal institutions systematically influence the resource allocation and has inherent, 7 specific transaction costs. This is because the complexity and uncertainty of the environment s individuals does not allow the contract to be perfect and allows opportunistic behaviour. Internal organisation thus determines the efficiency of resource allocation within the firm and thereby factor productivity and competitiveness. The efficiency of the internal organisation is then, conversely, a factor that influences organisational changes. Democratic governance structures such as those existing in LMFs are associated with communication and bargaining costs, which exponentially increase with the number of the organisation members and the complexity of the production technique (see, e.g. Williamson 1975). Reorganisation to a hierarchical coordination and decision-making structure can significantly lower communication and bargaining costs. However, a hierarchical organisation brings advantages only if large organisational advantages such as technical scale or scope economies are present. If these advantages are compensated by the transaction costs of the hierarchical coordination and decisionmaking structure, an organisation could benefit from transforming to a more decentralised and independent governance structure (see, e.g. Williamson 1975). Another disadvantage of a cooperative organisation is that the traditional equal remuneration and mutual control provide insufficient incentives for labour performance (see, e.g. Sen 1966) and results in high control costs, respectively. These disincentive costs increase with the number of organisation members. This is also true for control costs; nevertheless, these also increase with the increasing firm size and complexity of the production process (Axelrod 1987; Ribhegge 1986). However, both cost categories can be reduced through a firm s conversion to a performanceoriented remuneration and hierarchical control (Alchian and Demsetz 1972). Also, the hierarchical control which would require an ownership concentration and incentive structure is favourable only if the advantages of a large firm exceed control and incentive costs. Otherwise, a transformation to self-employment through which control and incentives are reduced might be advantageous. Based on Miyazaki s model, transaction cost arguments, and the empirical context presented in Section 2, we can hypothesise that agricultural companies with LMFs character are less efficient 8 and represent a transient ownership form which is going to develop into a PMFs with hierarchical organization with more concentrated ownership. 4 Data and variables Ownership structure and further farm characteristic data were collected in the Czech Republic in This extensive data survey was organised by the Institute for Agricultural Development in Central and Eastern Europe (IAMO) and by the Research Institute for Agricultural Economics in Prague (VUZE). Data for the construction of selected farm-level economic performance indicators were taken from the Farm Accountancy Data Network (FADN) CZ survey. The sample consists of data on 167 agricultural companies with a legal entity status. These farms include 87 cooperatives, 60 JSCs and 20 LTDs 5. The firms in the sample can be mostly classified as farms with combined crop and animal production, but their crop/animal production proportions and size significantly varies. The definitions of the ownership and structural variables, as well as performance indicators derived from the data, are provided in Table 1. 5 Empirical analysis Principal component analysis was applied to detect the mutual relationship between farm ownership and structural variables. This analysis determined six components, which were further used as composed variables in a K-means cluster analysis. The objective of the cluster analysis was to classify analysed companies into homogeneous groups with respect to their ownership structure and stage of organisational transformation. The best clustering solution provided six clusters 6. The 5 This configuration does not necessarily reflect the farm structure in Czech agriculture (see Table 1); it rather reflects the willingness to cooperate in the survey. 6 Missing observations for some of the variables in the components caused a significant reduction to 82 total observations of the sample size for the cluster analyses. The number of observations in other structural variables which are used to illustrate the cluster differences varies, as indicated in Table 3. The number of observations for the performance indicators is 373. This is because an unbalanced panel for seven years is used. The reason for using panel data is that performance indicators can vary between years depending on the chosen strategy, e.g. investment strategy, and local weather conditions. Therefore, considering only one year could lead to an interpretation bias. 9 cluster means in various ownership, structural and performance variables and the significance of the cluster differences are provided in Table 2. TABLE 1: Variables description Unit EXTEROWN Share 0 to1 Share of external investors on total number of owners LTD No 0/Yes 1 Legal form of LTD EMPLOWN Share 0 to 1 Share of employed owners on total numbers of employees COOP No 0/Yes 1 Legal form of cooperative COMPAGE Years Company age OWNDECR No 0/Yes 1 Intention to decrease the number of owners in the next five years CAPSHARE 1,000 CZK Average per owner share on legal (fixed) capital TRANSFDEBT % Transformation debt to asset ratio = level of transformation indebtedness VOTING No 0/Yes 1 Voting system equal to one member (shareholder) one vote MANOWNDIFF Categ. 1-4 Interest differences between owners and managers PROBWMORAL Categ. 1-4 Problems with workers working moral OWNENGAGM Categ. 1-4 Owners engagement in company s operation NONAGRPROD Share 0 to1 Share of non-agricultural production on total farm revenues SIZE Million CZK Total farm revenues PARTEST No 0/Yes 1 Farm established through partition of formal collective or state farm CROPSHARE Share 0 to1 Share of crop production on revenues from agricultural production MANOWN No 0/Yes 1 Managers own hi
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