3 Inventions By Coops And Why Cooperation, Not Competition, Drives Innovation

Leo Sammallahti

Leo Sammallahti

Mar 29, 2019

Public And Cooperative Sector Contribution To Innovation

There is a widespread belief that the driving force of innovation is competition between companies. The government is viewed as an obstacle holding back the full potential of entrepreneurs with outdated regulation. However, practically all tech start-ups that are poster-boys for innovation are built on two profound inventions, both of which are born out of publicly funded research: the digital computer and the internet. These inventions were not born from profit driven competition, but instead cooperation between scientists. This can be seen in other areas as well: the private sector spends much more on medical research and development, but three out of four break-through medicines in the US are developed by the publicly funded National Institute Of Health. Mariana Mazzucato’s book The Entrepreneurial State makes these and other convincing arguments about the key role of public funding plays in fostering innovation. 

There is also another undervalued contributor to innovation: cooperatives. Cooperatives are often risk-averse which is why they have a lower risk of bankruptcy than other businesses. This risk-aversion has lead many to think that they are less capable of innovating. However, cooperatives are often spearheading innovation, as three examples from three different sectors below show.

Shareholder companies have a narrow scope and time-frame of innovation

The shareholder model with its narrow time frame of quarterly profits is holding back innovation. 78% of US business executives say their firms frequently forgo profitable investments in order to make short-term earnings targets. Constituency statutes that allow companies to prioritize the interests of various stakeholders – often employees – rather than just shareholders, raise the rate of patenting among firms by at least 6.4 percent. These statutes exist in 34 states in the US and they give businesses more time to bring innovations to market, rather than forcing companies to prioritise quarterly financial results at the exclusion of new products and new activities. Without shareholders pushing for quarterly returns, cooperatives are better positioned to consider their decisions with a more long-term focus.

Shareholder companies don't only have a narrow time-frame for innovation. Their scope of innovation is narrow. Facebook is dedicated to maximising ad-revenue. It might be in the users interest for the social media site to make it easier to organise sports events, but if it would mean that the users would spent more time exercising and less on Facebook, the company has an incentive not to do so. Unless, of course, it would be a user-owned platform cooperative, as Nathan Schneider argues. In which case, the scope of innovation wouldn't be as narrow as maximising ad-revenue, but making it as useful as possible for its users, and allowing users themselves to define what is useful.

Wikipedia is an example of a website that operates without shareholders and is largely governed democratically by its users, who vote half of the members on the board of directors. It is my prediction that it will outlast all other websites of similar popularity, partly because of its wider and more long-term vision.

With mass participation, cooperatives can also tap into the collective intelligence of their members. For example, OP Financial Group, a cooperative that is also the largest Finnish bank and the first online bank in Europe, has recently introduced a crowd-buying platform that was proposed by an ordinary customer-member. The platform sells products such as design lamps and headphones, and if a large number of member-owners purchase the product, the price of the product is reduced.

Two difficulties cooperatives have

Currently cooperatives have two problems with regards to innovation.

  1. It is difficult for small and new cooperatives to operate at a loss while developing and spreading innovations. Uber made a loss of $1.8 billion in 2018. The company can operate on a loss by covering it with venture capital investment. It is harder for a worker cooperative of taxi drivers to do the same - everyone owns one share in a cooperative, therefore equity investment to cover the loss is trickier.

  2. One-member-one-vote principle can also make creators who put a lot of initial effort into the company reluctant to use the cooperative model, as it makes giving sweat-equity more tricky. As Gideon Rosenblatt writes in his article When Robots Take Our Jobs, Platform Cooperatives Are a Solution, cooperatives are good at keeping the wheel spinning, but it is more difficult for them to get the initial push of funding in order to make the wheel spin.

How Coop Exchange fixes the two difficulties

Coop Exchange seeks to solve these problems by enabling cooperatives to issue investor and founder shares. These two type of shares give a dividend of the profits, but no voting rights. The members have full and democratic ownership on a one-member-one-vote basis, but the coops can raise investment from anyone across the world and reward the founders. This will make it easier for likes of the taxi-driver owned cooperative alternative to Uber to operate on a loss as they grow, because they can shift the initial losses from workers to investors in exchange for giving a share of the profits to them when the cooperative becomes profitable.

We at Coop Exchange are different from Silicon Valley. We do not see the public sector or trade unions as the enemy, but an ally in building an economy where stakeholders can democratically hold accountable those who make decisions affecting them. We want to build a sharing economy where ownership is shared. We want the internet to be a place where free services are not provided by turning the users into products to be sold, but a place where users are the owners of the value they create. This in turn will make the economic system more fair, innovative and effective.

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