Democratic Enterprises: Enterprise Creation in the Social Economy

1. Democratic Enterprises:Enterprise Creation in the Social Economy David Ellerman University of California at Riverside and WWW.Ellerman.org

2. Biological Analogy: Increasing Economic Bio-Mass • Two modes of increasing economic “bio-mass” (jobs & enterprises) • Existing “organisms” getting bigger; • Spawning of new “organisms.” • Biological principle of plenitude is second mode—spawning of new life through fission and reproduction. • Biologically, expanding old life is very limited by structure and by death. • Secret of development is spawning new life rather than “fattening” old life—See Jane Jacobs. • What form of enterprise best fosters spawning new life?

3. Old Companies as Schools for New Companies • Every company has two products: • Its products, and • Organization of people trained in technologies and business capabilities. • Cambridge economist A.C. Pigou emphasized that the second product can have positive externalities: • “One very important indirect service is rendered by the general economic organisation of a country in so far as, in addition to fulfilling its function as an instrument of production, it also acts, in greater or lesser degree, as a training ground of business capacities.” [Pigou 1960, Economics of Welfare. 204] • How to promote this potential positive externality? • Best source of new life is replicating existing business DNA perhaps with mutations in offspring.

4. Spin-offs of Routine Operations • Many parts of big firms are routine and could sell products or services elsewhere too: • Trucking, • Printing and graphics design, • Food services, and • Cleaning services. • Organize them as separate spin-offs perhaps with worker ownership. • Long-term contract with mother firm so that it is not out-sourcing. • Spin-offs can then do trucking, printing, etc. for any number of other firms and thus create more jobs.

5. New Product Spin-Offs with Existing Technology • Once a technology is learned in a company, there may be many other products using it but of no interest to company (different markets, different suppliers, etc.) • Business Dev. Agency could sponsor team learning technology in existing firm to set up spin-off producing the other products. • Happens spontaneously in Silicon-Valley-type environments so idea is to foster the process.

6. ‘Light-touch’ Franchising • Most entrepreneurs learn a business in an existing business. • A development agency could subsidize training a potential entrepreneur by working beside a manager in an existing business. • New near-clone start-up obligated to be in a non-competing region to the original firm. • Like franchising without top-heavy machinery to replicate systems & enforce trademarks.

7. When a Company Fails • The same spawning-new-life principle should be applied when a company is failing and going bankrupt. • Turn existing buildings into an “industrial park” where former managers and workers can start up small enterprises (capitalizing on their habits of working together and business know-how). • Like turning a sinking ship into a number of small sea-worthy lifeboats. • This approach used successfully in the ARIA Project in Moldova: See Ellerman & Kreacic paper at: www.ellerman.org or http://econ.worldbank.org

8. 4 Enterprise Creation Schemes • Overall Idea: Best incubator for new firms is existing firms. Best source of new economic life is replicating existing business/technological DNA. • Focus on development efforts is to create incentives for existing firms to foster new firms through: • Spin-offs of routine products and services, • New products from existing technologies, • ‘Light touch’ franchising, and • Recycling facilities and know-how of existing firms that are failing or have failed. • But what is best form of company for this?

9. The Problem with Conventional Companies: Not Best for Spawning New Life • Conundrum: ordinary “ownership” in conventional companies supports existing “organisms” getting bigger, not the principle of plenitude—the spawning of new life. • Biological parents know offspring have to be spun off; no possibility of permanent ownership. • But ordinary companies want to own any potentially profitable “new life” and thus it is not “new life” but is: • New division of old company, • New subsidiary of old company; • So company gets bigger.

10. Lack of incentive for spawning spin-offs • Shareholders want every profit potential to accrue to their company so at best packaged as new divisions or new subsidiaries—so company gets fatter. • Managers are usually rewarded by size of operation under them so genuine spin-off reduces their “empire” and is thus resisted. • Indeed, managers often promote “reverse spin-offs”, i.e., acquisition of previously independent companies, to increase size of their empire.

11. Democratic firms are different • No “ownership” that owns every new enterprise opportunity. • Analogy to biological parents who cannot own new life. New life naturally is separate with relationship to parents. • Democratic firms are natural to sponsor: • Spin-offs of routine operations; • Spin-offs with new applications of existing technologies; • Light-touch franchising to create new business partners; • Bust-ups before bankruptcy. • Genuine spin-offs not limited by diminishing managerial attention and incentives as company just gets fatter; • Genuine spin-offs are separate firms that can carry out more experiments, go in new directions, and fill more niches with full incentives—which fatter old companies can only try to imitate.

12. Examples of Development by Spin-Offs • Thermo Group did partial “spin-out” with every new product so 70+ companies now in group. See www.thermo.com, “About Us”, “Former Brands”. • But it was due to founder stipulating this pattern and has not been reproduced elsewhere. • Thermo Group was exception that proves the rule. • Over a 100 companies generated in Mondragon group of democratic firms: www.mcc.es • Similar expansion of LEGA cooperatives in Italy. • Imagine if MicroSoft did spin-off for each new product. • Related but separate companies have more vitality and create more jobs.

13. Democratic Enterprise and Entrepreneurship • Since conventional firms do not promote new enterprise creation by spin-offs, entrepreneurs are seen as “dropping from the sky.” • Such entrepreneurs who come out of nowhere would want to start conventional firms where they own everything. • But democratic firms can use existing firms as schools for new firms, and thus naturally create new democratic firms. • In this sense, social economy of democratic firms can be more entrepreneurial than conventional economy.

14. Thought Experiment • Imagine a company with a maximum of, say, 10 years working in company. • Within 10 years, each person had to devise, along with some colleagues, a spin-off which they would join. • Spin-offs would follow the same rule. • Rather than one large company dedicated to furthering the interests of top managers building their empire, there is • Within a matter of years, a group of related small-medium sized companies continuing to divide and multiply making new products and filling new niches. • This tends to happen automatically with democratic firms particularly with financial & consulting support orgs. and support from local universities.