Book chapters
The book ‘’Business History; complexities and comparisons’’ will discuss concepts that are related to modern economic development, and all revolve around one of the most important actors, which is the business firm. Events such as economic recessions have made people think about firms, and how they can affect our societies and economic opportunities. Next to these thoughts, the book will also highlight the evolution of the firm, and the primary social organization in the capitalist system.
The book consists of 24 chapters, of which the first part (chapters 1-3) cover relevant issues in the history of businesses, such as theories on firms and the concept of entrepreneurship. The chapters after these (chapters 4-6) will provide further information on analysis of the evolution of business The chapters will describe the firm between the preindustrial era and the First Industrial Evolution.
Part III of the book (chapters 7-9) is going to provide insights on the birth and consolidation of big businesses. Especially the United States will be discussed, as this is the country were mass production first started to take place. Moreover, infrastructure will be discussed, as this was key in the forming of new types of production. Besides the United States, also the United Kingdom, Germany, Russia, Japan, Italy and France will be discussed.
In part IV (chapters 10-12), the state and market in the period between the two world wars are the main theme. This topic is subdivided in the three chapters, which are on the multidivisional corporation and managerial capitalism, Europe between the two wars: convergence and divergence with the United States, and the origins of the Japanese miracle: entrepreneurship, the State, and business groups.
In part V (chapters 13-18), the age of ‘’shrinking space’’ will be discussed through various chapters. The third Industrial Revolution will be discussed in chapter 13, followed by the examination of what happened to business during the 1950s and 1980s in chapters 14-17.
The in part VI (chapters 19-24), which is the last part of this book, the globalization of today will be discussed. This part covers topics such as multinationals, new forms of enterprises, the roaring 1990s, slowing down in Europe and Japan and new protagonists, China and India.
Knowledge
Throughout the book, the reader will gain knowledge on the following issues:
Micro and Macro developments: Throughout the history of business it has become evident that there is a strong relationship between these two types of developments. This relationship has become clear when one provides context, and also because the main character is a large enterprise that often dominates the industrial sector.
Industrial revolutions: An industrial revolution is a transition in terms of technological paradigms, which is determined by aspects such as technical skills, scientific knowledge, forms of energy, and capital intensity.
Entrepeneurs and Managers: We look at entrepreneurs as people that are innovative, are risk-taking, manage to grab opportunities and, most importantly, make decisions at the highest level within the company. The best entrepreneurs are the ones that manage to synchronize the firm’s activities with the form of Industrial Revolution in which they are involved. Managers on the other hand, are individuals that have developed firm-specific, functional know-how through the acquirement of theoretical and practical experience. They are usually assigned to a department within the company over which they have autonomy.
Markets: Markets are determined by for example the size of a population per capita income. Usually we are concerned with national markets, however, sometimes we are also looking at international markets.
Cultures: Culture is the attitude of a nation towards economic activity and economic change. To know the differences in culture helps us to understand certain developments, e.g. the First Industrial Revolution.
State: The state is a very important body in this book, as most of the times it is served as a guarantor of the legal framework. Sometimes, the state can also be a supplier of physical and intangible infrastructures.
Forms of enterprise: Enterprises are shaped by their general design, their size, their strategies and by their interrelationships. A very important part of an organisation is the relationship that the operating units and the headquarters have. What is important to clarify is the way that enterprises have worked in specific historical settings, and to recognize that inside each international economic system there is a community of companies that is operative.
Varieties of capitalism: Varieties of capitalism are the intersections between the economy and its institutions. There is not really one type of capitalism that is superior to others.
Change and how it is unforeseeable: Something that we have learned from looking back at history is that some relative positions of nations are very volatile and that it is very difficult to make forecasts about international competition. What works for one phase does not necessarily work for the other.
Post-Chandlerism: Alfred Chandler was a very well-known business historian, who has written many articles and books. For one, his vision was leading, for others it was an obstacle to progress in discipline. He perceived the industrial big business as the engine of economic development. His most famous works are ‘’Strategy and Structure’’, ‘’The Invisible Hand’’ and ‘’Scale and Scope’’. Chandler believed that the essential task of van entrepreneur was to give birth to an extended managerial network.
Introduction
The first Industrial Revolution was at the end of the 18th century: The business enterprise has been one of the most prominent units of analysis for understanding modern economic growth. The business enterprise has been identified with the ‘factory’, the British way of organizing production. Europe became involved with the British style of industrialization, they experienced the same struggles over control, the same social and political changes, and the same surges of growth as Britain.
Actually, during the First Industrial Revolution, the ‘factory’ with its capital and labour concentration was not a novelty. What was new was the special combination of a centralized operation with a more efficient technology, which became the basic building block of the early industrial enterprise.
We already know quite some theories about firms. Adam Smith’s theory is one of these, but Max Weber’s bureaucratic organizational theory also has been discussed in several courses. The following paragraphs will discuss other theories about the firm.
The neoclassical view
The neoclassical view treats business behaviour in a particular slice of time. Some basic assumptions in this theory;
The representative firm enjoys perfect information
The representative firm operates efficiently at the lowest point of the marginal cost curve
The representative firm is a price-taker with few possibilities of influencing the market in which it operates
Technology is exogenous
It can be complicated by comparing it with another slice in time (Time 1 and Time 2), but how you get from 1 to 2 is not stressed
The representative firm is small-medium sized that performs limited number of functions
The neoclassical firm thus operated in a highly competitive, price-oriented system, where technical knowledge and other information could be obtained easily and at very low cost. This makes that the neoclassical view is particularly relevant to the business history around the First Industrial Revolution. The First Industrial Revolution was characterized by a process named ‘collective invention’, which is an open-source system in which usually incremental innovations circulate freely among users, and each user contributes to the increase of the overall stock of knowledge.
The dynamic view
Another analytical dimension is that on dynamism. The firms studied tend to increase in size over time, due to scale economies. Given a certain technology, one expects to find that firms expand until the point at which marginal returns start to decrease. All the phases of the dynamic process of continuity and discontinuity, expansion, stagnation and decline are relevant to the analyses of business scholars. In explaining the dynamic process, the following should be considered;
Relational complexity; Organizations are increasingly faced with significant internal and external relationships
Technological imperatives;
Dynamism of the consumption market
The efficiency of financial markets; Have to channel resources to the firm
The presence of legal frameworks; Should protect the firm’s assets and facilitate trade
All these elements (most of them technology-related) can force the business enterprise to adjust and adapt. We should not forget about cultural patterns, which play a considerable role as well. Take the presence of legal frameworks, which can be the direct outcome of culture and history. Therefore, we should analyze history carefully.
Other theories
Joseph Schumpeter
Challenged the neoclassical approach. Two features;
Schumpeter was interested in the innovative role of the firm, and how the entrepreneur carried out this innovation. Schumpeterian firms grew actively by innovating and thus strengthening their competitive position.
1950s-1960s: The large managerial corporation
This kind of organization was partly responsible for the dominant position of America in the period after World War II. Understanding how large corporations became successful meant understanding economic growth >> So macro-economics (the wealth of the nation) were explained by microeconomics (the success of large corporations).
Peter Drucker
According to Drucker, big business could best be understood by looking at its technological foundations, at the human effort that went into the efficient coordination of its individuals, and at the social impact the big business had in the modern capitalism.
As you can see, the new theoretical approaches dealt with several issues:
Alfred Chandler
Chandler launched one of the most important issues in business theories, namely he analyzed the relationship between the strategy and the structure of the firm. Technological regimes (scale intensity, tendency towards mechanization) determine the activity and competitiveness of firms, and also their optimal organizational structures. Technology, here, is an exogenous force, whereas other theorists and scholars always saw technology as endogenous.
Edith Tilton Penrose
According to Penrose, firms are a stratification of resources and competencies, modern firms first learn, and then know. Growth is explained by how firms exploit their resources and human capabilities. Over time, the firm evolves and creates new knowledge and gains capabilities applicable to the industry.
Richard Nelson and Sidney Winter
Introduced the issue of routines. Routines are the ways in which organizations are able to remember successful behavior to maintain their leadership positions. Firms and economic agents are characterized by bounded rationality, cumulative learning based on experiences, and trial-and-error processes, and they typically reduce uncertainty by employing routines that lead to path dependence.
Stephen Hymer
Competitive advantage can be built in the domestic country, and then exploited abroad.
John Dunning
International activity of the firm can be explained by firms developing competitive advantages at the domestic country and the advantages present in the host country (productive and skilled work force for example).
Robin Marris
Firm growth is explained by the self-interest of management. Managers want to expand in order to gain more resources.
Agency theory and Transaction cost theory
Elaborating on the theory of Marris, where managers’ actions were driven by self-interest, around the 1970s the conflict between managers and shareholders frequently became tense. In 1976, Micheal Jensen and William Meckling developed the agency theory, which explains the need to align, either through the market or by means of legal instruments, the personal interests of the subjects (managers, principals and shareholders, agents) who sign this contract.
At the beginning of the 1980s, another stream of studies opted to explain the existence of firms via transaction cost theories, with Ronald Coase being the ‘founding father’ of this theory. He wondered why firms exist, and why is it necessary to internalize some transactions inside the legal boundaries of the firm instead of leaving them to the market? According to Coase, transactions were internalized due to inefficient markets. Oliver Williamson further developed the ideas of Coase, where he stated that transaction costs are costs related to searching and monitoring. Transaction costs will be higher in a framework in which economic agents are characterized by limited knowledge, bounded rationality, and where they are inclined to act as free-riders. In this setting, internalizing certain types of transactions is better.
Theories about the modern firm
The Third Industrial Revolution brought electronics and tele-communications, which have an enormous impact on the firm’s structure and its dynamics. New coordination forms are becoming more and more important.
Richard Langlois states that the new technologies made the coordination process among firms easier and lowered transaction costs and uncertainty. As a result, the coordination of the production process by market forces increased and the role of large integrated managerial firms decreased. Single parts can be made by individual, independent producers.
Practice questions
Explain the difference between the exogenous force and the endogenous force that Chandler considered in his studies.
On which theories of which researchers did the two American economists Richard Nelson and Sidney Winter build their concept of routines upon?
What did the transaction cost theory explain?
Explain the concept of dynamism.
Why is the neoclassical perspective so particularly relevant to the business history of the First Industrial Revolution?
The first Industrial Revolution was at the end of the 18th century: The business enterprise has been one of the most prominent units of analysis for understanding modern economic growth. The business enterprise has been identified with the ‘factory’, the British way of organizing production. Europe became involved with the British style of industrialization, they experienced the same struggles over control, the same social and political changes, and the same surges of growth as Britain.
Actually, during the First Industrial Revolution, the ‘factory’ with its capital and labour concentration was not a novelty. What was new was the special combination of a centralized operation with a more efficient technology, which became the basic building block of the early industrial enterprise.
We already know quite some theories about firms. Adam Smith’s theory is one of these, but Max Weber’s bureaucratic organizational theory also has been discussed in several courses. The following paragraphs will discuss other theories about the firm.
Different views on entrepreneurship
Entrepreneurship has been a topic of interest for decades now. It seems so central to the wealth and competitiveness of a nation that there is a very strong tendency to codify it, for both instructional purposes and for industrial policies. Hundreds of business schools and colleges offer academic programs or centers dedicated to entrepreneurship.
Numerous distinguished scholars were attentive to innovation and the role culture played in fostering entrepreneurial action on a social scale:
Max Weber described the entrepreneur as the beholder of an instrumental rationality. This instrumental rationality makes him capable of linking his goals with the most proper means.
Werner Sombart stressed elements of the entrepreneur that otherwise might have been considered deadweight. Those elements can be labor or capital lingering beyond the denomination of property rights or their formal position in a company.
Friedrich Nietzsche made a difference between those who are far ahead of the conventional wisdom of their times and those who only adapt to it.
The most important name that came up with ideas around entrepreneurship is Schumpeter. Schumpeter saw the entrepreneur as an irreplaceable engine of growth, where innovation was the justification of the entrepreneur’s profits. According to Schumpeter, innovation did not adapt to the current market needs, but instead imposed its output on the market, and a good entrepreneur was not necessarily a risk taker, nor even an owner, but kept an eye on opportunities for innovation.
Kondratieff identified three technological waves and the entrepreneur, who was looked upon as a sort of translator identified them and took advantage of these waves.
1798-1842: Innovation in the textile and metallurgy sectors
1843-1897: Innovation in railways and closely related activities
1897-outbreak World War II: Innovation in electricity, chemicals, and automobiles
Schumpeter versus classical and neoclassical economics
The economic process in classical and neoclassical economics can be seen as a spectrum, with Schumpeter and his ideas on the right extreme and Adam Smith on the left extreme.
According to Adam Smith, the most important function of the businessman was to supply capital, and similar work from David Ricardo stressed the automatic nature of economic movements. So too with Karl Marx, who claims that the social relationship binds capitalists and workers. Later, entrepreneurship is even more neglected by the neoclassical view based on the concept of market equilibrium.
Fortunately, there was also a middle ground between Schumpeter and the classical and neoclassical economists. Jean-Battiste Say described entrepreneurship as the power to unify different elements (workers, owners, and financial supporters) behind the visible goal of product creation. According to Alfred Marshall, the entrepreneur was portrayed in his daily activity, embedded in the company, aiming to keep the system going. Israel Kirzner underlined the psychological dimension of entrepreneurial actions, he viewed alertness as the entrepreneur’s essence. Alertness is described as the ability to recognize the opportunities that arise in markets from a misallocation of resources. Mark Casson, finally, defines the most relevant talent of an entrepreneur as his ability to make effective decisions regarding the coordination of scarce resources. All of these discussed scholars see the entrepreneur as ‘one of us’, instead of a hero like Schumpeter does.
Entrepreneurship and the organization
In the first half of the twentieth century, it were the United States that were dominant on studies on the rise of large organizations. Take Taylor, Berle and Means, Burnham, and Whyte. Central in their work was the centrality of the organization, and the long and slow decline of entrepreneurship from the nineteenth century.
There are many different views and opinions on entrepreneurship, and a lot of authors have dedicated extensive research on it. We cannot deny that entrepreneurship is a vital part of our modern economic, social, cultural, and political systems. The main views on entrepreneurship;
Entrepreneurship shapes the modern economic, social, cultural, and political systems
Entrepreneurship depends on the terrain in which it operate.
Practice questions
Why is the term entrepreneurship so difficult to define clearly, and what does Mark Casson have to do with this?
Who is Joseph Schumpeter and what was he known for?
Who were Max Weber, Werner Sombart and Friedrich Nietzsche, and what did they all have in common?
Why is an entrepreneur sometimes looked upon as a kind of translator?
If you had a spectrum with classical on one side and neoclassical on the other side, where would you put Schumpeter and where would you put Adam Smith?
Why did Edward Denison reject entrepreneurship?
What stands out in the Traité d’economie politique that was written by Jean-Battiste say?
What creates the entrepreneurial paradox?
How was Chandler different from other theorists in his studies on organisations
Entrepreneurship has been a topic of interest for decades now. It seems so central to the wealth and competitiveness of a nation that there is a very strong tendency to codify it, for both instructional purposes and for industrial policies. Hundreds of business schools and colleges offer academic programs or centers dedicated to entrepreneurship.
Numerous distinguished scholars were attentive to innovation and the role culture played in fostering entrepreneurial action on a social scale:
Max Weber described the entrepreneur as the beholder of an instrumental rationality. This instrumental rationality makes him capable of linking his goals with the most proper means.
Werner Sombart stressed elements of the entrepreneur that otherwise might have been considered deadweight. Those elements can be labor or capital lingering beyond the denomination of property rights or their formal position in a company.
Friedrich Nietzsche made a difference between those who are far ahead of the conventional wisdom of their times and those who only adapt to it.
This part of the book focuses on the period between the preindustrial era and the First Industrial Revolution.
Long before the era was dominated by British factories, businessmen were developing new combinations of capital, labor, and natural resources (land) in order to provide customers with the goods and services they wanted. The pace of the changes was slow, but change was taking place in all sectors of the European economies, including manufacturing.
General features of the preindustrial Europe
The preindustrial Europe was not a homogeneous entity, although there were aspects that European countries had in common. According to some estimates, 80-90% of GDP came from agriculture and 70% of the people worked in farming. Even though big cities existed like Paris, London, and Naples, mobility and urbanization were low.
The economies in Europe were certainly not static, the population grew from 57 million in 1500, to 132 million by the end of the eighteenth century. Society’s purchasing power was in the hands of a very small, and very wealthy percentage of the population, who mostly were those who owned the agriculture and industry.
The preindustrial period was also characterized by periods of bad weather and wars, leading to unpredictable downturns. People were badly fed and were vulnerable for diseases.
Next to this negative side, the economy began to become more dynamic, and people started to innovate, which eventually led to the First Agricultural Revolution, where Europe made its first steps towards economic growth. The rise in demand encouraged the development of long distance trade, along with improved techniques for shipbuilding. In this period, the financial markets were forced to become more efficient as well, so innovations like the bill of exchange and the banknote arose.
Ways of manufacturing
The putting-out system
The presence of a cheap, and flexible workforce encouraged manufacturers to push their operations into the countryside >> Putting-out system was developed
Top; ‘Master’, or ‘merchant-entrepreneur’ who was the owner of the raw materials, or circulating capital. This person usually coordinated a network of cottage workers who performed some stages of the production process (spinning and weaving) at home.
The putting-out system was especially useful in industries where the production processes were easily breakable into separate functions.
The system was flexible, because;
The network of laborers could be easily enlarged or shrunk, depending on fluctuations in demand at no cost
The production unit was located at a household, so the workers could supply the enterprise with cheap, easy-to-maintain fixed capital
Hidden costs;
Craft production
Craft work was characterized by a higher level of sophisticated, and skilled laborers. This type of production was needed in industries with relatively high value added (take for example metalworkers, cobblers, or gunsmiths), as with the putting out system there was no control over the quality of production. These industries were located near the source of raw materials, and energy (water, wind, wood, or coal) was cheap and easily available. This meant that craftsmen clustered around the countryside and in urban locations.
There was a strong hierarchy, with one master who managed all production, often in a shop of which he was the owner. The master and his shop were normally part of a complex organization, namely the guild that was based on particular types of work. The rules of the guild determined quality and quantity of foods produced, and they set the prices masters could charge. The guild also resolved conflicts among members, controlled internal regulatory standards, organized training for workers, and judged the process by which workers became masters. The guild system provided craft producers with protection and stability, by setting high entry barriers via the trainings they offered.
Disadvantages;
Guilds restricted production and demand by maintaining too high prices (like monopolies)
They inhibited innovation by controlling the techniques of craft production
The guild system was conservative, meaning innovation was seen as a threat
‘Big business’
Manufactories = Large-scale enterprises with large numbers of workers and high capital intensity, or a concentration of laborers working in the same place.
Large plants and centralized production facilities existed as independent forms of manufacturing in only a few cases. Most often, the central organization complemented the much more diffuse putting-out system. Where there was a concentration of employees, coordination and organization were not developed yet, because these plants existed of groups of craftsmen, rather than a coordinated assembly of skilled or unskilled workers. Manufactories, thus, were organizations who complemented to the domestic system, rather than being a fundamentally different way of coordinating capital, resources, and labor.
Practice questions
Why and in what ways was preindustrial Europe not a homogenous entity?
What was the main downside of the preindustrial European economy depending almost exclusively on agriculture?
What was the main reason for the European economy to become gradually more dynamic? Explain.
Explain the putting-out system, and what where the hidden costs within this system?
How does the craft-production differ from the putting-out system, and why did it still play an important role?
How did the craft system differ in between different types of areas (more urbanized, less urbanized)?
How come the population of guild members remained relatively small?
Why were guilds more inclined to constrain output?
Explain why the percentage of people that were employed in manufactories was probably slightly lower than in domestic industries.
What was the main purpose of the establishment of the Manufacure royale de glaces de miroirs
The preindustrial Europe was not a homogeneous entity, although there were aspects that European countries had in common. According to some estimates, 80-90% of GDP came from agriculture and 70% of the people worked in farming. Even though big cities existed like Paris, London, and Naples, mobility and urbanization were low.
The economies in Europe were certainly not static, the population grew from 57 million in 1500, to 132 million by the end of the eighteenth century. Society’s purchasing power was in the hands of a very small, and very wealthy percentage of the population, who mostly were those who owned the agriculture and industry.
The preindustrial period was also characterized by periods of bad weather and wars, leading to unpredictable downturns. People were badly fed and were vulnerable for diseases.
This part of the book focuses on the period between the preindustrial era and the First Industrial Revolution.
The First Industrial Revolution transformed the world economy, gave Great Britain a dominant position, and gave shape to the world’s first long-term change in population dynamics. From 1820-1879, Great-Britain’s population grew faster than that of the rest of Europe, and their GNP growth rate was higher than the average of the rest of the world. From 1789-1914, Great-Britain, Belgium, and France were all growing fast and at the same rate.
Britain versus the rest of Europe
Great-Britain’s performance was not only outstanding because of its growth rate, but also the fact that for the first time, the main source of wealth was to be found out of the agricultural sector. The heart of the economy now was manufacturing. Some numbers;
1760: 53% of male labor force in agriculture (EU: 66%), income derived from agriculture 37.5% (EU: 46.6%)
1840: little more than 25% of male labor force in agriculture (EU: over 55%), income derived from agriculture 25% (EU: almost 40%)
Europe eventually followed, but at a way slower pace. At the end of the nineteenth century, the percentage of the labor force in agriculture had fallen to less than 50% in Belgium, Germany, Denmark, the Netherlands, Switzerland, and France. In the other European countries, agriculture remained the main source of wealth and employment.
Thanks to the openness of the world economy, new countries were able to follow Great-Britain, and some of them even became the leading exporters in manufacturing by the mid-nineteenth century. Some numbers;
Percentage of output exported in Britain, Switzerland, and Germany; 70%
Percentage of output exported in France; 60%
Percentage of output exported in other countries; 20-25%
European countries now enjoyed a stable position in the international market, thanks to specialization in manufacturing. Now, they were able to finance large imports of goods from the rest of the world.
The British competitive advantage
The structural transformations were rooted in radical transitions both at the meso level (industries) and the micro level (firms).
In manufacturing, product innovations and new ways of organizing the production process contributed to the rate of growth in particular industries. Water power remained the primary source of energy, but it was supplemented increasingly by the steam engine.
In textiles, and particularly in cotton manufacturing, technological innovations in both spinning and weaving improved the industry’s productivity enormously.
The cluster of innovations characterizing the early phase of the First Industrial Revolution could be traces to a series of factors that were economic, cultural, institutional, and legal.
Britain already had a strong commercial sector with capacity for distributing goods and extending credit
Britain had a cultural climate generally favorable to science, innovation, experimentation, and new practices
Britain had legal protection of intellectual property (patents)
The British took Adam Smiths’ message seriously by exporting manufactures, and importing raw materials and food that could be produced cheaper elsewhere.
What also contributed to the so called ‘great transformation’ were entrepreneurs, who came in all shapes and sized, with widely skewed social origins and levels of professional training. In general, the countries that had more fragmented social structures (Britain, and the Netherlands), offered the most favorable environment for the development of entrepreneurial initiatives. The British entrepreneurs were mostly masters who transformed their shops into factories, and expanded from local, to regional, to national, and sometimes even international. Many traditional landowners looked suspiciously at the process of change, but also mixed the new opportunities with the activity they always engaged in, like promoting investments in mining, or building capital-intensive infrastructure that would provide a necessary link to new markets. Much further down the scale of innovations and investments were instrument-makers like James Watt, who invented the steam engine.
What the company of the First Industrial Revolution looked like
Ownership, control, and management
Larger workforces, more fixed assets, new technologies and larger markets revolutionized the unit of production, which opened up new challenges and choices for entrepreneurs.
We shouldn’t attribute all these factors to increases in the scale of activity and in the organizational and managerial complexity, this was more for the Second Industrial Revolution. The relatively small size of the factory meant that necessary financial resources could be provided by wealthy individuals, and that the ownership and control were in the hands of the founders and their families. One of the first systems of limited liability was the partnership, which became the legal device that allowed for the association of other individuals with the company’s founder/owner.
Management and ownership in the First Industrial Revolution thus remained at the owner and his family. Sometimes, support was provided by a so called foremen who was responsible for organizing the working hours, timetables, and who had to manage the workers’ behavior inside the factory.
Characteristics of the production process
Innovations on average clustered around stages of the production process, meaning that scale effects were not generated. Innovations in one stage of the production process created bottlenecks and pressured firms to introduce innovations at other stages. This was positive, but did not foster integration in the various production stages. As in the case of textiles, the production process remained fragmented.
Many entrepreneurs had many factories under their control. The lack of coordination between stages of production was also due to the fact that similar units of production tended to cluster in the same geographic area, which had a lot of advantages;
Benefits derived from a fast flow of goods and services
A plethora of skilled workers
Lower cost of information
More efficient knowledge sharing
Companies had little or no influence on prices, knowledge circulated relatively freely, and innovations could seldom be kept secret for long.
Trade and markets
To manage relationships with the market, it was now necessary to build efficient networks of agents, representatives, or even independent but associated merchants. This allowed for pushing sales beyond the limits of the local market. This sales network meant an increase in transactions costs and the management of necessary relationships with other actors as well.
Finance
When willing to create new ventures, or expand existing enterprises, challenges arise. The finding of capital necessary to finance day-to-day activities was the first challenge. The funds needed to start up a business were a significant barrier to the entrepreneurs (this got even worse in the Second Industrial Revolution). The crucial task, here, was to exploit multiple channels of funding: personal wealth, capital of family and close friends, and local credit were all tapped.
Practice questions
What made Great Britain’s economic performance so outstanding during the decades following the Napoleonic wars?
Mention a few reasons why the degree of export specialization had increased.
What were the advantages of productive specialization and manufacturing?
Describe the impact of the introduction and the diffusion of the steam engine.
Explain ‘’industrial enlightenment’’ en what its results were.
Which countries offered the best environment for entrepreneurs and why?
What incentives encouraged entrepreneurship?
Explain the term ‘’merchant-entrepreneurs’’ and what they did.
The First Industrial Revolution transformed the world economy, gave Great Britain a dominant position, and gave shape to the world’s first long-term change in population dynamics. From 1820-1879, Great-Britain’s population grew faster than that of the rest of Europe, and their GNP growth rate was higher than the average of the rest of the world. From 1789-1914, Great-Britain, Belgium, and France were all growing fast and at the same rate.
This part of the book focuses on the period between the preindustrial era and the First Industrial Revolution.
What the factory system looked like
In the factories as discussed previously, entrepreneurs combined fixed capital like buildings and machines with working capital (raw materials, labor, and semi-finished goods) in order to produce large quantities of standardized goods.
Modern factories were different from previous workplaces and methods of production, because:
The factory gathered a significant number of workers under one roof, much more than ever had been the norm
There was a clear separation between units of production and consumption
There was specialization of labor for both machines and workers
The machines also bring along some problems;
They were much more sophisticated than the tools used by the craftsmen and guild master
They were complex from a technical point of view and thus required the presence of workers specialized in the maintenance of the machinery
They were expensive
Employees could no longer be the owner of machines
A regulated system of training and supervision was required to ensure proper use of the machinery
The machines used in the First Industrial Revolution required more energy than in the past. This energy had to be cheap and almost continuously available.
The factory system spread quickly through the British economy and then diffused more slowly throughout Europe. The work was unpleasant, and wages were low.
Societal impacts of the factory system
Macroeconomic level >> Most of the changes were in the rate of economic growth, the amount and quality of international trade, and the relative contributions of agriculture and manufacturing to GDP.
Microeconomic level >> Employers were confronted with several issues, like governments that became involved in their management. They experimented with various solutions in terms of factory layout, but also in terms of organizing and disciplining workers. Employers needed more and more employees on their limited workspace, and in order for the production process to run smoothly, employers attempted to enforce behavioral rules.
Workers’ level >> Working in the factory system meant a radical transformation of lifestyle, and at the same time they had to undergo a dramatic and difficult process associated with urbanization. Their new life was characterized by clocks, bells, and shift work that took place both night and day.
The factory introduced carefully defined and relatively rigid roles and hierarchies. From the social and cultural point of view, the uneasy life and sharp transitions workers experienced in the machine-oriented world of the factory system were more important than the wealth generated by this more efficient system of production.
The transformation that came along with the factory system
While some factory owners ignored the problems that arouse, some owners acknowledged the problems and attempted to solve them. Factory villages with shops originated, with the financial help of the factory owners. This was especially for the workers that had to travel to reach the factory. The process of industrialization rapidly imposed urbanization, and company towns and villages were built around factories throughout Europe and America. In many, the company and the founding family held a leading role in the social and civil life of the town. Paternalistic relationships between entrepreneurs and workers were established, where they gained the most strength in regions where local and national institutions were weak. Paternalism turned out to be a very effective method of control, it even led to a so called industrial bourgeoisie, that began to institute governmental rules that were aimed at mitigating the harsh aspects of the factory system, like new laws regulating the employment of women and children but also forms of compulsory insurance.
Why the factory system?
However, many workers were offended by the paternalism and the controls of the new system, as those controls always seemed to be in favor of the capitalists. Some workers were determined to fight back to the factory system and get some control over their lives back >> This set in motion labor struggles and political movements that would extend up until now.
Schumpeter saw the factory system as a successful innovation, one that generated profits and thus encouraged others to change the way they did business. The whole system would benefit as the economy became more efficient ; consumers would have cheaper products, workers would have new jobs and thus money to buy products, and managers would of course continue to have problems that called for continued innovation
Marxist view on the spreading of the factory system >> Entrepreneurs concentrated the workforce in a single location in order to exert a closer control over the workers and to achieve a more efficient exploitation of their labor. The more means of production and the more control, the more machinery that could be introduced, and the lower the labor costs of output became. Specialization reduced the skill levels of the workers, lowering their wages again. The economic progress was denied to the working class who were eventually no longer able to buy industrial goods. According to Marxist theory, this would create a final great crisis for the capitalist system.
Practice questions
How did modern factories differ from previous workplaces and other methods of production. Give short descriptions.
Why was the location of a factory so important?
Why did some people think of the emergence of factories as a good development, and others as a bad development?
What type of lifestyle changes did a factory worker have to undergo?
To what extend did the emergence of factories do any good to society?
What did some factories offer to make life for the workers easier?
What is ‘’paternalism’’?
What does Joseph Schumpeter have to do with industrial capitalism?
In the factories as discussed previously, entrepreneurs combined fixed capital like buildings and machines with working capital (raw materials, labor, and semi-finished goods) in order to produce large quantities of standardized goods.
Modern factories were different from previous workplaces and methods of production, because:
The factory gathered a significant number of workers under one roof, much more than ever had been the norm
There was a clear separation between units of production and consumption
There was specialization of labor for both machines and workers
This part of the book focuses on the period of the birth and consolidation of big business.
The emergence of the large firm
In the last quarter of the nineteenth century, large corporations began appearing in some of the most advanced industrialized nations. The arrival of these corporations meant that it was necessary to come up with some form of governance via salaries managers who had specific technical skills. Before the Industrial Revolution, there were a few examples of such large corporations: in most cases they were banks, or overseas companies like the East India Company. These companies, however, still employed a relatively small number of workers, especially when compared to the normal workforce in the twentieth century. The same counts for the manufacturing capacity of the early industrial firm.
In the early nineteenth century, the firm was concerned with a single function and a single product, while neither ownership structures nor internal organization was different from the preindustrial time.
What led to the modern big business were advances in technology and markets that finally permitted firms to reach dimensions and complexity that were previously impossible to imagine. It was the large variety of processes that formed the growth of large corporations. This would not have been possible without changes in communication and transportation systems, which offered possibilities to reach a much larger market, and to count on more solid relationships with both suppliers and clients.
The rise of communication and transportation networks
The second half of the nineteenth century witnessed a remarkable growth in communication and transportation networks. New developments like the telegraph and the telephone permitted faster, more efficient, and more extensive exchange of information. The telegraph was invented in 1844, and by 1880, there were 291.000 miles of telegraph lines, and almost 32 million messages were sent each year. The telephone was invented by Bell in 1877, and it allowed to transmit 100-200 words per minute instead of the 15-20 that were possible by telegraph.
The arrival of railways changed things significantly. Older forms of transportation became obsolete, tolls were eliminated and the road traffic was reduced to moving short distances. Middle of the nineteenth century: 15.000 miles of railway in Europe
1850-1870 : 70.000 miles
1875 : 75% of the English system of railways completed.
In 1850, a handful of industrial firms had capital of more than 500.000 pounds, and 19 railway companies had capital excess of more than 3 million pounds. The railway companies were thus the first big businesses. In both Germany and Italy, railway companies were the first big businesses that facilitated in the countries’ industrial growth.
The innovations in communication and transportation soon found their ways to the United States, where distances between urban centers and the other territories called for a more extensive railway network. Around 1910, America had more than ten times as many railroad tracks as Britain (240.000 versus 20.000 miles).
Practical implications on the railway system
As the new communication and transportation networks developed, the modern form of big businesses emerged. Railroads, here, were the most important, as they played a critical role in opening larger and more extensive markets, by making it necessary to find new ways of financing, by favoring the development of organizational capacities and managerial hierarchies, and by offering the first point for industrial relations and regulation policies.
Trains and markets
There were three characteristics that made the difference between railroads and that which had preceded it:
Speed >> Trains offered a fast means of moving both merchandise and people
Regularity >> Extended diffusion and interconnection of trains
Reliability >> Large quantities of goods could be shipped with a precise timetable that was not affected by meteorological conditions
Companies now were able to exploit a truly national market and quickly meet the needs of customers in every corner of the country. Furthermore, now that the movement of goods did not depend on the force of animals and men, on water and wind, or on weather conditions, firms could increase production.
Railroads and finance
Building up a railway network required capital, and the nation’s financial institutions often played a dominant role in the spread of the railway network. Over time, these financial institutions were fundamental in the growth of the modern industrial firm.
Germany : Railways favored the creation of the universal banks that played an important role in the growth of the biggest firms in the country
The enormous amount of money needed to build the railroad network in the United States led to the creation of specialized investment banks like J.P. Morgan
The majority of the Wall Street firms invested their financial instruments in railways and related companies
Railways and management
The growth of the railroads necessitated a new distribution of ownership assets among the firms involved and brought about new forms of corporate management. The railway companies found themselves in a position where they had to manage enormous investments, large numbers of employees, and to coordinate their activities such for safe and efficient travel. This all led to the need for a systematic division of roles >> One side; investors/shareholders, other side; salaried managers with specific skills and abilities. This asked for new forms of management, and new American models for creating and controlling workforces and finances were developed.
With increasing size and complexity, the managers started to delegate more and more tasks to other managers and lower-level employees. There was a clear distinction between line and staff, where line managers controlled the movements of people and trains, following a hierarchy. Staff were men who were responsible for standards and advising the managers of the functional departments. Railway companies dealt with the problems of running very large and complex enterprises very effectively;
Managers established standards for tracks and equipment like switches, air-powered brakes and signals
Managers took the task of perfecting goods such as the bill of the lading, agreements between firms, and accounting rules for train cars belonging to other companies
Semiprofessional associations like the Society of Railroad Accounting Officers and the American Society of Railroad Superintendents established standards that made it possible to transfer fully loaded railway cars 3000 miles
Trains, industrial relations, and regulation
Railways also played a role in the arena of relations between management and workers. Also, they were the first sector of the American economy in which competition was regulated by the federal government. In growing, the companies had to face some classic issues of industrial relationships;
Recruitment, training, and managing workers
Organizing workers who were scattered over vast geographical areas
The introduction of worker recruitment, fixed salaries, and clear internal hierarchies with established career paths
The introduction of insurance systems, and pensions for employees
Unions and collective bargaining were not accepted by management
The railway sector in the United States developed various cartels and price-fixing agreements in an effort to control competition. The strategic and organizational know-how that had been acquired in the railways was rapidly transferred to other industrial sectors, thanks to managers and entrepreneurs who had started their careers in the railroad sector and then embarked into manufacturing. The Carnegie strategy is a famous example that will be discussed in more detail later on.
Practice questions
Why was it necessary to adopt some form of governance via salaried managers who had specific technical skills?
What developments were critical to the growth of large corporations?
Describe three developments in the second half of the nineteenth century and explain their effects.
What was so special about the Claremont?
Name the three characteristics that made the difference between railroads and other transportation methods seem so big.
What was so special about railroads that made them so beneficial to companies?
How were railroads usually financed?
What effects did the emergence of railroads have on management?
In what ways did railway companies face classic issues of industrial relationships?
In the last quarter of the nineteenth century, large corporations began appearing in some of the most advanced industrialized nations. The arrival of these corporations meant that it was necessary to come up with some form of governance via salaries managers who had specific technical skills. Before the Industrial Revolution, there were a few examples of such large corporations: in most cases they were banks, or overseas companies like the East India Company. These companies, however, still employed a relatively small number of workers, especially when compared to the normal workforce in the twentieth century. The same counts for the manufacturing capacity of the early industrial firm.
In the early nineteenth century, the firm was concerned with a single function and a single product, while neither ownership structures nor internal organization was different from the preindustrial time.
This part of the book focuses on the period of the birth and consolidation of big business.
The technologies of the Second Industrial Revolution
In the second half of the nineteenth century, department stores started to appear, and they quickly gained popularity thanks to innovations like free admittance, fixed prices, a vast assortment of goods, special sales, and low margins, which made it possible for quick turnover of inventory.
The United States was also the pioneer in two related sectors: mail order sales, and retailing chains. The mail order sales concept was popular in markets far from the urban areas. The store chains grew quickly starting at the beginning of the twentieth century. They grabbed important shares of the market from traditional shops thanks to their economies of scale and diversification.
The area where the transportation and communication infrastructure made its biggest impact was in manufacturing through;
The invention of automatic packaging machinery
New processes became more widely available
Important changes took place in firms that produced and assembled interchangeable parts
The availability of a new and more flexible energy source like electricity made possible interactions between chemicals and metallurgy
This complex interconnection of innovations is currently called the Second Industrial Revolution, which was characterized by the fact that volumes were much higher, the rate of change was much faster, the speed of shipping goods was increased, and economies of scale and scope were achieved.
The distinction between the sectors
The Second Industrial Revolution created a distinction between the areas where the large corporation predominated and the other sectors >> The biggest firm operating in the US, Germany, and Great Britain were concentrated in the same sectors, where they would remain predominant up until the 1970s : food, chemicals, oil, metallurgy, machinery, and transportation vehicles.
In other industries where the mechanization process was simpler and machinery only had to help workers instead of replace them, neither the quantities produced nor the speed would change a lot. These industries were : clothing, woodworking, textiles, leather goods tanning, saddle making, furniture, construction panels, and printing. Innovations in these sectors did not lead to building bigger plants that would allow for the continuous, rapid manufacturing that would offer economies of scale. Instead, increasing production would mean adding more workers and machinery dedicated to the process.
Necessary investments to be made in production
The first objective of large manufacturing corporations : Reach high levels of production and keep it stable in order to fully exploit economies of scale and diversification. The initial capital investments in their factories were way higher than that of labor-intensive counterparts. The only way to get the best out of these investments was to fully use the plants. Two considerations in determining costs and profits;
The nature of the manufacturing capacity that was installed
The quantity of raw materials put into the manufacturing operations in a given amount of time
The new technologies of the Second Industrial Revolution allowed for a net reduction in costs when a minimum efficient size was reached. In many industries, the volumes produced by one single plant were sufficient to meet national, or even global demand. These industries soon became oligopolies. Even if these technologies would have been available earlier, the same huge firms wouldn’t have achieved the same success, due to the fact that the modern network of transportation and communication wasn’t complete.
The Second Industrial Revolution also had an impact on the workshop level, namely that it was no longer possible for a foremen to control the complete workforce. Taylor and his work ‘scientific organization’ stressed the importance of the division of the work into different tasks. Organizational know-how was collected by the management, which then could impose a new and more efficient order on the workers, leading to a eliminated autonomy on the shop floor. Workers were paid higher salaries in order to keep them satisfied.
Necessary investments to be made in distribution
Only machinery is not sufficient to obtain and maintain great success, a high level of vertical integration in order to maintain a constant throughput in the manufacturing process is also necessary.
Before the technologies of the Second Industrial Revolution reached superiority, the typical intermediary collected products of many manufacturers to count on a greater volume for their buyers. This allowed the distributors to realize economies of scale as well. During the Second Industrial Revolution, however, products became more and more diversified and personalized, which called for special skills related to how the products were sold and installed. In the beginning, the intermediaries adapted to this by building structures to meet the demands from manufacturers, but these structures could only be used for a single line of products and this made the traders more dependent on manufacturers for whom they were distributors.
The new products made with the new technology required demonstrations of the product first, which meant marketing had to be specialized as well. After the product was sold, it had to be installed and maintained periodically as well, which meant specialized technicians had to be hired. Manufacturers had the resources and skills to offer all of this, but wholesalers hadn’t, they didn’t have the means to demonstrate, maintain, and repair the products.
In the United States, the first to integrate into the distribution system were the sewing machine manufacturers. They initially relied on independent agents who were in charge of marketing, which had two limitations:
The vendors had limited skills in operating sewing machines >> Couldn’t explain how the machine worked, and couldn’t maintain and repair the machines
Vendors couldn’t offer special payment terms to potential buyers who wanted to buy an expensive machine
>> Result: Majority of the manufacturers started to own and manage own sales points, where someone demonstrated the machine, someone repaired and maintained the machine, a commercial director who did the payment conditions, and where someone did the actual marketing and sales. In a short period of time, there were also employees needed to take orders from customers, to oversee advertising, organize product deliveries, coordinate installation, maintenance and repairs of the products, and plan financing programs for customers. Large corporations started to create centralized office with specialized personnel for procurements.
Necessary investments to be made in managerial hierarchy
In investing in production systems that were able to produce massive volumes, and at the same time setting up networks for distribution, big business became very complex in a very short period of tie, which required some changes in order to oversee production and distribution activities, coordinate incoming and outgoing flows of goods, and adequately allocate resources for future production and distribution. These changes were hiring mid-level managers who had professional capabilities in these fields.
Good managers were talented in the POSDCORB-group of activities:
Planning
Organizing
Staffing
Directing
Coordinating
Reporting
Budgeting
Some managers already introduced innovations within their field >> Albert Fink separated fixed costs and variable costs, F. Donaldson Brown, working at DuPont invented Return on Investment [DuPont Identity, finance].
What managerial hierarchies looked like : Organization on the basis of departments that were responsible for different functions, the head of each department was an intermediate level manager, who had to make sure lower level managers oversaw the various operating units of the firm. Functional departments were organized as line and staff activities, as discussed earlier in the railroad example. Line managers had executive powers, staff managers worked behind the scenes and performed functions like bookkeeping and accounting.
The firm during and after the Second Industrial Revolution became a new kind of political entity as well. On the one side there were strong financial demands that called for an extensive group of shareholders who were interested in dividends. On the other hand =, at the highest level of the management, there was the need to use the firm’s profits to fund expansion.
Conclusions
The new firms thus became big, set up vertically integrated distribution systems and created managerial hierarchies in order to remain big. New firms who wanted to enter the market had to make huge investments in order to compete with the biggest firm, which set huge barriers to the market. Moreover, they had to steal the loyal customers of the first movers. The dynamics of competition were very bitter.
Practice questions
What were the major changes as a result of new transportation and communication systems in the end of the 1800s?
How was the ‘’Second Industrial Revolution’’ different from the previous phase of industrial change?
In what industry sectors did the new technologies of the SIR have most impact and why?
Which two considerations were decisive in determining costs and profits in analyzing investments?
Describe and explain two examples of the importance of pursuing economies of scale and scope.
Why did it become necessary to make a significant investment in distribution activities?
In the second half of the nineteenth century, department stores started to appear, and they quickly gained popularity thanks to innovations like free admittance, fixed prices, a vast assortment of goods, special sales, and low margins, which made it possible for quick turnover of inventory.
The United States was also the pioneer in two related sectors: mail order sales, and retailing chains. The mail order sales concept was popular in markets far from the urban areas. The store chains grew quickly starting at the beginning of the twentieth century. They grabbed important shares of the market from traditional shops thanks to their economies of scale and diversification.
The area where the transportation and communication infrastructure made its biggest impact was in manufacturing through;
The invention of automatic packaging machinery
New processes became more widely available
Important changes took place in firms that produced and assembled interchangeable parts
The availability of a new and more flexible energy source like electricity made possible interactions between chemicals and metallurgy
This part of the book focuses on the period of the birth and consolidation of big business.
Introduction
In the beginning of the twentieth century, with the coming of big business, the economies of several countries transformed. Existing sectors revolutionized, and entirely new industries developed. The United States and Europe were the first to experience all of this, and large corporations appeared with significant differences and timing among nations. By 1913, the United Stated provided 36% of the global industrial production, while Germany only supplied 16%, and the United Kingdom 14%. This was because the European nations were significantly smaller than the US, their resources were less abundant, and their markets were narrower.
What the large corporation looked like in advanced nations
Before highlighting the three most advanced nations separately, there are several interwoven factors that seem especially pertinent to a comparison of entrepreneurial actions;
Market characteristics
Governmental regulation of economic competition
Social attitudes toward big business
Cultural resources available to corporations
The United States
Around World War I, several large corporations developed in the US, where in most cases the characteristics of these firms were very different from those of previous forms of enterprise:
They were based on stock shares and not partnerships
They tended to integrate a growing number of activities inside the firms
The management of these firms was different >> Distinction between ownership and control
Mid nineteenth century: more than a million in capitalization and more than 500 employees was rare. 1901: United States Steel Corporation had 1.4 billion dollars in capitalization and over 100.000 employees. It accounted for 7% of GNP. Later on, Standard Oil, Remington, American Tobacco, DuPont, Singer, and Heinz and Campbell emerged.
The market in the US was large and extremely dynamic, as the American population grew exponentially, and the power of the consumer increased. The Americans favorably viewed the improvements in material comforts and living standards brought on by the growth of big business. At the same time, however, they showed signs of mistrust, as the big business threatened some of the country’s well respected values like free competition. Especially small entrepreneurs started to voice themselves in the so-called antitrust battle. The big corporations with huge economies of scales and thus very low prices pushed them out of the market >> 1911 : The court chose to break up Standard Oil and American Tobacco.
American paradox = One hand there are political forces that were intent on limiting the growth of large corporations, but the reality is that the antitrust legislation produced the opposite result: the prohibition of price agreements and cartels brought a wave of mergers, that formed giant corporate entities.
The big business that arose between 1880 and 1920 can be seen as successful attempts by America’s urban middle class and working class to establish a new order based on efficiency, continuity, and systematic controls. The effects spilled over into the complete American society. Higher education quickly adapted to the needs of the industry, educating middle- and upper-class Americans for citizenship. At around World War I, the structure of new sectors was oligopolistic. However, there still existed opportunities for smaller companies. Their principal advantage was flexibility, which allowed them to produce goods that were highly differentiated, and to adapt quickly to shifting consumer needs.
Germany
The setting in Germany was quite similar to that in the United States, but there were also some differences. Owners in Germany, for example, continued to exercise a greater say in management decisions and kept making investments required for expansion. German owners also were attentive to making a good management hierarchy working. Similar as in the United States, the public opinion was favorable towards large corporations, and German entrepreneurs coexisted with management. Management methods based on family traditions or passed on from person to person were no longer adequate for expanding firms.
Unlike what happened in the United States, in Germany the large corporations did not take on a leadership role in all sectors, but just in electro mechanics (Siemens and AEG), the chemical industry (BASF, Bayer, and Hoechst) and in the heavy machinery industry. German banks played a significant role in the economy, and their money would flow into investments in specific companies or specific industry sectors. The bank as a shareholder exercised a big role in the management of firms. Eventually, in the early twentieth century, the German companies got big enough to finance their own growth, and the increasing complexity to manage problems related to production, marketing, and new product development reduced the bank’s role even further.
German manufacturers understood that just the German market wasn’t big enough, and that their focus should be on foreign markets. Also, in Germany there was no pressure from the government on how big business operated. Where there were first only 4 cartels, there were 103 in 1890, and 385 in 1905. The full recognition of agreements characterized the most dynamic sectors of Germany, namely the corporations in the cartel didn’t sacrifice efficiency, and they still innovated, such that they stabilized volatile markets by leaving room for investments in R&D.
Germany was also home to some of the best science departments in the world and the German universities became very important research centers. Moreover, there was an old-age existence of a highly trained class of artisans who made it possible to shift toward a flexible factory production with limited costs for training and supervising workers. Also, in some sectors there were entrepreneurial associations for the development of growth plans for the long term, as well as strategies coordinated with public policies and negotiated with other industry sectors. The same as in the United States, the small companies could exist next to the large corporations.
Great Britain
The new technologies of mass production and increasing international competition had the biggest impact on the birthplace of the First Industrial Revolution: Great Britain. In the years around World War I, a lot of big firms (Dunlop, Courtaulds, and Pilkington) had successfully integrated manufacturing with a good marketing network. The opportunities and challenges for Great Britain were different than those of Germany and the US. British firms, for example, were specialized in consumer goods, where in some cases investments weren’t made in mass production. A lot of firms were still family-owned and managed, and the path they followed was often less efficient. The challenges and opportunities for British firms were in:
The characteristics of their markets
The attitude of the public
The positions taken by their legislators as regards large corporations
The education system
Around 1870, Britain had one of the world’s highest per capita incomes, as well as the highest level of urbanization. Looking further at their numbers, neither internal market demand nor that coming from abroad gave incentive to take advantage of the opportunities as presented by the Second Industrial Revolution. Also, Britain continued to export products typical for the First Industrial Revolution, like textiles (38% of exports), and iron and steel (14%).
Also, Britain’s socioeconomic structure wasn’t favorable for large corporations to grow. Back in 1870, England had completed its transformation into an urban-industrial society. While parts of America moved further and further away from the urban areas, forcing the US corporations to create their own marketing network (the sales points as discussed above), the majority of Britain already resided in urban centers which had been developed at the same time as the industry. Unlike as what was necessary in Germany, British cities were not in need of expansion or being rebuilt.
The educational system in Britain was much slower in its response to the needs of the country’s new industrial firms. Little or no was done regarding managerial training. Also, third generation English entrepreneurs had a form of cultural resistance to the technological and organizational needs of the new industrial revolution. Where in 1856, it was an Englishman who invented the first artificial colorings, and the country was blessed with large supplies of coal, and had an enormous textile industry that offered the best potential market, it were the Germans who took on the role as first movers in the end of the eighteenth century.
The latecomers
France
The French case falls midway between what happened in countries such as the United States, Germany and Great Britain on one side, and Russia, Japan, and Italy on the other side. It was claimed that France was lagging behind because of the French Revolution. Around World War I, effective large French corporations were rare, and small compared to those that existed in the United States and Germany. Also, almost all countries in the country were still owned and controlled by families, which probably slowed down investments in mass production and mass distribution.
At the beginning of the 1900s, some of the French firms grew by investing in technologies, professionalizing their management structures, and developing organizational competencies. The iron and steel industry was one of these examples.
Russia
The history of the large Russian corporation has its start prior to the October Revolution of 1917. Government interventions had a critical role in promoting and subsidizing local initiatives, using tariffs to protect businesses that served the national market and attracting foreign investments after ascertaining that local interest was scarce. The State also highly invested in infrastructure for the process of industrialization and modernization, especially in railways. The first large industrial corporations were in the field of capital-intensive sectors, which were highly oligopolistic. The State didn’t block any form of cartels, it even formed some itself.
Japan
Japan was the first non-Western nation to reach a front row position in the international economy. The government actively supported industrialization and created and managed companies itself. Often, the government brought in foreign experts and subsidies. After a while, the government turned some of its firms over into private firms. thus began the central institution of Japanese industrialization, the zaibatsu – a diversified group owned and controlled by a wealthy family. The limitations of the national market and the inability to develop adequate technological competencies kept the Japanese firms lagging behind.
Italy
Prior to the outbreak of World War I, Italy underwent a hefty process of industrialization. Italy mixed elements of the First Industrial Revolution with elements of the Second, a predominance of small firms in the traditional sectors coexisted with a set of oligopolies in the industrialized sectors. The State intervened with tools such as protectionism, state order, special favors and subsidies. There were three important large firms in Italy: Fiat, Pirelli, and Falck. Unfortunately, the limits of the internal demand hindered them from growing to huge firms.
Practice questions
What is a Zaibatsu?
How was Germany different from the US in terms of the emergence of big businesses? Explain.
How was France different from the US/Germany in terms of the emergence of big businesses? Explain.
Name two characteristics of the first large industrial corporations in Russia.
What position did the Italian Government take in the emergence of big businesses?
What were the views of consumers in the US market?
How did the newer, more modern firms in the US differ from the previous forms of enterprises? Explain.
In the beginning of the twentieth century, with the coming of big business, the economies of several countries transformed. Existing sectors revolutionized, and entirely new industries developed. The United States and Europe were the first to experience all of this, and large corporations appeared with significant differences and timing among nations. By 1913, the United Stated provided 36% of the global industrial production, while Germany only supplied 16%, and the United Kingdom 14%. This was because the European nations were significantly smaller than the US, their resources were less abundant, and their markets were narrower.
This part of the book focuses on the State and market in the period between the two world wars.
Moving from a U-form to an M-form
The large firms in the US were the result of internal growth or mergers. In the case of mergers, inefficient plants were closed and others were built according to the state-of-the-art technology in order to take advantage of economies of scale and scope. The new plants manufactured the same, but they also were part of a new organizational design. Sign of success of a merger : Drop in cost per unit and significant growth in market share.
The typical large American firm was characterized by a U-form (where the U = unitary), where the organization was based on functions like production, marketing, sales, finance, and human resources. These functions were overseen by the board of directors, and authority was highly centralized. This U-form was difficult to implement, given that large organizations exist of plants, distribution centers, warehouses, laboratories, and offices spread over a complete nation, or even several different nations.
Development: given these challenges, the multidivisional corporation arose. The appearance of this new form was due to factors within as well as outside the firm;
1920s; GNP and aggregate demand started to stabilize
1930s; GNP and aggregate demand dramatically dropped
Firms could no longer count on factors such as population growth, the construction of railways, and booming cities for expansion
Many firms created a surplus of internal resources due to earlier investments in functions not directly linked to production
Managers had to get rid of these resources or make better use of them
Now managers had to be smart, and diversify themselves, in order to survive, and the old U-form could not manage the process of diversification. The first to come up with a plan to adapt to the new environment were DuPont and General Motors. They created divisions that were built on a common technological or geographical base. Here, the M-form (M = multidivisional) arose.
The M-form in practice: General Motors
The multidivisional is not just a simple or universally successful outcome. Here, we take the example of Henry Ford >> He was determined in pursuing standardization, vertical integration, and the assembly line he invented himself. Ford introduced the minimum wage, and he was by far the number one manufacturer of automobiles in the world.
General Motors, established by William C. Durant, was the result of a merger of many firms in the automobile industry like Cadillac, Pontiac, and some small producers. The objective of the mergers would be not to cut costs, but to restructure the organization in order to further increase production. Durant unfortunately overestimated future demand and couldn’t manage to integrate the various companies in a rational manner by creating a central office. Around 1920, the biggest shareholder in GM was DuPont. In a short period of time, DuPont replaced Durant and together with Sloan transformed GM in a multidivisional firm, where each division had its own organization for both production and distribution.
Sloan perfectly understood that the time of consumers buying their first car was over, and that it was time to think further than the “any color as long as it’s black” mentality of Ford. GM wanted drivers to think about the purchase of a replacement automobile, and the company started focusing on improving styling, comfort, and performance of its various models in varied colors. Around 1929, GM outperformed Ford with a market share of 32.3% (Ford had 31.3%), and Chrysler entered the market with 8.2%. By 1940, GM had almost half of the market with 47.5%, Chrysler had 23.7%, and Ford remained with 18.9%.
The owners of GM (primarily the DuPont family) pushed for a strict application of the M-form, and wanted to exclude the divisional heads from headquarters. They wanted to concentrate power in an Executive Committee made up of top management and a few representatives of the stockholders. They wanted to control GM, and at the same time protect it from the tendency of uncontrolled growth which had characterized the firm before Sloan came in. This approach, however, had some drawbacks. Top management wanted to include the divisional managers more, whereas the owners definitely wanted to exclude them. Also, top managers started to fight the ownership’s right to veto in new investments. Two factors that impeded owners from realizing their version of the theoretical M-form they longed for:
The government’s antitrust policy
Late 1940s >> the Department of Justice launched a legal battle against DuPont, the stockholder
GM’s success
The enormous profits made that GM had “the money necessary to do whatever they wished”
The owners of GM took back control of the firm when performance started to decline around the years between 1956-1958, when the ‘pure’ M-form was fully adopted. The new structure reestablished the power of the shareholders’ financial veto and imposed a strict separation between the divisions and the headquarters. The new top management did not involve the middle management, leading to a sense of mistrust and dissent. Instead of increasing efficiency and improving governance at GM, adopting the M-form in its theoretical version ended up causing the destruction of the company.
The conflict between ownership and control
Berle and Means stressed that the fact that ownership of shares was easily transferable changed relations between a corporation and its owners. One significant consequence of this separation between managers and owners was that there would be a divergence of interests of the controlling group (top management) and the interests of the majority of the shareholders. >> The attitude of Berle and Means toward managers was pessimistic:
“Managers were capable of shifting profits to their advantage, arranging things such that they could choose how to invest the profits, in the pursuit of objectives that would bring them prestige, power, and personal satisfaction rather than focusing on the interests of the majority of the shareholders.”
For Berle and Means, ownership and control were opposites, where the one worked against the other. Question: Who should be held responsible? >> Three possible answers that represent three forms of modern corporate governance
Interest and responsibility of managers should refer only to the shareholders, going back to the traditional concept of the rights of the owners
Give official recognition to the situation that had emerged, namely that managers only acted in their own interests
Recognition of the principle that the modern listed company was to be at the service of not only its owners or the individual that managed it, but of the entire community
This was the ideal situation according to Berle and Means
Walter Rathenau had similar ideas of what the modern corporation should look like: he focused on the phenomenon of a gradual withdrawal of the shareholder from the daily management of the firm. Rathenau identified two types of shareholders : Permanent investors & Speculative investors.
The second group of shareholders were the ones that were in conflict with management. The firm should place itself at the service of collective interests and assume the role of a pillar of the conservation and defender of the nation State.
Both theorists were struggling with two fundamental problems:
Practice questions
Describe the difference between a U-form and a M-form.
What happened to General Motors during 1956-1958 when the performance started to decline?
What was the attitude of Berle/Means towards managers and why?
Who should be held responsible in an organisation according to Berle and Means? Describe three situations.
To what extent did Rathenau agree with Berle and Means?
Which two problems did Berle and Means struggle with? Explain.
The large firms in the US were the result of internal growth or mergers. In the case of mergers, inefficient plants were closed and others were built according to the state-of-the-art technology in order to take advantage of economies of scale and scope. The new plants manufactured the same, but they also were part of a new organizational design. Sign of success of a merger : Drop in cost per unit and significant growth in market share.
The typical large American firm was characterized by a U-form (where the U = unitary), where the organization was based on functions like production, marketing, sales, finance, and human resources. These functions were overseen by the board of directors, and authority was highly centralized. This U-form was difficult to implement, given that large organizations exist of plants, distribution centers, warehouses, laboratories, and offices spread over a complete nation, or even several different nations.
This part of the book focuses on the State and market in the period between the two world wars.
Introduction
On December 25, 1925 several German chemical firms set up a federation called IG Farben (IG = Interessen-Gemeinschaft, or community of interest) via mergers, with the aim to restore German leadership in the world’s chemical industry that had been lost after the war. Immediately after its establishment, IG Farben started a strategy of taking over foreign firms in order to penetrate promising markets. The first move they made was a bid to take over the British Dyestuffs Corporation, which was considered unacceptable by the British government, which managed to promote an all-British merger that created the ICI (The Imperial Chemical Industries). The ICI case was not isolated in interwar Europe, but it is particularly telling in many respects:
The sectors that were dominant in the First Industrial Revolution were giving way to the capital intensive ones of the Second. Most of the counties involved in World War I had tested the advantages of high volumes of production and scale intensity, since the war had proved the effectiveness of domestic production systems and industries at all levels. Almost everywhere the war effort made it necessary to create large organizations, where some got so large that they hardly could adapt to peacetime conditions.
ICI clearly indicates the characteristics of the European interwar company >> Protectionist, corporatist, and increasingly interventionist
The European market
The imperatives of the new technological wave brought by the Second Industrial Revolution forces entrepreneurs and governments to look at new organizational, financial, and competitive practices. Many of the European entrepreneurs succeeded in building competitive corporations characterized by strong and enduring capabilities, but the framework in which this building took place was different from that in America. The model of the managerial corporation in Europe was slowed down by market structures, and by the industrial policies adopted by each countries. It is not difficult to find explanations for this phenomenon
The first half of the twentieth century was characterized by crisis and chaos >> Two world wars, a huge economic crisis, and dictatorships
A leading element that shaped European firms was the small size and dynamism of internal markets
Europe was lagging behind when compared to the United States. A lot of European countries were still characterized by an overall predominance of agriculture, and Great Britain still maintained her leadership position in industries of the First Industrial Revolution. Not only was demand low, as population barely grew, but also consumption styles were far from that of mass-consumption societies. Also, at the end of the war, the European market was fragmented into nationally protected economies in which a limited penetration of foreign investments and products was allowed.
The role of European institutions
One consequence of the structural backwardness of Europe was the adoption of public policies that played a role in shaping competition and entrepreneurial choices with effects that varied from country to country.
Cartels
Legal institutions played an important role in regulating markets and competitions. Europeans, namely, were tolerant to setting up agreements. Between the wars, the setting up of cartels all over Europe became an essential component of economic policies undertaken and planned by dictatorial regimes as well as by democracies. Cartels allowed their participants to benefit from relative stability in prices and demand, but they also limited incentives towards integration and growth. Stability of market quotas allowed companies to plan investments while maintaining a stable level of employment, which was favorable in the interbellum period, especially after the outbreak of the financial crisis at the beginning of the 1930s.
The role of the State as entrepreneurs and interventionists
Governments played a relevant role the creation, support, and ownership of a number of investments in capital-intensive industries. In several cases, the government was a large consumer, especially in areas that served the common good. Also, the government undertook all kinds of actions in order to protect these areas through orders, tariffs, and even financial aid. In Italy, for example, the State was the biggest and most important investor, and in the 1930s the IRI (Institute for Industrial Reconstruction) was developed.
Capital markets, corporate finance, ownership, and control
In Britain, the small business which operated in the fields of the First Industrial Revolution were supported by local and regional banks. At the same time, a dynamic stock market played an important role in supporting entrepreneurial initiatives in manufacturing and commerce. Around World War II, 1700 companies were listed on the London Stock Exchange, which channeled the resources necessary to foster growth to a number of important mergers and acquisitions in the capital intensive sectors. In lots of cases, the growth process was controlled through the perpetuation of the traditional approach of a federation under a holding company, which was a financial company that directly controlled a number of subsidiaries. Still, in many British firms the founding families kept playing an important role.
In Germany, the growth of large companies was supported by the stock market, along with a consistent self-financing and an efficient banking system with many large institutions >> Banks were a key component of the German capitalism, where they shaped the company in selecting and monitoring top management, and at the same time weakened the Stock Exchange Market as a way to channel financial resources toward the industrial system.
Industrial relations
Europe was also different in the role of the workers in the organization. In a lot of countries, workers were involved in decision making, or there were councils through which the employees could get information on top management decisions and the direction the company was heading in. European workers had some autonomy. When modern, bureaucratic techniques of job management were introduced in Europe, they were filtered through a unique system of labor-management relations, and were very often rejected or heavily adapted to the local European environment.
In other European countries like Italy and Spain, workers’ participation took different forms. Here, workers were given a little bit of voice in order to prevent them from rising.
Another difference between the US and Europe was in management. In the US, there were institutions for training managers, and even business schools. In Europe, there was no training for management, and the training that was available was just on-the-job. Managers were obtained internally.
Practice questions
What was so special about the London Stock Exchange after the Second World War and what was its function?
In what ways were Italy and Spain similar after 1930?
How was foreign investment affected by the World War I and the end of the ‘’first globalization’’?
What was an advantage of a cartel, and why did they quickly spread during the interwar years?
In what areas was the government very often the main customer for large concerns?
How did America and Europe differ in the composition of managerial class?
On December 25, 1925 several German chemical firms set up a federation called IG Farben (IG = Interessen-Gemeinschaft, or community of interest) via mergers, with the aim to restore German leadership in the world’s chemical industry that had been lost after the war. Immediately after its establishment, IG Farben started a strategy of taking over foreign firms in order to penetrate promising markets. The first move they made was a bid to take over the British Dyestuffs Corporation, which was considered unacceptable by the British government, which managed to promote an all-British merger that created the ICI (The Imperial Chemical Industries). The ICI case was not isolated in interwar Europe, but it is particularly telling in many respects:
The sectors that were dominant in the First Industrial Revolution were giving way to the capital intensive ones of the Second. Most of the counties involved in World War I had tested the advantages of high volumes of production and scale intensity, since the war had proved the effectiveness of domestic production systems and industries at all levels. Almost everywhere the war effort made it necessary to create large organizations, where some got so large that they hardly could adapt to peacetime conditions.
ICI clearly indicates the characteristics of the European interwar company >> Protectionist, corporatist, and increasingly interventionist
This part of the book focuses on the State and market in the period between the two world wars.
Introduction
The story of the Japanese economic growth is fascinating, especially when considering the isolation that characterized japan until the last quarter of the nineteenth century. Japan’s development was made possible by a model of industrialization that incorporated entrepreneurship, new forms of business organization, and planning buttressed by a nationalistic culture.
Meiji Revolution = Oligarchs, aristocrats, and samurai took control of Japan, and a political and military leader called the shogun ruled the country. >> The birthdate of modern Japan
From the early seventeenth century, the ruling class kept foreigners away, meaning that the presence of western influences was out in Japan. There were some exceptions made for Dutch and Chinese merchants, but Japan remained isolated from the West and its capitalist economy. Also, pre-modern Japan was divided into castes, with very low social mobility, and the entire national economy was based on rice production.
Driving factors in Japan’s growth:
Some merchant families began to occupy important roles in the economy, where they established relationships with powerful politicians
An efficient educational system based on thousands of primary schools scattered over the country
A strong central government
An efficient network of roads and irrigation systems
Japan wanted to catch up with the modern west, but remain an independent nation. Their strategy was to modernize infrastructures, take over and disseminate recent technologies, develop an industrial policy, and the creation of new monetary and fiscal policies. Japan set out to create high-quality human capital through education and they were importers of technology and knowledge. In the following years, the Japanese economy grew strongly and the industrial base began to serve military ambitions >> Japan won the 1894 conflict with China, and ten years later from Russia for the control over Korea. Allied with Great Britain, Japan entered World War I fighting against Germany in Asia. Due to the wars, the economy grew even further.
Zaibatsu
Education fostered entrepreneurship, as did the opportunity to build enterprises in a stable political and financial setting. The private sector became so successful that the government decided to take a step back and sell their firms to private entrepreneurs, and zaibatsu, or ‘financial groups’ arose. Examples of zaibatsu are Mitsubishi, Nissan, and Yasuda. The zaibatsu were different than the American M-form corporations and the European H-form businesses >> They had less central control than Americans and more than Europeans. The zaibatsu were based on a multi-subsidiary structure based on holding companies that were fully controlled by each zaibatsu’s founding family. The holding companies were active in a lot of sectors.
Shosha = The zaibatsu’s trading company, which provided trading services and ensured financial liquidity for the zaibatsu as a whole.
The zaibatsu relied on house banks who acted as creditor and shareholder. Also, in order to manage hundreds of companies and thousands of employees, the zaibatsu relied on decentralized production structures. Japanese businesses expanded by creating new subsidiaries, sometimes in entirely new fields.
It shouldn’t be thought that zaibatsu were the only businesses in Japan. There were also quite some small and medium sized firms, who were mainly led by skilled technicians and blue-collar workers. Very often, these small businesses were linked to the zaibatsu.
The Japanese large firms build some kind of managerial hierarchy, but unlike as it happened in the US, authority didn’t have to be specified formally. Cooperation and competition were shaped by the Japanese culture and social relations.
Bantô = A kind of a general manager who did not technically belong to the zaibatsu family, but who through many years of employment was bound by close ties of loyalty to them.
>> The bantô meant the separation between ownership and decision-making.
When dealing with their workforce, zaibatsu managers promoted employment stability by offering workers welfare programs, insurance, and education which they even extended to the family of the workers.
The role of the Japanese State
The several wars Japan engaged in offered positive effects on capital-intensive industries. Japan’s military spending passed from one-third of the total manufacturing output to over 55%. In the meantime, management was seeking technological advancement by acquiring knowledge from abroad >> Reverse engineering = The imitation of western technology for improving quality and efficiency. Examples : Toshiba established a relationship with General Electric, Mitsubishi with Westinghouse, and Fuji Electric was born out of a joint initiative between Siemens and a Japanese mining group.
At the same time the Japanese government was channeling the findings of its public research laboratories into the industrial sector, in order to prepare for and manage war. It maintained a strong influence over Japan’s economic system as a whole, by ultimately determining the shape of industrial development in many strategic industries.
Practice questions
Name a few distinctive economic features of Japan which might have influenced its process of modernization.
Explain the catching-up strategy what was introduced in Japan in several areas.
What was the real function of the so-called ‘’pilot plants’’?
How were the zaibatsu different from the American M-form corporations and the European H-form businesses?
Name and describe an example of a small entrepreneurial enterprise in Japan, and explain how this type of enterprises were often not fully independent.
Explain why the zaibatsu were crucial to Japan’s unique style of industrial modernization, and what they achieved.
The story of the Japanese economic growth is fascinating, especially when considering the isolation that characterized japan until the last quarter of the nineteenth century. Japan’s development was made possible by a model of industrialization that incorporated entrepreneurship, new forms of business organization, and planning buttressed by a nationalistic culture.
Meiji Revolution = Oligarchs, aristocrats, and samurai took control of Japan, and a political and military leader called the shogun ruled the country. >> The birthdate of modern Japan
From the early seventeenth century, the ruling class kept foreigners away, meaning that the presence of western influences was out in Japan. There were some exceptions made for Dutch and Chinese merchants, but Japan remained isolated from the West and its capitalist economy. Also, pre-modern Japan was divided into castes, with very low social mobility, and the entire national economy was based on rice production.
This part of the book focuses on the period form the postwar years to the fall of the Wall.
Around the outbreak of World War II, many countries were in a contradictory situation: they were struggling to survive the Great Depression and at the same time encourage entrepreneurs to take full advantage of the economic opportunities generated by the technologies of the Second Industrial Revolution.
Big business was one of the major products of the Second Industrial Revolution, and three features of the large corporation stood out:
The existence of complex organizational structures
The presence of often conflicting actors (entrepreneurs, managers, shareholders, employees, local communities, and the State)
The increasingly strategic role played by R&D
In large corporations, the process of innovation became linked to national and international scientific engineering networks, and the people who worked in R&D kept relationships with the professors and teachers that trained them. The number of employees in R&D departments increased impressively in the period 1920 – World War II, and innovation became a collective process. The R&D centers were comparable to assembly lines, in the sense that there was a business system with bureaucratic rules, defined roles, and a complex and rigid hierarchy.
>> R&D became a strategic asset, and products had to be protected by patents
R&D is an expensive process, and sometimes a long process that doesn’t offer direct results as well, meaning firms put a lot of money in R&D, but do not immediately see effects. In the leading countries of the Second Industrial Revolution, R&D departments operated alongside a network of other institutions that were also preoccupied with technological advancement. This created a series of spill-over effects, which benefited the manufacturing sector as a whole.
Germany cultivated technical skills and engineering.
1930 >> Most advanced technological level in Europe
United States had the most sophisticated and efficient national system of innovation, in establishing R&D laboratories that were funded by large corporations. Also, there were private research labs, performing commissioned research
The role of World War II
World War II imposed serious demands on manufacturing industries in all countries involved. The budgets on R&D were removed, and expenditures skyrocketed. The American government opened the Office of Scientific Research and Development (OSRD), which had the job of supplying public funds to research institutions. During the War, Germany and America succeeded in making significant technological advances that changed the structures of markets, industries, and companies involved.
Examples : radar technology, jet engine.
Raw material shortages made it necessary to come up with efficient substitutes. This way, synthetic rubber, fibers, and synthetic polymers were developed and widely used during the war. At the end of the war, research efforts intensified even further in those areas characterized by big science, which was especially intense in the United States, who were in a Cold War during the 1950s and 1960s.
The Third Industrial Revolution
Where the Second Industrial Revolution was chemical in nature, today’s industries are based in science in physics, and in the efforts to go beyond the limits of space, of time, and of existing materials. >> Third Industrial Revolution = The creation of totally new industries, with new market opportunities and radical changes in at least three broad clusters of businesses:
Communications : Internet and modern communication systems were made possible by both the personal computers and by technological advancements in fixed telephony and cellular systems
Transportations : Technological advancements due to World War II made bigger and faster aircrafts
Physical materials : Nuclear experimentation became important in those industrialized countries that ran out of traditional sources of energy. This created a new field of biotechnology
A key factor in the Third Industrial Revolution was the availability of General Purpose Technologies. GPTs could be applied to a wide range of industries. The microchip and microprocessor played the same role in the Third Industrial Revolution that steam power had played in the First Industrial Revolution.
William Shockley, researcher at Bell Labs, the R&D labs of American Telephone & Telegraph (AT&T), replaced vacuum tubes and electromechanical switches for transistors. This invention removed the bottleneck in the American telephone system at the end of the 1950s. The most important application of Shockley’s discovery came later, when Texas Instruments and Fairchild Semiconductor invented the integrated circuit. The first microchips were developed in the early 1950s, and a decade later this was followed by the microprocessor, designed and manufactured by Intel. These microchips and microprocessor were essential to the development of personal computers.
Global trends
The technologies of the Third Industrial Revolution led to a shrinking of space, according to Raymond Vernon. This shrinking of space, which meant the reduction of physical distances, and an elimination of barriers to the movement of people, goods, capital, resources, knowledge, and data changed business at both macro- and microeconomic levels. Imports and exports skyrocketed , and foreign investments increased significantly. The same goes for levels of immigration in developed nations, who had markets with professionals for skilled and unskilled workers.
The effects of shrinking space on firms
Companies that already became big had to renew their strategies and get their position as first mover back. Due to the new technologies, new firms could enter the market, particularly in the computer industry, where those in the computer industry were rewarded for being the first movers and for having a bundle of capabilities in manufacturing, technology, and marketing. Companies such as General Electric, IBM, and AT&T became big in this period. IBM’s investments allowed engineers to improve the design of the computers and to implement a language needed for operation: software. IBM grew very fast, also with the help of indirect support from the US government in the form of financing for R&D, but also by being IBM’s biggest customer in testing new products. Factually, the government gave IBM the entry barrier in a new and promising market. By the end of the 1950s, IBM dominated the market and covered almost all segments of the industry. In around the 190s, IBM held about 70% of the world market.
Motorola produced car appliances and started working with semiconductors later on. Texas Instruments had been active in producing detection equipment for the oil industry, and started manufacturing radars and sonar equipment during the war. Texas Instruments soon became the largest semiconductor producer in the world, holding between 11 and 12% of the market. The semiconductor market changed with the maturation of microchips and microprocessors, and only a few big and efficient producers remained. Intel started producing memory chips and enjoyed continuous growth.
Conclusion
The Third Industrial Revolution enabled companies to expand their activities on a considerably larger scale than they had been able to in the past. Heavy investments in R&D contributed to cultures of learning and knowledge management. But the adoption of new technologies forced companies to reorganize, decentralization became necessary.
Practice questions
Name and explain a few results of the process of institutionalization of innovation.
Name three features of the large corporation that stood out.
Why is it that R&D became so popular in the period of 1920-WWII, and how was it used?
How did WWII influence the manufacturing industries?
How does the Third Industrial Revolution differ from the first and the second one, and in which three clusters of businesses was it at least present?
Explain why the General Purpose Technologies was so important during the Third Industrial Revolution.
Explain how a company such as IBM could become so big during the TIR.
To what extent were structural reorganisations needed in firms during the TIR?
Around the outbreak of World War II, many countries were in a contradictory situation: they were struggling to survive the Great Depression and at the same time encourage entrepreneurs to take full advantage of the economic opportunities generated by the technologies of the Second Industrial Revolution.
Big business was one of the major products of the Second Industrial Revolution, and three features of the large corporation stood out:
The existence of complex organizational structures
The presence of often conflicting actors (entrepreneurs, managers, shareholders, employees, local communities, and the State)
The increasingly strategic role played by R&D
This part of the book focuses on the period form the postwar years to the fall of the Wall.
The American superiority
By the time of World War II, America had been the world’s leading economic power for many decades. In the US, the birth of large corporations where technology made it possible was greatly favored by the availability of natural factors, an uncommon dynamism in the internal market, by antitrust policies, and by the diffusion of a culture that was well suited to business and organizational change.
The governmental support in R&D and the two World Wars, plus the Cold War stimulated the demand for technologically advanced products in fields such as air transportation, electronic, synthetic materials, and pharmaceuticals. All these products could be used or easily transformed for civilian use. All the men that had joined the army engaged in training programs that would help them to reenter the workforce, and increasing competition from the Soviet Union forced the government to invest even more in R&D and education. The US were a paradise for consumers, due to the modern distribution channels. America was surrounded by a climate of confidence, that pushed the country toward new risky undertakings. English was becoming the universal language of business.
The first signs of decline
The Americans seemed irrepressible, but during the 1950s, the first signs of a slowdown appeared. Intense competition started to show, and the Americans were not prepared for this, as they enjoyed unchallenged success. The Americans helped Europe and Japan to recover after the wars, but this recovery went sooner than expected. American entrepreneurs responded to this in different ways. Some invested even more in R&D, others wanted to invest in fields where competition seemed to be less fierce, leading to mergers and acquisitions that were based on no rational criteria. Business saw in diversification strategies that promised a stabilization of revenue and profit , which led to huge increase in mergers and acquisitions.
Conglomerates
Result of the wave of mergers and acquisitions >> Conglomerates = Firms that operated in a number of sectors that were unrelated.
Diversification was a common corporate strategy of American businesses throughout the twentieth century. The level and type of diversification between 1950 and 1960 was based on the extraordinary economic situation of America. Firms enjoyed huge profits, but putting these profits to use was a serious challenge. Investors were more interested in long term growth of their investments, making it unnecessary to distribute larger dividends. Top executives had considerable sums of money to be used for investments >> These investments were done in activities abroad who promised good profits and growth. Unfortunately, not all sectors were suitable for internationalization.
Some sectors were at maturity, so investing abroad or in R&D didn’t have much appeal. Firms in these sectors purchased controlling shares in companies that were already operative or exchanged shares with other firms. Armco Steel is a good example; They started to diversify when they saw demand for steel stagnated. Armco started to invest in firms further and further away from their original business. They even bought an insurance company and further expanded into other fields of finance. At the end of the 1960s Armco leased manufacturing assets, and even entered the real estate industry.
Factors stimulating the growth of conglomerates;
Increasing fiscal pressure
Global competition
Developments in management science; The application of mathematical models
Diversification; Profits in one sector could compensate for losses in the other
The conglomerates got a lot of critique. Different management scholars defended the conglomerates, on the basis of the strong points conglomerates had when compared to other forms of enterprises;
1970s >> Economic crisis, stagflation = High unemployment, no productivity increases, high interest rates, and growing inflation. Not even the largest American corporation was spared the enormous economic problems. The economic crisis made managers realize it was hard to manage companies that operated in highly diversified sectors. Some of the big problems could be traced to the administrative structures of the conglomerate management. The headquarters were relatively small and focused primarily on controlling functions like finance and the purchase of new businesses. The supervision of the headquarters was reduced to little more than establishing objectives for the various units and assessing the results obtained on a quantitative basis. The system came to be known as management by numbers, with ROI as a guiding star.
The decline of the American conglomerate was serious, with two outstanding reasons;
Top management was either incompetent or unable to understand the technological processes and the various markets in which the conglomerate’s companies operated
The almost impossible task of governing aggregates based on a huge number of divisions
1980s: The intention was to reduce the broad spectrum of activities or even return completely to the firm’s core business so as to recover some of the terrain lost from global competition. From here on, strategies of de-conglomeration were pursued.
Buying and selling companies offered great rewards, and new institutional investors arose. Shares were sold and purchased continuously. There was a market for the control of businesses that were at times purchased by buyers that had no ties with what they bought. Complete companies were bought, sold, separated, and reassembled in different ways >> De-conglomeration became a super popular phenomenon.
Practice questions
Explain why, in the US, there was an atmosphere of confidence with regards to the economy, and how this could have a negative impact?
Describe the slowdown of the economy during the 1950s in the US.
What are conglomerates?
Explain how the strategy of diversification could sometimes also be challenging.
Name four factors that stimulated the growth of conglomerates.
Describe the term ‘’stagflation’’ and how it relates to an economic crisis.
Why was there such a big decline in the amount of American Conglomerates?
How did strategies of de-conglomeration become more popular?
By the time of World War II, America had been the world’s leading economic power for many decades. In the US, the birth of large corporations where technology made it possible was greatly favored by the availability of natural factors, an uncommon dynamism in the internal market, by antitrust policies, and by the diffusion of a culture that was well suited to business and organizational change.
The governmental support in R&D and the two World Wars, plus the Cold War stimulated the demand for technologically advanced products in fields such as air transportation, electronic, synthetic materials, and pharmaceuticals. All these products could be used or easily transformed for civilian use. All the men that had joined the army engaged in training programs that would help them to reenter the workforce, and increasing competition from the Soviet Union forced the government to invest even more in R&D and education. The US were a paradise for consumers, due to the modern distribution channels. America was surrounded by a climate of confidence, that pushed the country toward new risky undertakings. English was becoming the universal language of business.
This part of the book focuses on the period form the postwar years to the fall of the Wall.
The rise of the Communism
Communism = The economic and social order created by Vladimir Lenin and his Bolshevik followers, following the ideas of Karl Marx and Friedrich Engels. In the communistic order of Lenin, it would no longer be possible to obtain an economic advantage from the labor of workers. Production was going to be shared and not traded and the outcome would be a class-less society where the motto was “from each according to his ability, to each according to his needs”.
Marx wanted to implement their project in England, the workshop of the world, or in Germany. Even the Us was a good candidate. Eventually, Marx took Russia as incubator of the Communist transformation, because:
Marx was fascinated by the Russian communities that were known as the obscina, which were perfectly capable of transforming themselves into modern Communism, avoiding the horrors of the Industrial Revolution
Marx realized that capitalism had already spread around the world
Revolutionary movements to establish the Communism in Russia
1919; Comintern (Communist International) was founded as a key instrument for creating a global revolution
“War Communism” where the economy regressed to primitive levels. It was won by Lenin and the Bolsheviks
1921; Lenin launched the New Economic Policy (NEP) where capitalism reappeared; a peasant was no longer subject to requisition of the entire harvest, and once he paid a duty, he could sell the remainder of his crops
1922-1923; The Soviet Union created 421 trusts that extended into 90% of all Russian industries, the 140 largest of them accounted for 90% of the Soviet Union’s workforce, and the best of the former Russia’s know-how was in the hands of these trusts
1925; The trusts produced 80% of GDP, and the objective was to make a profit, even though the trusts were property of the State. Two limits of Soviet trusts when compared to American firms;
20% of profits was for new investments, 80% was to be turned over to the State, who made decisions regarding the creation of new production units
Trusts lost their marketing function over time. Management only had to make sure production was taking place
1924; Lenin died, and three fractions came to the forefront within the Soviet Communist party
That of Lev Trotsky, who created the Red Army and looked a lot like Lenin. Trotsky stressed the importance of permanent revolution via conflicts with the capitalistic societies
That of Nikolai Bukharin, who believed that private initiative should be encouraged, and that peasants should not be penalized by a form of forced industrialization
That of Stalin, who agreed with Trotsky, but also believed that the Soviet Union would be able to deal with the capitalistic world only if it was industrialized and had a strong military. It was necessary that the agricultural sector should maintain low prices, which led to a lot of bloody processes where millions of peasants died. The Market was eliminated and became the Plan
The Plan
The Plan (Gosplan) = Various ministries that were responsible for industrial sectors. It established what and how much should be produced, which technology should be used, where the plants should be located, how prices would be fixed, and what salaries should be paid. Companies were clustered in administrative units of production, glavk, and no longer had to focus on profits.
Soviet companies only knew one level of management, namely the lower level. Middle management was situated in the functional departments, and top management was situated in the Gosplan. This form of organization led the Soviet Union to become a major global industrial player >> Between 1930 and 1950, the economy grew by double digits. the first spacecraft and the first traveler into space were both from the Soviet Union, and the Gosplan brought Soviet citizens a moderate level of well-being.
Stalin died and his successor Nikita Khrushchev attempted to limit the concentration of decision-making and the supervision of economic activities. Ministries that controlled various sectors were replaced with organizations of industrial management, sovnarkhozy. The outcomes were not favorable, and in the 1950s, the sovnarkhozy were replaced by production associations that were the result of merging plants and integrating production functions. Production associations were characterized by elements that were not found in Western firms, and actually only limited their efficiency, namely, all functional departments of the Gosplan held their powers:
Gossnab and Gostekhnika = Responsible for supplying firms and making sure that finished products are characterized by technological congruence
Goskomstat = Responsible for the stabilization of prices
Goskomtrud = Responsible for work conditions and compensation levels
Gosstandard = Responsible for product quality and standards
The drawbacks
What was absent in the Soviet Union were firms that pursued a competitive strategy. Andrei Yudanov compared Russia with an organ that is healthy, but unable to correctly perform the functions with which it is associated. In the West, there are four main types of strategy for a firm:
Focus on volume; mass-production with the right quality-price combination
Seek a small market where customers are assured a good part of the product quota
A personalized strategy that is for small-scale manufacturing that adapts to local needs
Introduce radical innovations to the market
The Soviet Union adopted only the big firm strategy, but it lacked the tools to convince customers why they should buy their products. Due to the Gosplan, the Soviet Union’s firms couldn’t control production, and were not flexible at all.
Practice questions
What is communism and who were the people that were very important in this social order?
Why did Marx take Russia as an incubator of the communist transformation? Explain.
Name 4 revolutionary movements that helped to establish Communism in Russia. Be specific, name the years, people involved, and how it was important.
Which three fractions came to the forefront within the Soviet Communist party and what were their beliefs/thoughts?
What was ‘’The plan’’ and how did it help the Soviet Union to become a major industrial player?
What is the sovnarkhozy and why was it not successful? What replaced it?
What were the four main types of strategy for a firm in the west?
Communism = The economic and social order created by Vladimir Lenin and his Bolshevik followers, following the ideas of Karl Marx and Friedrich Engels. In the communistic order of Lenin, it would no longer be possible to obtain an economic advantage from the labor of workers. Production was going to be shared and not traded and the outcome would be a class-less society where the motto was “from each according to his ability, to each according to his needs”.
Marx wanted to implement their project in England, the workshop of the world, or in Germany. Even the Us was a good candidate. Eventually, Marx took Russia as incubator of the Communist transformation, because:
Marx was fascinated by the Russian communities that were known as the obscina, which were perfectly capable of transforming themselves into modern Communism, avoiding the horrors of the Industrial Revolution
Marx realized that capitalism had already spread around the world
This part of the book focuses on the period form the postwar years to the fall of the Wall.
Keireitsu
Japan’s impressive success has already been discussed in Chapter 12, but at around World War II, it still wasn’t as successful as the US and Europe, as Japan was late in industrialization. After World War II, Japan was catching up, and its firms were able to enter the realm of international oligopolies as top players. The zaibatsu slowly were replaced by keireitsu. There were two forms of keireitsu:
Kynyuu keireitsu = Grouping competitive firms that operated in different sectors of industry, trade, and finance. These firms were connected to each other by a complex network of interlocking shares. The biggest of these were re-creations of the main zaibatsu from before the war. An exchange of shares between subsidiary firms assured that the control of the majority shares remained inside the group.
A new type of actor slowly emerged; the large house banks that also played a dominant role of the early zaibatsu. During the liquidation process of a firm, shares not held by small investors were bought up by banks, who resold them to financial institutions like insurance companies, and real estate holdings. Thanks to the banks, groups were able to reconfigure themselves via interlinked shareholdings and thus reestablish ties similar to those of the former zaibatsu. The vertical structure was replaced for a horizontal one >> Due to cross-shareholdings, integration of management groups, loans, and a structure for coordination through periodic meetings that was a sort of club existing of presidents of the largest companies in the group.
The keireitsu was controlled in an informal way, as there was no central body, and shareholders could not control the strategic or operating decisions of the affiliated companies. Also, there was a high level of trust among the firs, as there was not only an exchange of shareholdings, but the tight network the keireitsu operated in had close commercial, financial, and personal tights. The banks were a sort of glue in the keireitsu, they were entrusted with information regarding the daily management of the firms and could exert influence on investment decisions given their roles as principal lenders.
The principal function of keireitsu was not to increase business volume or to search out new entrepreneurial opportunities, it was just to assure stability of decision-making and organizational structures. Although determined in legislation, shareholders couldn’t nominate the board members, as in Japan there was a common sentiment that firms do not belong to shareholders, but to the employees. Because of this, and because of the highly common lifetime employment, the Japanese workforce was loyal and highly motivated.
Kigyoo keireitsu = Vertical grouping of businesses, made up of a head group (usually a large manufacturing company) and tens of related companies that operated as suppliers. Suppliers faced intense competition, which was beneficial for the efficiency. For an example, see page 175-177 for the Toyota case
The role of the State
The State played an essential role in maintaining and increasing the competitive position of Japan, especially that of the exporting sectors. The Ministry of International Trade and Industry (MITI) had adopted more selective criteria for support and quickly scored success.
Primary period postwar period: To accumulate foreign currency to finance the reconstruction of a nation that had been dependent on foreigners. One example where the MITI reached incredible growth was in the Japanese steel sector, which MITI saw as main strategic product due to its high value added. The Japanese market was tightly regulated, with demand and prices carefully controlled by the government. Managers of the Japanese steel industries were allowed to make own investment decisions, and further steps included;
Protectionism became more rigorous
A new system for supporting prices was put into place
A system that linked permits to expand manufacturing capacity to past results.
Practice questions
Describe the two forms of Keiretsu. What were their characteristics, what was the goal of them and how do they differ? Can you give an example?
What was the role of banks in the Keiretsu?
Who or what controlled the Keiretsu?
Why and in what ways did the state play an essential role in maintaining and increasing the competitive section of Japan?
When the managers of Japanese steel industries were allowed to make own investment decisions, what steps did they follow?
Japan’s impressive success has already been discussed in Chapter 12, but at around World War II, it still wasn’t as successful as the US and Europe, as Japan was late in industrialization. After World War II, Japan was catching up, and its firms were able to enter the realm of international oligopolies as top players. The zaibatsu slowly were replaced by keireitsu. There were two forms of keireitsu:
Kynyuu keireitsu = Grouping competitive firms that operated in different sectors of industry, trade, and finance. These firms were connected to each other by a complex network of interlocking shares. The biggest of these were re-creations of the main zaibatsu from before the war. An exchange of shares between subsidiary firms assured that the control of the majority shares remained inside the group.
A new type of actor slowly emerged; the large house banks that also played a dominant role of the early zaibatsu. During the liquidation process of a firm, shares not held by small investors were bought up by banks, who resold them to financial institutions like insurance companies, and real estate holdings. Thanks to the banks, groups were able to reconfigure themselves via interlinked shareholdings and thus reestablish ties similar to those of the former zaibatsu. The vertical structure was replaced for a horizontal one >> Due to cross-shareholdings, integration of management groups, loans, and a structure for coordination through periodic meetings that was a sort of club existing of presidents of the largest companies in the group.
This part of the book focuses on the period form the postwar years to the fall of the Wall.
The Harvard research
In the early 1970s, Harvard Business School’s Research Division started a research to the postwar economic ‘miracle’ in Europe. Their industrial systems were populated by large corporations, both privately owned and State controlled, in the capital-intensive industries of the Second Industrial Revolution, and they were successful. The research was conducted to find out if the enterprise had been accompanied by organizational modernization as well. The research focused on the United Kingdom, Germany, France, and Italy, and lasted from 1950-1970. It focused on the top 100 companies in each country by turnover, ranking them by strategy and diversification adopted, and by organizational structure. The European firms were compared with the US model, and the researchers believed that they would find similarity between European and American styles of business.
The researchers found a shift toward the M-form in the countries, that was partially due to the Americanization of the European culture, which extended to include managerial culture. The Americanization came from the Marshall Plan that was set up to provide European countries with the resources necessary to speed up the reconstruction of their economies, and at the same tie build a barrier against the Soviet Union and their communism. The Marshall plan transferred 12.5 billion dollars to the European countries, and next to the inflow of raw materials, machinery, and goods, the Europeans became familiar with the techniques of American organizations as well as US technical and scientific knowledge. It helped, the GDP of the European countries grew significantly in the period between 1950 and 1970, following the two pillars of Americanization: opening markets and abolishing trade barriers. >> 1957: European Common Market (ECM).
Steady growth in demand offered not just new economic space for existing producers, but also for new ones, and offered producers possibilities for mass production and diversification. The Fordist and Taylorist methods of working became widely known in Europe. Governments tried to attract as much foreign capital and knowledge as possible, sometimes by smoothening the law. The foreign investments had to fill knowledge gaps, or foster industrialization and employment in depressed areas. New challenges arose; European firms had to adapt their structural features to the requirements of the new market situation. An adequate managerial class had to be developed, and existing structures had to be transformed.
Differences between European and American firms
The implementation of the M-form occurred kind of randomly in Europe:
United Kingdom: Top management was unwilling to delegate power and responsibility, so a centralized M-form was adopted
Germany: Managers wanted to dedicate themselves to strategic planning, but there was little independence in divisional management, and low attention was paid to marketing
France: Loose organizational structure, characterized by a strong and pervasive State presence. Top management had close relationships with politicians
Italy: Anarchy was tolerated, but autocratic decisions were made at the central level
The European divergence from the US model was the consequence of national differences. Many European managers weren’t comparable to American managers, partially due to their lack of ‘soft skills’. The European education system was more inclined towards academic theory than to empirical evidence. European leaders were occupied with the day-to-day activities, which limited their ability to plan for the long term. Also, there was little attention for marketing, and European firms remained rather small, when compared to the Americans.
The movement towards the M-form
By the time the Harvard researchers completed their survey, European firms started to rethink their competitive strategies, and implemented the multidivisional structure more and more. This happened at the same time the US firms were in the middle of their process of de-conglomeration.
Great Britain: Diversification was particularly evident in the mid-1990s; two-thirds of the top 100 British companies was diversified into related fields, 24% was diversified into unrelated fields. The spread of diversification, here, mirrored the adoption of the M-form
Germany: Conglomerates were popular, but the Germans decided to stick to the U-form with a holding-company structure
France: Low diversification strategies. The functional structure was no longer in use, and had been replaced by the M-form, or the holding company
Italy: There was a trend toward diversification, which was accelerated by adopting aggressive financial strategies. During privatizations that occurred during the 1990s, some of the most important Italian firms diversified and introduced the M-form
The role of the State
Together with families and financial institutions, European States were directly involved as corporate owners in manufacturing and services. Western Europe’s ‘activist States’ initiated massive programs of intervention at the end of the reconstruction years, using ‘soft’ instruments:
Nationalization = The creation of State-controlled firms. Nationalization became increasingly popular in the four countries after the war. Especially companies in the energy sectors came in the hands of the State, but some countries got even further than that, like the French Renault that was taken over by the government. Nationalization had influence on the strategies, behaviors, and organizational choices of Europe’s big business as well: the State-control enterprises had to compromise between efficiency and social goods, with the idea of boosting demand and employment in the back of their heads.
Beginning of the 1980s >> External pressures and internal inefficiencies started to undercut State ownership, which is privatization.
The privatization wave lasted for nearly 15 years and still isn’t complete. Of course, the process differed in all four countries
Great Britain: Privatization resulted in the emergence of US-style public companies. Also here, the presence of institutional investors was pervasive.
France: First the banking system was privatized, and later on the manufacturing and service industry. They opted for a soft privatization process, and wanted to avoid foreign ownership in strategic and capital-intensive sectors
Noyau dure = Stable financial and industrial investors who had to stabilize and protect management and make strategic decisions.
Italy: Here, the State-owned companies were not made public, but sold to individuals and families
The hybrid form
Stakeholders and main controllers of firms influence the strategy, structure, and efficiency of the enterprise, and thus the national economic system. Three types of ownership that are inconsistent with strategies of diversification:
Personal/familial: Don’t want to give up their power, so decentralization and delegation of power (the M-form) will be resisted
The State: Was believed to prefer the U-form over the M-form
Banks
However, today’s European businesses are heavily concentrated and based on a mixture of State, bank, and personal control. Some argued that it was a lack of adequate regulatory framework that reduced the efficiency of European firms. In Europe, there are plenty of large diversified M-form corporations, but there are also many variations on business forms. A lot or Europe’s large corporations were accompanied by the persistence of business systems alternative to mass production >> Industrial districts and local production systems characterized by the clustering in a defined area of a high number of small firms, each one highly specialized in one or a few phases of the production process. This system led to strong social cohesion and low transaction costs, plus a high degree of flexibility and creativity = European hybrid business system, or H-form, an alternative for the US ‘One Size Fits All’ model.
Practice questions
In the early 1970s, Harvard Business School’s Research Division did research on the postwar economic ‘miracle’ in Europe. What did they try to find out about this, and what were the findings?
Explain which role Americanisation of the European culture had on firms in Europe.
After there was a period of steady growth in demand in Europe, the firms had to conquer a few challenges. What were these challenges and come up with a possible solution.
Explain how the implementation of the M-form occurred kind of randomly in Europe. Distinguish between different countries.
At some point, European firms started to rethink their competitive strategies, and implemented different types of structures, explain how this process went for Great Britain, Germany, France and Italy.
When the ‘activist States’’ initiated programs of intervention at the end of the reconstruction years, what kind of instruments did they use?
What is the difference between nationalization and privatization? Explain by giving the definitions of the two terms.
Explain how the privatization process was different for Great Britain, France and Italy.
Name three types of ownership that are inconsistent with strategies of diversification.
What is the European hybrid business system, and of what is it an alternative?
In the early 1970s, Harvard Business School’s Research Division started a research to the postwar economic ‘miracle’ in Europe. Their industrial systems were populated by large corporations, both privately owned and State controlled, in the capital-intensive industries of the Second Industrial Revolution, and they were successful. The research was conducted to find out if the enterprise had been accompanied by organizational modernization as well. The research focused on the United Kingdom, Germany, France, and Italy, and lasted from 1950-1970. It focused on the top 100 companies in each country by turnover, ranking them by strategy and diversification adopted, and by organizational structure. The European firms were compared with the US model, and the researchers believed that they would find similarity between European and American styles of business.
This part of the book focuses on the period form the postwar years to the fall of the Wall.
The situation in South Korea
A lot of countries in Indochina, who were expected to be hit by the domino effect of the Communism, embarked on a unique form of economic development that mixed state intervention and competition.
The focus of this chapter will be on two nations that were initially slow to modernize and were clearly on the fringes of the critical core of capitalism: South Korea and Argentina. They had differing economic performances in the second half of the past century, but a lot of similarities as well;
Their internal markets and their limited dimensions meant that big corporations were based on diversified groups because it was almost impossible to take advantage of economies of scale
There were authoritarian political regimes capable of bringing together economic resources and piloting them toward their choices without any opposition
Among the Asian nations that faced rapid economic development, South Korea stood out.
1970s: South Korea had a series of economic policies aimed at favoring the growth of exports and placing restrictions on imports and FDI. South Korea’s leaders decided not to focus on labor-intensive sectors where it would have the advantage of low labor costs, instead, they adopted a more difficult approach. The South Korean State didn’t intervene directly to take the role of the entrepreneur, instead it wanted to support the private industry by subsidizing them, protecting them, and granting them credits at favorable terms. In exchange, the government demanded the firms to strive for economies of scale, in order to compete internationally on the export front. The Korean State ran through a strong bureaucracy, that was capable of getting businesses to adhere to the commitments made, even though there were cases of corruption.
Korea focused on industries with high capital intensities and well-defined technologies, unless their lack of adequate scientific and technical know-how. They paid special attention to the production stage and the quality of labor, and a lot of effort was put in training technicians and workers, making the Korean workers the most highly trained in the world.
Chaebol = Firms controlled by family owners who worked in tandem with their managerial hierarchies. The chaebol diversified their activities into unrelated sectors, but not in the financing area. Banks were considered to be public property. Two examples of chaebol: Hyundai and Samsung. Korea was able to combine a strong State that promoted growth and forced competition on a global basis. By the beginning of the 21st century, Korea was top producer of ships, second in semiconductors, sixth in steel production, and fifth in automobiles.
Weaknesses of the Korean system;
The situation in Argentina
Argentina, unlike South Korea, could boast of extensive natural resources, and was characterized by substantial political instability and significant errors in the economic policy. As a result, the nation’s industrial development was slow uneven, and incomplete over the long term.
First decades of 1900s : Argentina ranked sixth in per capita income, and enjoyed great success in the agricultural and food sector. The money earned there, however, wasn’t invested in industrial industries, but was kept by Argentina’s ruling class. From the crisis in the 1930 and decades later, various tools were used to support the different sectors and actors; “todo lo que se mueve se promueve”, which means: everything in motion is in promotion. This statement summarizes Argentina’s mentality, and the government intervened in any company that exercised pressure via lobbying. Almost all firms benefited from this, but the support didn’t follow a consistent course, and it didn’t encourage industry.
Grupos = Diversified business groups in the hands of immigrants, who had grown because of the export of agricultural products and had integrated their banks. Due to a booming local economy, a number of multinationals, like Colgate-Palmolive, Bayer, Johnson, Quaker, and Abbott set up plants in Argentina, and survived the economic crisis of the 1930s.
1946: Juan Domingo Perón’s power rose >> Government policies started to favor State Owned Enterprises, who had to achieve economic, social, and military goals, and small firms, seeking to reinforce local initiatives.
1950s: State changed direction, trying to create a balance between neo-liberalism and nationalism. Argentina set high tariffs, which did not count for imported capital assets. For those who set up new plants, there were guarantees of special terms and few bureaucratic obstacles.
1970s: Argentina stagnated again, and firms entered a period of crisis. A massive reduction in output was the result, and the government had to change policies and objectives again.
End 1980s: Negative signs again, companies and policies failed, and Argentina was in miserable shape. The grupos had been occupied with lobbying more than with increasing efficiency, and the multinationals that entered Argentina had to deal with continuously changing policies, which made Argentina very unattractive.
1990s: Reforms that should foster efficiency and innovation. The financial services industry got transformed, the most important State enterprises were privatized, and regulated sectors were liberalized. Mercusor was created, which was a trade agreement between Argentina, Brazil, Paraguay and Uruguay. Today, it is still too early to evaluate the new program.
Practice questions
Name two similarities between the economy of South Korea and Argentina.
Describe the development of the South Korean economy in the 1970s. Be explicit.
What is the Chaebol? Explain and name two examples.
Give two examples of weaknesses of the Korean system.
In what way does Argentina differ from South Korea, and by what is it characterized?
What are grupos?
Pick one time frame between 1946 and 1990 in Argentina and describe what happened in this period of time.
A lot of countries in Indochina, who were expected to be hit by the domino effect of the Communism, embarked on a unique form of economic development that mixed state intervention and competition.
The focus of this chapter will be on two nations that were initially slow to modernize and were clearly on the fringes of the critical core of capitalism: South Korea and Argentina. They had differing economic performances in the second half of the past century, but a lot of similarities as well;
Their internal markets and their limited dimensions meant that big corporations were based on diversified groups because it was almost impossible to take advantage of economies of scale
There were authoritarian political regimes capable of bringing together economic resources and piloting them toward their choices without any opposition
Among the Asian nations that faced rapid economic development, South Korea stood out.
This part of the book focuses on the globalization of today.
Introduction
Innovations in communication and transportation system made the transfer of people, goods, money, and information across the globe much easier. The years after World War II brought a new wave of globalization, economic integration, and intensification of cross-border investments.
The process of multinationalisation involved all the advanced industrialized economies. European and American investors invested in foreign countries, including developing ones like Asia and South America because of their large endowments in natural resources. The lack of technical expertise and capital in these developing nations was coupled with an increasing demand for utilities and services, which made these countries very attractive areas for investment by foreign entrepreneurs.
Business leaders working in developing nations attempted to replicate the Western strategies that had worked so well in their home countries. US enterprises were present in almost all industries in which organizational capabilities and superior technology gave them advantages. Between the 1950s and 1960s, European firms were catching up, with support of their governments. The US were slowly sinking deeply into debt, especially because of the war they were conducting in Vietnam. By the early 1970s, Germany, France, and Japan were catching up in foreign direct investment.
Incentives to go abroad
Using the M-form, the largest multinational companies were able to adapt rather easily to international expansion. In moving abroad, the multinationals opened subsidiaries, built totally new plants, or sought the support of local partners to reduce uncertainty. R&D usually was conducted in the home country, creating a strong dominance of the mother company. The foreign subsidiaries had a relatively low degree of autonomy in planning strategies, approaches and investment decisions.
Incentives to go abroad were the absence of a big internal market, or superior capabilities in marketing and sales. Several scholars studies why firms went abroad, where John Dunning was the most influential >> He described certain advantages on which a foreign firm could rely, including the internal characteristics of the company, its capabilities, and assorted competencies that he labeled the ‘ownership advantages’. Some incentives could be found in specific factors, generated by the resources found in the host country. These were ‘location advantages’, which range from infrastructure, to political climate, and cultural attitudes. The shape that the foreign operations took could vary from simply exporting to vertical integration, which is referred to as the level of internalization.
The three factors described are the OLI framework: Ownership-Location-Internalization, and it describes incentives to go abroad.
The 1970s
Late 1970s, beginning 1980s different types of services emerged. Three areas of businesses were active in this new wave; finance, trade, and services to business. Finance and trade benefited from deregulation and liberalization. Services to business, which include management consulting also expanded rapidly.
The internationalization of retail forced companies to confront increasingly complex and varied cultures of consumption, meaning that strategies of expansion had to be planned more carefully. Consulting services became more popular, as businesses needed good advice and knowledge on accounting, finance, and how to tap foreign markets.
Around the 1970s, the Americans began to lose dominance, particularly due to the devaluation of the US currency, as well as the technological progress Europe and Asia made. By the end of the 1980s, American businesses had lost their position as the world’s most active foreign investors.
East Asian multinationals
The East Asian multinationals arose for different reasons than the American firms. they expanded abroad on the basis of advantages that frequently were not related to the possession of superior technology. Superior organizational capabilities, and support of the banking system and other companies made these achievements possible.
More recently, multinationals in emerging countries have been able to invest successfully abroad because they started adapting to emerging market needs, and succeeded to get access to untapped resources and markets. Companies like these are referred to as ‘Dragon Multinationals’, and they embraced internationalization in order to achieve competitive advantage that were unavailable at home by establishing partnerships and joint ventures.
Multinational strategies and structures
Multinational companies have adopted a variety of new organizational structures in order to be successful. Bartlett and Ghoshal came up with a framework of four organizational models:
The multinational firm
The international firm
The global firm >> Represented the centralized structure typical of the classic US multinational ; mother company with weak subsidiaries.
The transnational firm >> Represents a company surrounded by independent subsidiaries, all different in capabilities, which collaborated by sharing knowledge and innovations. The new style of globalising multinationals.
The Internet Revolution allowed firms to communicate more effectively and efficiently, thus reducing transaction costs. ‘Network’ organizational structures have become more and more common among international firms, as have cross-border alliances.
Practice questions
In what ways were all the advanced industrialized economies involved in the process of multinationalization?
Why is it that the largest multinational companies were able to adapt rather easily to international expansion by making use of the M-form?
Name a few incentives to go abroad and relate them to John Dunning’s theories.
Distinguish between ‘’ownership advantages’’ and ‘’location advantages’’.
Define ‘’internalization’’.
What does the OLI framework capture and what does it describe? Explain and illustrate.
Explain why around the 1970s America began to lose its dominance.
Describe and explain each organisational model in Bartlett and Goshal’s framework.
Innovations in communication and transportation system made the transfer of people, goods, money, and information across the globe much easier. The years after World War II brought a new wave of globalization, economic integration, and intensification of cross-border investments.
The process of multinationalisation involved all the advanced industrialized economies. European and American investors invested in foreign countries, including developing ones like Asia and South America because of their large endowments in natural resources. The lack of technical expertise and capital in these developing nations was coupled with an increasing demand for utilities and services, which made these countries very attractive areas for investment by foreign entrepreneurs.
Business leaders working in developing nations attempted to replicate the Western strategies that had worked so well in their home countries. US enterprises were present in almost all industries in which organizational capabilities and superior technology gave them advantages. Between the 1950s and 1960s, European firms were catching up, with support of their governments. The US were slowly sinking deeply into debt, especially because of the war they were conducting in Vietnam. By the early 1970s, Germany, France, and Japan were catching up in foreign direct investment.
This part of the book focuses on the globalization of today.
The influence of new technologies on big business
Now the conglomerates were over, businesses wanted to improve their efficiency and performance, which was supported by the Third Industrial Revolution. During the 1960s and 1980s, efficiency gains and a rapid decline in transport and communication costs encouraged the expansion of large companies. Multinationals and companies that were active in more sectors were able to exercise closer control over business operations, even in distant geographical areas. FDI flows skyrocketed in this period and many firms extended their borders even further and carried on strategies of diversification and international investment.
The Third Industrial Revolution made firms more decentralized, and in some cases there was a reduction in the scale of production, accompanied by an increase in diversification, which allowed companies to focus on unthinkable strategies of specialization.
The new technologies also influenced other aspects of business that had impact on the internal structures of many large firms.
Deverticalisation >> The once vertically integrated structures started to disintegrate due to the specialization process that required decentralization
Outsourcing >> To save both fixed and variable costs, and to achieve increased innovation. Firms also outsourced to focus more on functions like design and marketing
Hollowing-out
Networks and new organizational forms
Outsourcing is based on specialized suppliers of components and services, who developed unique skills and capabilities in the production of specific items.
Modularity = Components assembled through standardized interfaces, where innovation takes place inside each module. Modular architectures allow for mass production. The advent of modularity is one of the many conditions allowing for the efficient operation of organizational forms that are very different from the large vertically integrated enterprise.
Business networks = Groups of independent subjects linked by repeated cooperative relationships aimed mutual benefit and that during this process develop learning communities.
These processes had drawbacks as well: companies moving workforces abroad for example, left people in the home country without a job.
Inside the networks are coordinators who have to control the whole process and who develop projects at the core of the network itself.
Practice questions
Describe some developments in the 1960s and 1980s which are related to the TIR.
Explain the terms deverticalisation, outsourcing and hollowing-out, and explain how they are related to the TIR.
What is modularity?
Explain what business networks are and what its aim is.
Describe how the processes mentioned above can also have drawbacks.
Now the conglomerates were over, businesses wanted to improve their efficiency and performance, which was supported by the Third Industrial Revolution. During the 1960s and 1980s, efficiency gains and a rapid decline in transport and communication costs encouraged the expansion of large companies. Multinationals and companies that were active in more sectors were able to exercise closer control over business operations, even in distant geographical areas. FDI flows skyrocketed in this period and many firms extended their borders even further and carried on strategies of diversification and international investment.
The Third Industrial Revolution made firms more decentralized, and in some cases there was a reduction in the scale of production, accompanied by an increase in diversification, which allowed companies to focus on unthinkable strategies of specialization.
This part of the book focuses on the globalization of today.
What contributed to the American success?
By the start of the millennium, the United States was once again a global leader.
The success of the US in the 1990s was based on factors that were both intrinsic and extrinsic to the American economy. The US had high levels of productivity that increased even further during the decade. 1980s: American world market share in technology intensive industries was 25%. 2000s: American world market share in technology intensive industries was 40%.
Key contributors to the American success:
The size of the internal market
The pressures of foreign competition
The presence of an efficient institutional framework
Flexible capital markets
Public efforts in policies of procurement
Support of intellectual property rights
Scientific research
The United States even outperformed Japan, and the success was mirrored by a rise in the country’s international trade and investment outflows.
Exogenous factors that explained the American business system’s success
World trade levels that were greater than had ever been
The oil prices that started to drop again after tensions in the international oil market >> Energy costs fell again
The end of the Cold War relaxed the need for additional federal spending in military and defense industries
These three factors were embraced by Bill Clinton, who wanted to support entrepreneurial creativity and thus increase productivity and wealth. He wanted to invest in infrastructure, and broadband communications networks in particular. Clinton wanted to control public spending and thus further reduce the US deficit. Lower public debt, namely, meant lower interest rates >> These allowed the ‘new American economy’ to boost private investments
The new economy
In the new economy, as it was called, investments grew and ere done in technology- and knowledge-intensive industries like ICT, electronics and microelectronics, computers and biotechnology, and especially Internet development. The investments worked, labor productivity grew. The new economy created a number of new jobs, especially in the ICT industry.
Venture capital = An innovative financing instrument that supported and sustained initiatives in technology-intensive sectors by investing in small start-ups, betting on their entrepreneurial ideas and ability to become successful. Apple, founded by Steve Jobs and Steve Wozniak was one of these start-ups.
High-tech new businesses required lots of capital, and institutional investors and pension funds started to invest their huge resources in the New Economy. The investments on average offered returns of 30-40% per year. The Internet market showed a lot of potential and companies like eBay, Amazon.com, America Online, Yahoo!, and Google were able to achieve huge results. Another feature of the new economy was that already existing and rather static industries could be changed radically due to the new technologies like IT that were implemented in the management of purchases, sales, and stocks.
Re-engineering in the large companies
Re-engineering = Huge layoffs and deep changes in strategies and organizational structures. The origins of re-engineering can be traced to the intense pressure that competition exerted; revolutionary changes in the ownership of America’s largest companies had transformed the relationship between shareholders and managers.
The new economy made it possible for entrepreneurs like Bill Gates, and Steve Jobs to become super successful, and the roots of their success lied in a new form of entrepreneurship:
Science and hi-tech knowledge were at the core of all the successful initiatives, and entrepreneurs were almost always students studying computer science or electronics, or university graduates, or academicians and scientists
>> They were able to single out new market segments with huge potentials for expansion due to their technical knowledge they gained during their studies
Efficient instruments were available to direct appropriate financial resources into the projects mentioned above at their early stages
The highly innovative firms of the new economy were increasingly going public after a start-up period that was funded by the venture capital firms, and they were more and more attractive for investors on the stock market.
Institutional investments
Institutions like pension funds and insurance companies were the largest shareholders in American firms, their investments exceeded that of individuals and households. The institutional investors tended to favor bonds, but inflationary pressures after the oil crises redirected their investments toward the stock market. The institutional investors put pressure on management and the financial resources they provided businesses. At the end of the 1980s, about 25% of the capital of the world’s largest funds was in the hands of institutional investors.
The fund managers kept a close eye on the performance of enterprises in which they had invested and they judged the appropriateness of the behavior of management. When performance wasn’t according to standard and profits were not sustained, stock market losses occurred, and could be as much as 20% of a company’s capital. The pressure for performance was thus very high, and top management should be constantly focused. New procedures like Total Quality Management and outsourcing practices arose in order to remain as efficient as possible and more and more attention was drawn to shareholder value. This attention sometimes went too far, because shareholders were paid too high dividends, which remained the company with few capital to reinvest in their operations.
Practice questions
Name 7 key contributors to the American success. Choose two of them and elaborate further on those by giving a description.
Also name three exogenous factors that contributed to the success of the American business system. Which president embraced these factors?
What is venture capital?
What is re-engineering when did it first start? Was it a positive development in companies?
What made it possible for entrepreneurs such as Bill Gates and Steve Jobs to become so successful and influential?
What share did institutions such as pension funds and insurance companies have in companies?
By the start of the millennium, the United States was once again a global leader.
The success of the US in the 1990s was based on factors that were both intrinsic and extrinsic to the American economy. The US had high levels of productivity that increased even further during the decade. 1980s: American world market share in technology intensive industries was 25%. 2000s: American world market share in technology intensive industries was 40%. Key contributors to the American success are described in this chapter.
Europe for sale
Although the performance of the American economy in the 1990s was already looked upon as remarkable, it seemed even more exceptional when compared to the economies of Japan and Europe in the same period. Whereas in the 1980s these economies had been booming and the gap between them and the US had been shrinking, in the 1990s almost all European companies became less competitive. The explanation for this can be found by many factors, of which a lot were related to the structures of the economic systems of Europe and Japan.
Because the international political framework of Europe transformed a lot during late 1980s and early 1990s, we could see that this affected the economic performance in a negative way. Because things were not going as great, many started to doubt the economic and social model on which Europe had built its prosperity in the decades after WWII. Most countries had redistributive welfare systems that were based on full employment and pervasive state-ownership in strategic industries. This type of capitalism, that was based on ongoing deficit spending had been successful in achieving growth and satisfactory levels of employment, but in the late 1980s, it was no longer enough.
The first pillar of European-style capitalism to crumble under the pressure of the cyclical slowdown was the diffuse state ownership what was very common to almost all the economies of Continental Europe. Privatization took place in even ‘’natural’’ monopolies, and the SOEs that did survive were severely challenged. In the period of the early 1980s until the beginning of the 2000s, no less than 1000 privatization deals were concluded in western Europe. The total amount of capital involved was more than 600 billion dollars, which is nearly 50% of the world’s total.
Privatization programs were undertaken with different purposes and carried out in different ways. Whereas Britain employed a very radical privatization technique, which was based on huge sell-offs, in countries such as France and Italy the reduction of state-ownership did not necessarily mean the reduction of ownership concentration. Usually, the government would attempt to keep some control over the privatized companies. In Spain, the withdrawal of the state from direct intervention, took place through the 1980s and 1990s. Germany had a far lower level of state ownership to start with, but was nonetheless engaged in extensive privatization during the reunification.
The process of privatization went hand in hand with market liberalization. Privately owned firms were now allowed to enter markets that used to be characterized by close political control over natural monopolies. Privatization policies really transformed the ownership structure of the largest companies in many European economies, yet these processes were only sometimes accompanied by essential changes in the other economic, fiscal, and industrial policies of European governments.
American and European economies also differ in terms of their intrinsic structures. Whereas the recovery of the US in the 1990s was based mostly on the dynamism of the digital economy, Europe kept relying for a large part on mid-tech, and sometimes low-tech industries. This was because of the basic characteristics of some of the leading Continental countries.
Ultimately, Europe became less competitive because of a couple of reasons. First of all, because in Europe the workforce was so much protected, the European manufacturing sector became increasingly vulnerable to the competitive challenges of newly industrialized countries. These newcomers had advantages in terms of low-cost labor and minimal welfare expenses. Moreover, the labor productivity in Europe was not increasing.
One could say that European nations lost their competitiveness due to the challenging pressure of globalization.
The lost decade of Japan
The Japanese economy was based on four pillars:
Industrial policies encouraging domestic firms to increase their competitiveness in foreign markets;
The presence of the keiretsu;
A participative model of industrial relations, reinforced in many cases by the practice of lifetime employment;
An efficient banking system.
This model allowed businesses to create solid, long-term investments strategies, but neither the state nor the businesses were able to transform this model when there was a radical shift in the economy in the 1980s and the 1990s. The cause of this crisis can be found in the burst of a speculative real estate bubble what had been inflating between 1985 and 1989. It had only taken 4 years to triple stock market indices, while the value of land for residual and commercial use increased almost fourfold. All of this had its origins in concurrent elements, of which the expansive monetary policy that was undertaken by Japan’s central bank is the most important one.
The resulting problems were intensified by ongoing deregulation in the financial sector, which was intended to increase the competition inside a traditionally rigid banking system. Banks started to invest more aggressively, financing real estate speculation. The bubble burst when the Bank of Japan decided to change the discount rate, and Japan’s Ministry of Finance simultaneously limiting the involvement of banks in real estate speculation. Consequently, the Japanese stock exchange contracted sharply, and simultaneously real estate prices abruptly collapsed. As a result, private consumption and investment in Japan stagnated from 1990 to 2000, and this overlapped with a prolonged deflation and a rise in unemployment.
Banks’ distress
When the Japanese bubble burst, the main banks of the keiretsu suffered large losses. Many loans were defaulted, and the damages were immediately transmitted to the manufacturing industry, which lost the main banks’ vital support. As these problems brought about a major process of consolidation inside the financial sector, the number of very large banks dropped from seven to four: Mizuho, Mitsubishi Tokyo, Sumitomo Mitsui, and United financial of Japan. The decline in the banks’ support and confidence caused managers to increasingly put emphasis on cost reduction and profitability, market shares and revenues, and at the same time searching for additional resources of finance alternative to the traditional ones.
Because of this, foreign capital became more normal, and as a result foreign investors were putting increasing pressure on managers to improve the still poor disclosure practices in use among the largest companies. This need for external resources from abroad also impacted the state institutions, which were encouraging the adoption of disclosure practices.
Unwinding the Keiretsu?
Due to the large crisis in the financial sector, large Japanese keiretsu had to introduce changes in their approach to capital markets and corporate governance. One indisputable legacy of crisis had been a declining intensity of mutual cross-shareholdings among companies. Cross-shareholdings had shifted from nearly 20% to 11% of the total share capital among the largest Japanese business groups.
Consequently, the leading manufacturing industries found themselves in serious difficulties due to over-production and debt. Even the more established companies such as Nissan had to seek the support of foreign capital, which forced their managers to undertake radical restructuring processes, particularly as far as disclosure and corporate governance practices were concerned. Although formal reforms were made, an efficient market for corporate control was still virtually absent. According to Witt (2006:46): ‘’the main ingredient of a shareholder-oriented corporate governance structure, a market for corporate control, is still virtually absent and unlikely to grow much in the near future’’.
Crumbling industrial relations
Layoffs were massive. The crisis had started a discussion of all the fundamentals of Japanese capitalism,. The ‘’lifetime’’ and long-term employment system was sometimes replaced by a system with higher emphasis on meritocracy and efficiency. The job market, particularly for the new generations, rewards flexibility and mobility way more than previously. In many cases, under the pressure of short-term results, Japanese companies have not backed away from undertaking decisions unthinkable in the past.
For example in consumer electronics, companies started to reduce their size in order to remain competitive. Firms would sometimes also increase their foreign investments as to diversify risks and reduce costs. As was the case in the corporate finance system, however, the pace, direction and intensity of the transformation are all far from being clearly established. It becomes clear that the crisis has not undermined the model of industrial relations in Japan completely.
Practice questions
Explain why people started to doubt the economic and social model in Europe. Give examples.
Describe how privatization had such a big impact on many industries.
Why is it that privatization and market liberalization go hand in hand?
What caused the bubble to burst in Japan during the banking crisis? Explain.
Describe the effect on the keiretsu companies when the bubble burst in Japan.
What does Witt have to do with the crisis in Japan?
Although the performance of the American economy in the 1990s was already looked upon as remarkable, it seemed even more exceptional when compared to the economies of Japan and Europe in the same period. Whereas in the 1980s these economies had been booming and the gap between them and the US had been shrinking, in the 1990s almost all European companies became less competitive. The explanation for this can be found by many factors, of which a lot were related to the structures of the economic systems of Europe and Japan.
Because the international political framework of Europe transformed a lot during late 1980s and early 1990s, we could see that this affected the economic performance in a negative way. Because things were not going as great, many started to doubt the economic and social model on which Europe had built its prosperity in the decades after WWII. Most countries had redistributive welfare systems that were based on full employment and pervasive state-ownership in strategic industries. This type of capitalism, that was based on ongoing deficit spending had been successful in achieving growth and satisfactory levels of employment, but in the late 1980s, it was no longer enough.
China and India are two countries that best embody the world of business in the early years of the 21st century. Historians are interested in this for two reasons:
For the first time since the monumental transformation brought about by the FIR, the epicenter of the world economy shifted from the usual areas to Asia.
This groundbreaking shift in international economic history brings us full circle. This means that before the 19th century, China and India held a superior position to Europe or its colonies, and that nowadays, although there are still large pockets of poor and marginalized citizens, these nations are bursting with scientific know-how, technological skills, and cultures friendly to business activities.
Historical statistics have shown that for every peasant who starts to work in a factory, productivity increases sevenfold. As there is such a large hidden population in the countryside of these countries, this poses an advantage. This advantage, combined with heavy instruments by multinationals, should enable both countries to sustain their remarkable business expansion.
China
It has been hard for China to develop a coherent model of economic policy to be systematically repeated in order for it to always obtain well-defined results. Instead, a conceptual buildup of this type was accomplished by mixing some of the keys of the Japanese ‘miracle’ with those of the other Asian ‘’Tigers’’:
Create a relationship based on a principle of reciprocity between big businesses and the state. At the same time, large firms were expected to compete in the global marketplace with export goals.
Target product areas where a competitive advantage could be secured by staying in fields requiring mid-level technologies that were not too difficult to apply, and where the maximum economies of scale could be obtained.
Provide support for the big groups considered to be the best interlocutor for a policy of rapid growth.
Compared to Japan and other emerging Asian nations, the case of China had some significant differences:
Whereas Japan and other Asian nations focused on industries with relatively high capital intensity as they saw the path of competing via low labor costs to be potentially dangerous, China acted on all technological fronts and counted on a workforce that was paid at rates far lower than others.
While Japan and South Korea kept foreign multinationals out as a way of maintaining their independence, China used a qualified ‘’open door’’ policy.
While the first-comers of industrialization acted on the basis of an economic policy of systematic interventions, of guidelines and of moral stances, China focused on releasing the ‘’animal spirits’’ that had been repressed during the Maoist Cultural Revolution.
In 1978, Deng Xiaoping launched a program of economic liberalization, initiating extensive new legislation. More rights were granted to private enterprise, while, on the other hand, the weight of state properties was reconfigured. Schumpeterian are entrepreneurs like Ma Yun, who succeeded because of his ability to speak English and created very large and successful corporations. Relations between these entrepreneurs and the state were not always easy, as they remind us of those traits of oriental power described by Marx and Wittfogel. Some of these entrepreneurs followed the Asian tradition of maintaining a very low profile regardless of their notable wealth. Others maintained connections with the political world, or adopted an opposing stance, challenging political harassment.
Without a doubt can we infer that extremely low salaries are an essential component of the Chinese ‘’miracle’’ but no less it he country’s policy of openness to foreign investments. Four special economic zones were created in the provinces of Guandong and Fujian, of which their objective was to attract foreign capital by granting tax breaks on profits and by arranging exemptions for custom tariffs.
Over the next decade, tax exemptions and the elimination of duties were revoked. Simultaneously, the state allowed complete managerial freedom and reconfirmed its promise that firms with foreign equity would not be nationalize. This open-door policy had unequivocal consequences: between 1979 and 1999 China’s surplus grew to more than 40 billion dollars, although it did not bring about the nation’s economic colonization.
In the end, China was no longer just the world factory dependent on its low labor costs or the exporter of cheap goods. Over time China had favorably influenced consumers in the United States and other Western countries by transforming into commodities goods that were originally defined by their brands. Chinese manufactures started to form a relationship with Wal-Mart, which made sense because Wal-Mart’s competitive advantage was provided by its ability to offer the consumer the lowest price possible. This ultimately helped to promote Chinese exports.
Yet, China still needed other Asian Nations’ exports. This was the path it was obliged to travel in order to cover its growing needs for raw material imports and capital goods. The need to create jobs for the large amount of young people flooding the labor market, the many peasants who are leaving the countryside for cities, and for the employees of declining, almost bankrupt State holdings is still there. Although China might be known for being present in labor-intensive sectors, China also has a great impact on other global industries where labor costs are not a determining factor.
Some are afraid of the fact that Chinese prices are so low, due to the fact that many plants have been moved to China where labor costs are competitive. But fear over the medium-long term is not reasonable. The so-called ‘’China factor’’ should be beneficial for both demand as well as what is offered by Western nations. Manufacturing firms have enjoyed major declines in some of the costs of production and many can expect to enjoy new opportunities inside China’s growing domestic consumer market. There are concerns about the effect of China’s economic growth on the environment and the planet’s natural resources. Additionally the government is no longer Communist but it also shows few signs of being either democratic or transparent in its decision-making.
India
India seems to hold a net advantage over China in terms of political climate. India is the world’s most populated democracy and has been able to tolerate the coexistence of ethnic and religious groups that is potentially explosive. Additionally, its system of democracy has its deep roots even in the presence of strong social imbalances that are reinforced by its caste system. Still, even the people in the lowest castes have the right to vote and secure representation in the battle for social mobility and real equality. India is an example for nations that want to overcome problems of backwardness and minority conflicts.
India’s political system is part of the inheritance from the British colonial era. It guarantees rights and individual liberties to all. Even though the era of colonialism was not easy, there were some positive sides to it. One great asset is the English language, that is a very common language for the middle class, and with more than 350 Indians who are fluent, the country can boast an English-speaking workforce that is extremely large.
Unlike China, which wanted to take advantage of the race of Western nations toward ‘’offshoring’’, India followed a path that used its special resources in services. It started off with 24-hour call centers that progressed toward advanced service industries such as financial analyses, statistical and actuarial research, legal and financial consulting and so on. These sectors did well because the old industrialized areas of India were very eager to find new industries based in primarily immaterial assets. The actors of this more recent development were known for quantitative skills that were easy to combine with deep knowledge of the Vedic writings and their ties with the ancient Hindu mathematical traditions.
The fact that India ranks so high in immaterial industries such as software is in good part the result of specific decisions. For example, science centers were established that enabled the development of high-tech industries that were possibly important for national defense. The government encouraged successful Indian scientists and technologists to return home, for the sake of the countries’ success. A major player in this story is the Tata Group.
Unrelated diversification is a common characteristic in the economies of China and the other NICs. One reason for this is that in a limited domestic market it is impossible to adequately take advantage of economies of scale. One way to overcome these limits is by entering the international arena, or to pursue a diversification strategy of smaller dimensions.
One distinguishing characteristic of Indian entrepreneurs is that they have strong ethical ties that guide their actions. Social entrepreneurship seems to be an intrinsic part of India’s economy. In this setting, even the civil service has its entrepreneurs. India still faces enormous problems of poverty, social inequality, environmental pollution, and we should be skeptical of forecasts that envision India as one of the world’s top three top economies together with China and the US.
Practice questions
Name a Schumpetarian and describe his career.
Name three differences between Japan, other emerging Asian nations and China. Explain them.
What is so special about the year 1978 and what effects did it have on the Chinese economy?
What were the consequences of the new open-door policy in china? Were they positive or negative?
Explain why the English language is so important for some industries in India.
Why does the Indian government encourage successful Indian scientists to return to India?
How does social entrepreneurship influence the Indian economy?
China and India are two countries that best embody the world of business in the early years of the 21st century. Historians are interested in this for two reasons:
For the first time since the monumental transformation brought about by the FIR, the epicenter of the world economy shifted from the usual areas to Asia.
This groundbreaking shift in international economic history brings us full circle. This means that before the 19th century, China and India held a superior position to Europe or its colonies, and that nowadays, although there are still large pockets of poor and marginalized citizens, these nations are bursting with scientific know-how, technological skills, and cultures friendly to business activities.
Historical statistics have shown that for every peasant who starts to work in a factory, productivity increases sevenfold. As there is such a large hidden population in the countryside of these countries, this poses an advantage. This advantage, combined with heavy instruments by multinationals, should enable both countries to sustain their remarkable business expansion.
Conclusions
Altogether, this book was weaved by three elements:
The technological system; technology is a product of human beings and is determined by technical abilities, scientific know-how, and social attitudes. These elements might fall into a paradigm, which changes over time and evolves into a newer version. In our experience, it remains unchanged, and we have named this cycle of paradigms the Industrial Revolutions, and seen how they have impacted globalization.
The protagonist of this book, which is the firm: a mixture of people and tools of production assembled in hierarchical fashion. We might say that the firm has become visible during the FIR as it relied on a new and ‘’large’’ production place, which was the factory. After the SIR, this term started to become unwieldy.
The local context. When we consider the local context, we consider the national dimension. It is the local context that brings three other variables to the forefront: markets considered in their entirety and distinguished by their dynamism, the relationship between political powers and the business world, and culture in the sense of a combination of values such as the attitude to accept an institutional market and the ability to adapt to universal rules.
This book started with the workshops of the preindustrial era though that period also had some important companies as well as extensive manufacturers. The tale became more interesting when the First Industrial Revolution appeared in England towards the end of the 1700s.
England was not able to grasp the more important opportunities brought by the Second Industrial Revolution and was not able to develop the new integrated steel plants or machinery for continuous mass production or organic chemistry. Within Europe, England was overtaken by Germany, and Germany’s answer to British individualistic capitalism was a form of cooperation between banks, firms, and businesses or professional organizations. Yet, both Britain and Germany had to take a back seat to the US, who was the world’s industrial leading economy due to different factors:
Right before WWI, the American economy gravitated around large industrial corporations that came out of processes of vertical integration and mergers that were far more than the sum of the individual parts. The situation in Europe had its distinguishing characteristics. There was more active family control and greater willingness to enter into agreements on market control.
Technology’s impact was global, and no one was able to avoid the big dimensions it required, even in light of local peculiarities. As the world emerged from WWII, the US superiority was apparent. But history doesn’t stand still. The competitive scenario changed in the 1960s, when multiple factors pushed American big businesses toward unrelated diversification. It was the beginning of conglomerates and management styles based on financial reports.
The Third Industrial Revolution has shrunk space and communication times. It is an era of de-conglomerations, a return to core businesses and a remorseless application of new technologies of IT and communications inside firms.
Practice questions
Explain the concept of the technological system.
What is a paradigm, and why is it so important in the context of this book?
Why did the term ‘’firm’’ start to become unwieldy after the SIR?
How was Germany different when compared to British individualistic capitalism?
The US superiority was apparent after the WWII, but how did it change in the 1960s?
How was the TIR different from the other two?
Altogether, this book was weaved by three elements:
The technological system; technology is a product of human beings and is determined by technical abilities, scientific know-how, and social attitudes. These elements might fall into a paradigm, which changes over time and evolves into a newer version. In our experience, it remains unchanged, and we have named this cycle of paradigms the Industrial Revolutions, and seen how they have impacted globalization.
The protagonist of this book, which is the firm: a mixture of people and tools of production assembled in hierarchical fashion. We might say that the firm has become visible during the FIR as it relied on a new and ‘’large’’ production place, which was the factory. After the SIR, this term started to become unwieldy.
The local context. When we consider the local context, we consider the national dimension. It is the local context that brings three other variables to the forefront: markets considered in their entirety and distinguished by their dynamism, the relationship between political powers and the business world, and culture in the sense of a combination of values such as the attitude to accept an institutional market and the ability to adapt to universal rules.
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