GBH OVERVIEW POINT

Main argument : Trading comapnies meet the criteria of the modern MNE based on transaction cost theory ; the growth of a managerial hierarchy is necessary because of the transaction volume, and to control managers overseas.

1. The characteristic of modern business ernterprise is the hierarchy of the manager.2. The managerial hierarchy make the 16th and 17th century trading companies similar with

the modern enterprise.3. Managers who controlled the early trading companies has problem with coordinating flow

of goods, service, and information across the distance, so they need to extend the control of the head office toward the company’s manager abroad.

4. Those problem was also faced by the 19th century multinationals, that used central functional ad multidivisional forms of organization to handle that.

5. The charter companies shared a common business organization with modern firms. That’s why those are important historically, and economically (modern enterprise managers still searching for structure to handle the coordinating people and goods with distance)

6. Managerial hierarchies in early trading companies and modern enterprise is the result of the frequency and the volume of transaction.

7. When there is imperfection information there will be a cost for transaction.8. When the frequency of transaction is high, it is cheaper for manager to coordinate the flow

of goods and information rather than the market.9. The transaction cost explanation is also happened to the development of the early 16th and

17th centuries companies.10. Based on the transaction cost approach, the chartered company back then need to equalize

the supply of foreign goods to European demad and European goods to foreign demands in the imperfect information condition.

11. The managers collectiong and processing information on taste, commodities, and prices to ensure equilibrium in supply and demand in the condition that there are distance and limited communication.

12. Modern system : collect and process information, sent out orders, organized shipping schedule, and determined the price of goods.

13. Vertical integration in the form of charter company replaced the market as a system for exchanging goods and services interationally.

14. Eventhough managerial hierarchy economized the market, but it also caused a cost (monitoring and performance assessing cost of managers abroad)

15. Early multinational using high real wage labor contracts, bonding of managers, and incentives to motivate and control overseas factories.

16. The early trading companies are often viewed as failures. But that’s not true. Also, not all modern firm is success.

17. The charter companies did not always successfully control overseas managers, but they develop incentives contracts, oaths and bonds, and information flows on work performance which are the standard mechanism for evaluating managerial effort in modern enterprise.

18. Charter companies has succeed to equalize the demand and supply for Europe. This success was the work of modern business organization, committees of salaried managers. It is concluded that the trading companies is similar with modern companies.

THEORY OVERVIEW

1. Agency theory that was developed by Jensen and Meckling : it can arise between stockholders and managers. They consider the firm as a legal fiction which serves as a nexus for contracting relationship.The characteristic of the firm is its existence of divisible residual claims on the assets and cash flows of the organization. The characteristic explains the need to align, either through the market or by means of legal instruments, the personal interests of the stakeholders and managers. The theory was developed in the time when style of firm no longer considered effective.

2. Tom Peters and Robert Waterman : The idea of the firm as a legal device to solve problems arising from the interaction of various economic actors was the source of another extremely influential stream of studies that attempted to explain the existence of the firm itself : transaction cost theory.

3. Ronald Coase : transactions were internalized due to inefficient markets. Firms are islands of conscious power in this ocean of unconcsious cooperation like lumps of butter coagulating in a pail of buttermilk. He believed that their origins and characteristics lay in the need to contain the costs of transacting in the market.

4. Williamson : transaction involve the costs related to searching and monitoring. In a framework in which economic actors are characterized by limited knowledge and bounded rationality and inclined to act as free-riders. This system generates strategic alternatives, making it convenient to internalize certain types of transactions, rather than resorting to the market.

5. Transaction cost theory helped us to understand a wide array of historical events, from the rise of the factory system during the First Industrial Revolution to the growth strategies through vertical integration of the large industrial corporation. It provided an interpretation of the persisting efficiency of production systems that were alternatives to mass production.

Ratri Ika Pratiwi/S2735652

“Giants of an Earlier Capitalism”: The Chartered Trading Companies as Modern Multinationals

In the “Giants of an Earlier Capitalism” : The Chartered Trading Companies as Modern

Mulitnationals, A. Carlos and S. Nicholas they stated that the trading companies meet the

criteria of the modern MNE based on the agency and transaction cost theory. The

managerial hierarchy is one of the characteristic of the modern business enterprise, and it

seems that the trading company in sixteenth and seventeenth century also have this kind of

characteristic. In this case, managerial hierarchy is needed because the transaction volume

was increasing, and to control the managers overseas.

Based on the Business History: Complexity and Comparison book by F.Amatori and A.Colli,

agency theory may arise between the stockholders and manager. It happens because the

two parties has different interest. When the information is not complete and there are

uncertainty, the problem will become worst and it caused inefficiency. On the other side,

transaction cost theory is internalized because the market is not efficient. The transaction

cost form a strategic alternative that make it easier to internalize the types of transaction.

Transaction cost theory also helps us to understand historical events.

Companies in the sixteenth and seventeenth century faced the transaction cost problems

because their frequency of transaction become higher and they consider that they need to

lowering the cost in the condition where there is a difference in terms of time and space,

that leads to imperfect information.

Based on transaction cost theory, the managers of these early companies need to balancing

the supply of goods from foreign to fulfill their own demand, and the supply of goods from

their countries to fulfill other countries demand. The way these early companies overcome

the problem was really similar with the modern enterprise do. They collect and process

information based on taste, goods and price and ensure the balance of supply and demand.

In order to reduce this transaction cost, these early companies overcome it by involving

labor contract with high wage, bonding managers and giving inventives. They also use the

vertical integration to replace the market system to reduce cost, since when it is cheaper to

manage the flow of goods by the manager itself when the frequency of the transaction is

high.

The early trading companies are often described as a failed company. According to Alfred

Chandler, he argued that the transaction of these early companies were not enough to push

them to have a managerial hierarchy. This argument contradicts with the description of

these early trading companies that they have large volume of transaction and they are able

to handle the transaction cost and made it lower. Even though these early companies did

not always succeed to control their managers abroad, but they have created the standard

mechanism for evaluating the effort of the management in modern enterprise. Also, the

charter companies were able to equalize the demand and the supply of goods for Europe

because of their managers in overseas, which is similar with the modern companies. With all

of those evidence that are mentioned above, we can make a statement that the trading

companies has similar traits with the modern companies.