Introduction

Adam Smith’s famous discussion of the organization of production in a pin factory articulated the advantages of the division of labor, and the economic gains from specialization and large production. But Smith expressed considerable skepticism concerning the relative efficiency of that particular form of business organization we now name the corporation, in which ownership and control are separated (1937, p. 700). Yet, it has been this organizational form that has come to dominate the business landscape in both Smith’s own homeland and in most other Anglo-Saxon countries – a development that the Scottish sage could scarcely have imagined. Large corporations exist, of course, in all of the highly developed countries

of the world and in many of the developing ones. Outside of the Anglo-Saxon countries, however, control and ownership are usually combined. We shall devote considerable space in this book to discussing these differences across countries and examining their consequences for corporate performance (see, in particular, Chapters 6 and 7). The extent of the development of the corporate form in the United States is

revealed in Table 1.1. In 1998, there were 4,849,000 corporations in the United States – roughly one for every 60 Americans. Moreover, as a group they accounted for nearly 90 percent of business receipts in 1998, a fraction that is up from 2/3rds in 1945.1 Table 1.1 also reveals how the nature of economic activity in the United States evolved over the last century. While the number of corporations in the manufacturing sector in 1998 was a little more than three times the figure in 1920, the number of corporations in the service sector increased hundred fold over the same period. Not only do corporations as a group account for a large fraction of economic

activity, but the largest of these also take on a scale that makes the word “firm” seem a misnomer. In the year 2000, Wal-Mart had 1,244,000 employees, which made it roughly the same size as the Salt Lake City/Ogden Utah metropolitan area (see Table 1.2). Exxon, the largest company in the world, had sales of more than $200 billion. The twentieth century might well be called “the century of the automobile,”

given both the economic importance of the automobile industry and the impact of its spread on other industries, on the way people organize their lives, on the environment, and so on. Table 1.2 reveals that the economic importance of this

industry remains significant at the close of the twentieth century. Eight of the ten largest corporations in the world in the year 2000 were either manufacturers of automobiles or refiners of petroleum. Wal-Mart, the giant variety store chain, and General Electric were the only two corporations in the top ten that were neither in, nor heavily dependent upon, the automobile industry.2 Of the 100 largest corporations of theworld, 37 have their corporate headquarters

in the United States. Although this is a larger figure than for any other country, it clearly indicates that large corporations are to be found all around the globe. For this reason, we shall devote considerably more space in this volume to the characteristics of corporations and corporate governance institutions outside of the United States than was the case in its predecessor (Mueller, 1987). As the title of this book suggests, its focus is upon the activities of large cor-

porations. Virtually all corporations start out as small firms, however, and so before examining the characteristics and activities of large corporations, we shall focus upon the characteristics and origins of small firms. Essentially, two different accounts exist in the literature for why firms come into existence. One sees them as institutions for minimizing transaction costs, the other as a vehicle for bringing innovations into existence. These two, quite different accounts of the origins of firms are examined in Chapters 3 and 4. In Chapter 5, we focus upon the managers of large corporations and ask what

their objectives are likely to be. As we shall see, quite a number of different

hypotheses have been put forward to account for the behavior of professional managers in addition to the standard, textbook assumption that they maximize the profits of their firm. In the literature dealing with the “Anglo-Saxon corporation” there are only two

main actors, the managers who run the firm, and the shareholders who own it. Even in Anglo-Saxon countries there are sometimes additional actors of importance, like banks, however, and in non-Anglo Saxon countries banks, other firms, and the state often substitute for the individual shareholder. In Chapter 6, we discuss the objectives of these other actors. We also describe the different corporate governance systems that exist around the world, and look at some evidence regarding their impacts on corporate performance. One of the important activities of corporations that might be affected by corpo-

rate governance structures andmanagerial goals is investment in capital equipment. This activity is the focal point of Chapter 7. Mergers and acquisitions can be thought of as another form of investment. In light of their importance for understanding the behavior of large corporations, and the size of the literature that examines them, two chapters are devoted tomergers. Chapter 8 reviews the various hypotheses that have been put forward regarding the causes of mergers. Chapter 9 examines their effects on company performance and social welfare. A brief chapter brings the book to a close. The “profitmotive” iswidely believed to be the driving force behind all economic

activity in market economies. Although we shall have cause to question whether it is the sole driving force motivating corporate decisions, no one including me, would deny the importance of profits as both a measure of company performance and a goal of its owners and managers. Therefore, we begin our excursion in the next chapter by discussing exactly what profits are and how they come about.