The English East India Company: Model for Future Multinational Corporations?

 

INTRODUCTION

 

The English East India Company (EIC) was an innovative new type of corporation. It might be a model for how a multinational corporation could survive and prosper in an increasingly chaotic and hostile geopolitical world.

 

HISTORIC BACKGROUND

 

The creation of the EIC and its Dutch equivalent (the VOC) were part of the 400 year expansion of European power, trade, and influence. Much of the rest of the world became colonies, part of imperial empires.

By 1600, both England and Holland had a wealthy merchant and shipping class, bankers, lots of capital (wealth) not tied up in land, and risk-takers. These categories overlapped.

Both countries had limited monarchies. In England, the king and Parliament were about to begin a long struggle for power. In Holland, the monarch was mostly subservient to Holland's powerful and wealthy merchant class.

The East India Company (EIC) was chartered in 1600 by Queen Elizabeth I to promote and monopolize English trade with Asia. England, a poor country in the 1600s but with colonial ambitions after defeating the Spanish Armada in 1588, outsourced its colonial ambitions to the East India Company and other private companies. 

 

The East India Company was originally privately funded by 218 merchants and other investors. It was the first modern multinational corporation. The EIC was a joint stock company, that is, a company with publicly traded stock bought and sold in a secondary stock market.  Like modern companies, the EIC issued financial reports, held annual meetings for stockholders, and had quarterly meetings of the Board of Directors. 

 

The EIC was vertically integrated. The company designed, built and repaired its own ships, built its own docks and warehouses in London and in India. It had a large corporate headquarters in London. The company held sales auctions of its imports in its headquarters. It was a major employer in London. It was an “enlightened” employer, offering fringe benefits, including pensions. It provided a retirement home in London for sailors.

 

The EIC designed and built a new type of ship, called East Indiamen. They were built for long-distance trade. Because of commercial rivalry with other European states and local hostilities in Asia, EIC merchant ships were heavily armed and often contained marines.

 

The EIC had to build forts to protect its warehouses and trading stations. It hired a mercenary army and develop a navy (Bombay Marine) to protect property and trade routes. It negotiated with local rulers and signed treaties. 

 

In short, the company built its own self-contained infrastructure and pursued its independent strategies. 

 

The company ran its own management training programs and military academy. The selection process of employees was highly competitive, including written exams. Many of its recruits were ambitious young men from the lower and middle classes who were barred from the traditional paths of upward mobility and status. It employed “foreigners,” Scots and Anglo-Irish. Later, the EIC employed Asians and Anglo-Indians in secondary positions.

 

Economists have a warm spot in their hearts (yes, economists do have hearts) because the EIC was the first organization to employ and pay economists – Thomas Robert Malthus, James Mill, and his son John Stuart. John Stuart Mill was effectively the CEO for many years. Contrary to their economic writings, they did not support free trade with Asian countries. 

 

EIC “officers” and employees were loyal to the EIC. They saw personal opportunities and advancement within the company. They had opportunities for personal power and wealth that were not available at home. Because of their lower class origins and nationality, wealthy returning EIC officers were often resented as upstarts.

 

The EIC created a powerful lobbying group in England. The company attempted to get the English government to continue to support its monopoly on English trade with Asia. Important politicians and royal officials were bribed.

 

Unlike other private trading and colonization corporations established in England at about the same time, the EIC was set up as primarily an importing company. The company had the problem of how to pay for products bought in Asia. English exports to Asia such as English woolens were in limited demand. Asian sellers wanted silver. This created a drain of silver out of England, which was a source of friction between the company and the government.

 

CORPORATE STRATEGIES AND POLITICAL ENVIRONMENT

 

Besides the English-Asian trade, the East India Company was willing to trade anywhere in Asia, looking for profitable opportunities. Its resources, both ships and men, were highly mobile.

 

The EIC operated in a violent, insecure environment in Asia. Beside pirates and local conflicts with Asian rulers, England was usually at war with one or more European countries. The conflicts extended to trade rivalry in Asia. The EIC had to fight battles with other national trading companies, foremost of which was the Dutch East India Company (VOC, the initials of the Dutch name of the company). The EIC could not expect much support from England, which was unable to consistently project power in Asia until the 1800s.

 

The EIC lost out to the Dutch East India Company in its attempts to control the Spice Islands, the source of much of the profitable spice trade. The EIC also lost its footholds in Java and nearly islands, which became the Dutch East Indies (later Indonesia). 

 

Many early trading stations failed in other parts of Asia. Eventually, operations were centered on trading ports (entrepots) and stations in India, the traditional transit area for Asian products bound for the Middle East and Europe. India was also an important source of pepper.

 

The EIC was caught up in the Seven Years War (1756-1763) between England and France for dominance in Europe, North America (called French and Indian War in America), the West Indies, and India. The EIC, under the leadership of Robert Clive, was able to defeat the French in India and expand alliances with many local rulers. The company’s well-organized military assets with superior firepower made the company a prized ally for local rulers. In exchange, the company was given extensive privileges including the right to collect taxes.

 

At the same time, the company was developing what would be its most important trade – importing Chinese tea to England. To support this trade, the EIC established new stations that would grow to be Singapore and Hong Kong.

They immediately ran into an old problem – China didn’t want any English imports. Chinese merchants only wanted silver, which led to a major drain of silver out of England. The EIC solved the problem by growing and selling opium produced in India to private traders who smuggled it into China. Some of the financial transactions were handled by a bank that eventually became HSBC.  (One the traders was Franklin D. Roosevelt’s grandfather.) 

 

Chinese attempts to ban this trade resulted in a war between China and England (the Opium War, 1839-1842). China was defeated by superior English warships; the subsequent treaty was the first of many that opened up China to foreign influence and then domination. This would have important long-run consequences.

The demand for tea exploded in the 1700s. The EIC had trouble fulfilling the demand with tea from China. Growing and processing tea was a closely guarded secret in China. But the company smuggled out plants to start new tea plantations in northern India (Assam). These plantations were successful and an increasing source of tea for the EIC.

ORGANIZATION STRUCTURE, CONTROL, AND GOVERNANCE

Besides the EIC’s legal, financial, and governance structures which were innovative, the EIC had an internal management and control structure very much like a modern multinational corporation. It had to find a balance between home office control and branch management initiative. Given the problems of long distances, slow communication, and changing local operational information, the company was forced into a decentralized structure. 

The Board of Governors combined the oversight of corporate managers with the setting of governing rules and regulations. Much of their control was financial. There was also detailed supervision and control of the voyages sent out from England.

While officers of the company often sent detailed instructions about policy to local managers, direct operational control was difficult. It often took over two months for a letter from London to reach India. Local managers had discretion to react to local problems and trading opportunities. They had their own staff and resources. They were similar to “divisional” managers of early railroads and large industrial corporations. Even more similar to corporate presidents and their local staffs of national subsidiaries of multinational corporations.

 

THE EVOLUTION OF THE EIC. FROM A GLOBAL TRADING COMPANY TO A VIRTUAL SOVEREIGN STATE

                                    

The EIC was profitable in its early years. The EIC started its evolution from a purely private commercial company to an organization with its own substantial political and governmental responsibilities. For almost 100 years after the Seven Years War, it governed much of India from Bombay (Mumbai), Calcutta (Kolkata) and Madras (Chennai). The large areas around company headquarters in Calcutta, Bombay, and Madras were also effectively ruled by the company, often through “concessions” offered by regional rulers.

 

The company performed the major functions of a government – collected taxes, funded a military, made laws and regulations, and established a national bureaucracy. Many of its officers became rich because of IPOs (Indian Political Opportunities – aka bribes, private deals, kickbacks on contracts). Stockholders back in London just wanted profits but EIC officials in India saw the personal possibilities as tax collectors and political administrators.

 

As the EIC evolved from a commercial venture to ruling much of India, it became unprofitable. The company began borrowing large sums of money from the English government. In the early 1800s, the company exchanged loans from Parliament for government over-site and military support. Parliament stripped the EIC of its trading monopolies between Asia and England. Eventually, the English government took over overall management and supervision of the company and then annexed India as a British colony.  

 

The EIC came into conflict with the English government when the government tried to impose mercantilist goals on the company. The government, under pressure from its woolen textile industry and then the new English cotton textile mills, banned the company from exporting competing Indian cotton goods into England. India cotton, not cotton textiles, was exported to England. India became a large market for the export of English cotton goods.

 

The EIC start out as a profit-seeking trading company and ended up ruling much of the Indian subcontinent. The costs of administering India would eventually contribute to bankrupting the company; it was forced to turn over the rule of India to the English government.   

 

The home nation-states such as England were becoming more powerful and were able to project power and influence globally. They did not need private trading monopolies to further mercantilist or economic goals.

 

POSSIBLE LESSONS

 

The East India Company began as an aggressive overseas trading company that had to provide its own security in a violent and politically chaotic environment. For most of its existence, the company could not expect any military or political support from the English government. The company could bear these costs because of the very high profit margins it achieved. It crossed the line to become a colonial administrator. It became unprofitable and dependent on loans from the English government. Eventually, the English government stripped the EIC of its monopoly and took over its colonial empire.

 

After numerous failures to control spice production or dominate the spice trade, the EIC concentrated on entrepot trading in India, “country” trading throughout Asia and, eventually, the Chinese tea trade. This led to military conflict and political expansion in India, new trading stations between India and China (Singapore, Hong Kong), and conflict (The Opium War) when China attempt to stop the importation of opium that financed the tea trade. 

 

The EIC was doomed as European nation-states became more powerful, wanted colonies, and could use new military and communications technology to project power and influence throughout the world. A global economy followed, anchored first by England and then by the United States.

 

The East India Company illustrates the difficulty of combining the pursuit of wealth (profits) with the pursuit of power. In the end it could not be a profitable trading company, a colonial administrator, and an instrument of English global economic and political ambitions.

 

CONCLUSION

 

The EIC was the first modern multinational corporation (MNC). It operated far from home in the hostile, fragmented political environment in Asia. It had to pay the costs of self-protection. In doing so, it eventually adopted many of the functions of a sovereign nation-state. It also had to manage its often contentious relationship with English governments. 

 

The East India Company was born as part of the European expansion of rival nation-states to capture global trade and project power. As European countries conquered territory, established colonies, and projected military power anywhere in the world, private trading and colonization companies were replaced by extensions of the home country’s global reach. Royal governors replaced company officials and boards of directors. Free competition replaced government sanctioned trading monopolies. The modern international economic order began to take shape. 

 

The international political structure is now moving in reverse as the post-World War II economic and political order created mostly by the United States is breaking down. America seems to be less willing to pay for global political leadership, reverting back to its traditional policies of isolationism and protectionism. It hugely expensive military is paid for with deficit financing. Wealthy countries cannot pay for all of their programs; frustrations seem to be expressed in voting for nationalist political parties headed by authoritarian leaders. Most wealthy countries, including the United States, are attempting to limit immigration. Most of the more than 100 new countries created after World War II are dysfunctional or corrupt. Civil wars and local conflicts disrupt the global economy.

At the same time, the global economy dominated by multinational corporations operating on a global scale continues to expand. Markets, supply chain technology and organization, telecommunications, transportation, and finance are now all global. They all transcend national borders. Multinational companies have stronger economic links with similar companies in other countries than with the rest of their national economy.

While the East India Company operated in a different era, it may suggest some lessons for our times because it operated in an environment similar to the one currently evolving. The global political system constructed by the United States after World War II is breaking down. There are over 200 nation-states and territories. Many are poor or small. Many are autocratic (not democratic). But all are sovereign within their borders, although in many cases this sovereignty is limited.

The greatest danger now (2024-25) to multinational corporations, predominantly American, is the American government. President Trump's fluctuating tariffs and trade restrictions, attacking universities and greatly reducing research funds, cutting off immigration of technological and scientific personnel, increasing shipping costs, and extorting money from large companies, adversely impact multinational corporations. 

No country, with the possible exception of China, protects and supports its companies abroad. Many are state owned and share some similarities with the EIC.

Maybe multinational corporations, in this environment, will evolve to be more like the EIC. They will need some way to protect themselves from the “extractive” policies of political elites. Governments have power - sovereignty, guns, laws, forms of coercion, corruption and cooptation, “populist” support, that can be used against private companies. They have centralized bureaucracies and armies. But companies control most economic resources (except natural resources like fossil fuels and minerals) and innovate new technology. They have large financial resources. Employees of multinational companies may possibly have alternative loyalties.

For a wildly imaginative vision of a future society (not too future) dominated by powerful corporations similar to the EIC (with advanced technology similar to AI), see Neil Stephenson's The Diamond Age. The book centers around an English global company much like the EIC.  

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Elsewhere in this blog, I argue that the main form of America's economic competition, and probably geopolitical competition, with China will depend on the success of American companies in developing new technologies and global links. See

 

American Tariffs and the U.S. Economic War with China

For a case study of a country that became independent after World War II and illustrates the internal chaos of many countries, see

Nigeria

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