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

 

INTRODUCTION

 

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

 

HISTORIC BACKGROUND

 

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 EIC and other private companies. 

 

The East India Company was 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. 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. Contrary to their economic writings, they did not support free trade with India. 

 

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 class 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

 

The East India Company was willing to trade anywhere, 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.

 

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), 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 father-in-law.) 

 

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

                                    

The EIC started its evolution from a purely commercial company to an organization with its own substantial political and governmental responsibilities. For almost 100 years, 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 increasingly 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 oversite. 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 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. 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 economic structure is now moving in reverse as the post-World War II economic and political order is breaking down. 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. (for a wildly imaginative vision of a future society (not too future) dominated by powerful national corporations similar to the EIC (with advanced technology), see Neil Stephenson's The Diamond Age. It is easy to imagine that China is moving in this direction). 

 

The consequences of this trend for multinational corporations will be explored in a future post on Multinational Corporations.

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THE ALTERNATIVE:  THE DUTCH EASY INDIA COMPANY (VOC)

China is currently following another strategy - that of the Dutch East India Company (VOC).

The VOC was charted in 1602. Like the EIC, the VOC issued stocks and bonds to finance operations. Over the next two hundred years, the VOC owned more merchant ships and employed more traders than the EIC.

    It is the Dutch model of infrastructure for resources that China follows, not British or

    French colonialism that sought to administer and socially engineer entire societies...the

    objective was to secure trading posts and harness natural resource wealth, not to

    conquer the world for God or country.

        Parag Khanna, Connectography:  Mapping the Future of Global Civilization, 228.

In the Dutch East Indies (Indonesia), The Dutch allied with local rulers, build up the cities of Jakarta and Bandung, and built over 45,000 miles of roads to connect them and other ports and facilities.