College"Giants of An Earlier Capitalism": The Chartered Trading Companies As Modern Multinationals

The President and Fellows of Harvard College
"Giants of an Earlier Capitalism": The Chartered Trading Companies as Modern Multinationals

Author(s): Ann M. Carlos and Stephen Nicholas
Source: The Business History Review, Vol. 62, No. 3 (Autumn, 1988), pp. 398-419
Published by: The President and Fellows of Harvard College
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"Giants of an Earlier Capitalism":

The Chartered Trading Companies as
Modern Multinationals
ANN M. CARLOS and STEPHEN NICHOLAS
1 Much has been written about late-nineteenth-centurymultinationals and
their relationshipto the transnationalfirmsof the present, but both historians
and economists have largely discounted the relevance of the earlier chartered trading companies to this discussion. In an article emphasizing transaction cost analysis and the theory of thefirm, ProfessorsCarlosand Nicholas
argue that the trading companies did meet the criteria of the modern MNEthe growth of a managerialhierarchynecessitatedby a large volume of transactions and of systems to control those managers over space and time.
Economists have tended to view the growth and expansion of multinational firms primarily as an American phenomenon with roots in
the post-1950 period. Offering a corrective to the economists' view of
both the timing and the location of the international firm, economic
historians have found that the multinational was as much a European,
particularly a British, as an American development and that the late
nineteenth century was the seedbed of the new transnational corporation.1 Surprisingly,the early sixteenth- and seventeenth-century trading companies-the English and Dutch East India companies, the Muscovy Company, the Hudson's Bay Company, and the Royal African
Company-which traded goods and services across national boundaries
and had a geographical reach rivalingtoday'slargest multinationalfirms,
have been generally ignored.
This failure does not result from the lack of good data on the early
trading companies; detailed business histories exist for each company.
These early companies were characterized by cross-border transactions
through sales or production branches in two or more countries. Indeed,
the historianof each of the individualtradingcompanies implicitly treats
his firm as a multinational, and K. N. Chaudhuri has explicitly recognized that the East India Company had a premodern organization.2
ANN M. CARLOS is currently a visiting fellow at the Hebrew University of Jerusalem; as of July 1990 she
will be associate professor of economics at the University of Colorado, Boulder. STEPHEN NICHOLAS
is senior lecturer in economics at the University of New South Wales.
We would like to thank David Meredith and two anonymous referees for helpful comments.
' For a survey of the recent historical literature, see Mira Wilkins, "The History of European Multinationals: A New Look', Journal of European Economic IHistory 15 (Winter 1986): 483-86.
2 K. N. Chaudhuri, "The
English East India Company in the 17th and 18th Centuries: A Pre-Modern
Multinational Organization," in Companies and Trade, ed. L. Blusse and E Gaastra (The Hague, 1981), 29-46.
Business Ilistory Review 62 (Autumn 1988): 398-419. ? Copyright 1988 by The President and Fellows
of Harvard College.

CARLOS AND NICHOLAS: TRADING COMPANIES 399
Despite the work of these historians,data on the charter companies have

not been utilized to compare fully the early companies with their latenineteenth-century successors or to integrate the tradingcompanies into
the evolution of the modern multinational.The neglect of the early trading companies springs from the implicit belief that they were outliers,
offering little of historic or economic interest. In fact, Charles Wilson
compared the trading companies to dinosaurs, with small central
administrativeand controlling offices atop large bodies.3 The extinction
of all but a few trading companies by the twentieth century completed
the analogy.
SIMILARITIES
AND DIFFERENCES
This article argues that the early trading companies shared important characteristicswith today'smodern multinationals.Although at first
glance the nineteenth-century multinational looks much more like its
late-twentieth-century counterpart than do the charter companies,
appearances are misleading. The three business structures all developed
in the same way. Nineteenth-century international firms began as trading multinationalswhen they replaced merchant houses and agents with
sales branches abroad. Only after gaining experience as trading multinationals did the firms establish overseas production facilities. The
charter companies also began as trading companies with sales branches,
but many established production plants abroad early in their existence.
The Muscovy Company, for example, opened a rope house in Russia,
where it employed English craftsmen to make cordage, only four years
after the company's formation in 1553.4In Bengal, the Dutch East India
Company established a plant to refine saltpeter as early as 1641, a print
works for textiles ten years later, and by 1717 the company employed
over four thousand silk spinners in Kaimbazar.5Although the nineteenthcentury multinational became much more involved in production than
the early charter companies, the difference was one of degree, not of
kind.
Both the early trading companies and the late-nineteenth-century
multinationalsarose for the same reason:to economize on the high number of recurrent transactions.Yetbusiness historianshave focused exclusively on the late-nineteenth-century industrial transnationalfirm as the
modern multinational enterprise in embryo. Two criteria, the degree
of administrative control and the frequency of transacting, have been
used to date the origins of the modern multinational to the last decades
3 C. Wilson, "Multinationals,
Managementand WorldMarkets:A HistoricalView,"in Evolutionof International ManagementStructures,ed. H. F Williamson (Newark, Del., 1975), 111.
4 T. S. Willan, The Early Ilistory the Russia
of
Company(New York,1956), 40.
5 0. Prakash,The Dutch East India
Companyand the Economyof Bengal, 1630-1720 (Princeton, N.J.,
1985), 112-17.

400
BUSINESS HISTORY REVIEW
of the nineteenth century. As Mira Wilkins argued, the growth of "communications and transportation facilities made it possible (for the first
time in world history) to extend the span of managerialcontrol over substantial distances."6One of the few historians of multinationals to consider the early charter companies, Wilkins recognized that the trading
companies shared many similarities with the modern corporation, but
she thought that they failed to satisfy either criterion. Drawing on the
work of Alfred Chandler, Wilkins argued that the volume of transactions was not great enough to bring about a managerial hierarchy until
the late-nineteenth-century revolution in transportand communication.
The railroad,telegraph, steamship, and cable allowed managers to coordinate at a distance.7 According to Chandler, today's "small industrial
enterprises handle a far greater volume of transactions than did those
giants of an earlier capitalism-the Hudson's Bay Company, the Royal
African, even the East India Company."8
This is almost certainly wrong. The early trading companies were
characterized by a large volume of transactions, and they innovated in
mechanisms of administrative control to increase their information and
to reduce the costs of transacting internationally. In these two critical
respects, the early trading companies were indeed analogues to the
modern multinational. A transaction is defined as the transfer of a good
or service across a technologically separate interface, where one activity
stops and another begins.9 Thus, a transaction is an interchange of a
good or service between two or more contracting parties. Clearly, the
interchange can occur inter- or intra-firm and can involve either a
separate contract for each transaction or multiple interchanges within
one contract. For example, the firm may subcontract the production
of a good by specifying one formal inter-firm contract, or the firm may
enter into an employment contract, under which many intra-firmtransactions are undertaken by employees.
The volume of transactionsis central to the argument that the charter
companies were analogues to the modern business corporation. Some
extremely large contemporary multinationals do engage in millions of
transactionsdaily,but these firms do not represent the typical twentiethcentury multinational, which engages in many fewer transactions. The
volume of transactions of the nineteenth-century multinationals, which
historians have been willing to define as the precursors of the modern
multinational, was also much smaller than that of twentieth-century
giants. The typical late-nineteenth-century British multinational was a
6 Wilkins, "Historyof European Multinationals,"488.
7 Ibid.; Alfred D. Chandler,
Jr., "The Emergence of ManagerialCapitalism', mimeo, 1981, 1-3.
8 AlfredD. Chandler,Jr.,"TheGrowthof the Transnational
IndustrialFirmin the UnitedStatesand United
A
Kingdom: ComparativeAnalysis,"EconomicIlistory Review33 (Aug. 1980): 401-9.
9 Oliver Williamson, The EconomicInstitutionsof Capitalism(New York,1985), 1.

single-product, one-plant firm, producing in one foreign market.10In

contrast, the early trading companies had a higher volume of transactions than most nineteenth-century British multinationalsand than many
of today's international firms.
If one looks at only a fractionof the transactions,the invoicing of goods
between the factory at Batavia (present-day Jakarta,Indonesia) and the
head office of the Dutch East India Company, the volume of transactions filled "more than 500 fat volumes from the 17th century"' These
volumes include neither the intra-Asiantrade, which was more extensive than the trade with Europe during part of the seventeenth century, nor the transactions between the company's factors and local merchants in the Middle East, India, Batavia,and Japan,nor the transactions
covering the flow of trade goods from Europe to Asia. In addition, there
were transactions surrounding the building, chartering, and sailing of
ships, the building and maintenance of "factories" (warehouses or outposts, not production units), and payment for goods and services. Both
the English and the Dutch East India companies engaged in hundreds
of thousands of transactions every year, and even the smaller Hudson's
Bay Company was involved in tens of thousands of transactions between
the Indians and the local factor,the local factor and the ships' captains,
and the ships' captains and the principals in London. This large volume
of transactions occurred before the advent of the steamship, telegraph,
or other modern means of transportation and communication.
According to Chandler and Wilkins, it was the volume of transactions
that forced the replacement of owner-managers by teams of salaried
managers organized into hierarchies, which differentiated the modern
transnationalsfrom earlier firms. If our hypothesis that the early charter
companies experienced a large volume of transactions is correct, then
partners, unable to handle the high number of transactions themselves,
would have been impelled to create a team of managers to coordinate
the firms' activities in far-flungoutposts. This is exactly what happened.
For the Hudson's Bay Company,each factory was managed by a chief
factor, who carried out the trade with the Indians, managed the day-today operations of the post, and oversawthe general workers, or servants.
One chief factor,answerableto the Court of Directors in London through
the correspondence committee, was appointed with control over all the
factories on the Bay.'2 The English East India Company's Court was
served by subcommittees for accounts, buying, private trade, presidencies, shipping, and treasure; the Dutch East India Company had com'o Calculatedfrom a sample of 448 pre-1939Britishmultinationals.In the sample,31 percent of the largest 1918-39 multinationals(those with paid-up capital greater than ?4.5 million) had only one overseas
branch.
" K. Glamann,Dutch-AsiaticTrade,1620-1740 (The Hague, 1981), 269.
12 E. E. Rich, lHudson's
Bay Company,1660-1760 (The Hudson'sBay Record Society, 1958), chap. 7.

402
mittees for receipts, equipment of ships, accounting, commerce, and

correspondence.'3 The home-based managers of the Dutch company
corresponded with the Batavia Government, and those of the English
company corresponded with President and his Council in each of the
company's separate trading regions in Asia; these in turn controlled the
local managers in the branch factories.14
Thus, if we accept Chandler's argument that the existence of a
managerial hierarchy is a defining characteristic of the modern business enterprise, we must reject his suggestion that managerial hierarchies are entirely modern.15 In this crucial aspect, the trading companies of the seventeenth century were analogous to the modern
multinational, the same in kind but different in degree.
Although there are striking similarities between the early chartered
companies and the modern multinational, their differences also must
be explicitly recognized. They operated in different historical environments, both economically and politically. K. N. Chaudhuri argued that
"the organization and the conduct of the East India trade could not
be strictly separated from the conduct of national foreign policy," and
K. G. Davies found that the RoyalAfrican Company "preserved English
interests, the company carrying the national burden."'6The early trading companies differ also in that the head office managers were usually
owners with a minority share, whereas today's senior managers may be
shareholders, but they usually hold an insignificant number of total
shares. These trading firms operated in a pre-industrial world, where
a system of capitalist international trade had to be grafted onto a
premodern system of artisan and peasant production. 7 Given their economic environment, the ability of these firms to develop hierarchical
structures is all the more remarkable.
This article integrates the charter companies into the historical work
on the evolution of the modern multinational and into the recent theoretical literature on the origin and growth of firms. We focus on two
elements that made the early trading firms analogues to the modern
multinational: first, the institution-the managerial hierarchy-that
developed to economize on transactioncosts arising from a high volume
of transactions and second, the mechanisms that the managerial hierarchy used to control its managers at a distance. Drawing on the transaction cost literature used to explain modern multinationals, we briefly
specify a model for the existence of international firms. Next we apply
13K. Chaudhuri,The TradingWorldof Asia and the EnglishEast India Company,1660-1760 (New York,
1978), 267, 26-27; Glamann, Dutch-Asiatic Trade, 5.
14
Chaudhuri, Trading World, 27; Glamann, Dutch-Asiatic Trade, 186.
15Chandler,
"Emergence of Managerial Hierarchy," 1; Alfred D. Chandler, Jr., The Visible Iland: The
ManagerialRevolutionin AmericanBusiness (Cambridge,Mass., 1977), 7.
16
Chaudhuri, Trading World, 455; K. Davies, The Royal African Company (London, 1957), 264. Of course,
some present-day multinationals, such as the United Fruit Company, have exercised a quasi-political function.
17
Chaudhuri, Trading World, 455.

this model to the charter companies to show how the trading firms
economized on transaction costs related to a large volume of repetitive
transactions in the international market. Finally, we employ the theory
to analyze the internal control structures used to monitor and assess
the behavior of the companies' managers.
THE CHARTERED
TRADING COMPANIES
The sixteenth and seventeenth centuries saw the evolution of the

joint-stock company, of which the chartered trading company was an
important example. In this article we focus on five of the companies
chartered during the period and involved in long-distance trade-the
Muscovy Company, chartered in 1553 and disbanded in 1746; the East
India Company, chartered in 1600 and wound up in 1858; the Dutch
East India Company, chartered in 1602 and dissolved in 1799; the
Hudson's Bay Company, chartered in 1670 and still operating; and the
Royal African Company, chartered in 1672 and disbanded about 1712.
Our sample, spanning a hundred years between the first company
chartered and the last, is broadly representative of the seventeenth- and
early-eighteenth-century joint-stock trading companies. These companies captured trade to virtually every known corner of the globe, from
Russia to India, from Africa to Canada. The companies differed in size
and in the quantities of goods traded; the two East India companies
were the largest in terms of the value of business conducted, and the
Hudson's Bay Company was the smallest.
The sizes of the head offices also varied. Both the Royal African and
the Hudson's Bay companies had small central offices, growing from
six to twenty permanently salaried managers (excluding the Court) by
1700, whereas the Dutch and English East India companies employed
over 350 head office administratorsby the mid-eighteenth century. Few
late-nineteenth-centuryBritish multinationalshad an administrativestaff
greater than the Hudson's Bay or RoyalAfricancompanies, and few British interwar multinationalscould claim a head office administrativestaff
of 350 people.18As late as 1968, a survey in ManagementTodayreported
that 66 percent of the top 120 British companies had no hierarchy other
than the chairman and managing director. 9 Even at a large American
multinational-Standard Oil, on the eve of dissolution in 1911-the
general administration of the entire company numbered just over one
thousand individuals,and Jersey Standardhad fewer than three hundred
18Recently,T. R. Gourvishhas reemphasized familycontrol in British firms, the lack of administrative
hierarchies,and the absence of innovationsin managerialstructuresbefore 1950.T. Gourvish,"BritishBusiness and the Transitionto a CorporateEconomy:Entrepreneurshipand ManagementStructures,"in Enterprise, Managementand Innovationin BritishBusiness,1914-1980,ed. R. P.T. Davenport-Hinesand Geoffrey
Jones (London, 1988), 18-45.
19D. F Channon, The Strategyand Structure British
of
Enterprise(London, 1973), 212.

404
THE DUTCH EAST INDIA HOUSE, AERIAL VIEW

This early-eighteenth-centuryengraving shows the expanse of warehouse and office space
occupied by the Dutch East India Companyon the Hoogstraatin Amsterdam. (Reproduced
from J. C. Overvoorde and P de Roo de la Faille, De Gebouwen van de Oost-Indische
Compagnie en van de West-Indische Compagnie in Nederland [Utrecht, 1928], 21.)
administrators, fewer than the Dutch East India Company 160 years
before.20
Although the chartered trading companies differed in certain
characteristics-date of charter, size, and location of trade-they were
remarkablysimilar in the way they organized their business. The seventeenth and early eighteenth centuries were periods of experimentation
in business form, yet all of these companies chose the same methods
to lower the costs of doing business internationally. They chose to
become vertically integrated firms rather than to conduct their business through the market. They chose this route not because a private
market did not exist, but because operating by managerial fiat inside
the hierarchical firm was less costly than using the market.
TRANSACTION
COSTS AND THE ECONOMICS
OF AGENCY
The new institutional economics argues that firms arise as institutions for transacting in goods and services when the costs of managerial
coordination are less than the costs of using the market.21Transaction
20
Ralph Hidy and Muriel Hidy, Pioneeringin Big Business, 1882-1911 (New York,1955), 580.
See Williamson,EconomicInstitutions;Peter Buckley and MarkCasson, The Futureof the Multinational Enterprise(London, 1976);MarkCasson,Alternativeto the MultinationalEnterprise(London, 1979);
21

EAST INDIA HOUSE, c. 1840

From modest beginnings, the English East India Company soon outgrew its quarters, and
several additions and renovations were made during the eighteenth and nineteenth centuries to house goods and staff: The company's meeting rooms and warehouses eventually
covered afull block between Leadenhall and Lime streets. (Froman engraving by W Wallace, reproduced in William Foster,The East India House: Its History and Associations
[Edinburgh, 1924], facing p. 146.)
costs in arms-length markets include the costs of gaining information

and of negotiating, monitoring, and enforcing contracts for the exchange
of goods and services. Firms economize on transaction costs by replacing the price mechanism in the market with fiat inside the firm. Internalization of these market transactionstakes the form of vertical integration. According to Chandler, the increase in the frequency and volume
of transactionsbrought about by the expansion of marketsmade administrative coordination more efficient and profitable than market coordination.22In this section we analyze the costs of transacting in the markets in which the trading companies functioned, and we show how the
trading companies used managerialcoordination to economize on these
costs.
The degree of hierarchy is a function of the frequency and volume
of transacting, but hierarchical coordination by salaried managers poses
John Dunning, International Production and the Multinational Enterprise (Winchester, Mass., 1981); Diane
Hutchinsonand Stephen Nicholas,"Theoryin Business History:New Approachesto InstitutionalChange,"

Journalof EuropeanEconomicIlistory (forthcoming,1989). The transactioncost approachis from the same
generic literatureas that employed by Douglass North. See North, Structureand Changein Economiclhistory (New York,1981).
22 Chandler,VisibleIland, 8.

406
its own costs related to the economics of agency. Such costs are particularly evident in long-distance trade, where it is especially difficult to
ensure that managers will use their discretionary powers to the best
advantage of the company. Agency problems arise when incomplete
information and uncertainty are explicitly recognized.23 Asymmetries
in information meant that the principal or managers in London or
Amsterdam had different quality information than their agents
(managers)in India, Batavia,or Hudson Bay.Informationalasymmetries
give rise to hidden action, typically the amount of effort put into task
completion by the agent, and hidden information,which relates to observations available to the agent but not to the principal. The principals
at home thus cannot determine whether their managers abroad act
opportunistically by failing to use their better information in the way
best calculated to serve the principals' interests. Nor can principals simply evaluate the work of their agents on the basis of results. An energetic agent may have fewer sales than an inactive one, for example,
because of fluctuations in demand caused by poor harvests and famine.
Hidden action and hidden information make the employment relationship between the principal at home and the managersabroada decision problem under uncertainty. Since no employment contract can
specify for the agent a set of actions to meet every contingency, companies use a number of mechanisms to reduce the costs of agency. First,
the remuneration package in the employment contract uses fixed and
incentive fee payments to reduce opportunism and maximize effort. In
addition, managers must promise in their contracts to work hard and
in the interests of the principal. Since it is costly to write and enforce
contracts, firms also establish systems to monitor the behavior of
managers and to supplement information on outcomes.
Having created large hierarchies of salaried managers, the trading
companies employed all these methods to overcome the costs of agency.
Further, they created information by requiring written records of decisions and notification of compliance to orders from home and by
implementing rules and procedures that regularized action.
ECONOMIZING
ON TRANSACTION
COSTS
The trading companies were vertically integrated firms that undertook the entire range of activities from the procurement of commodi23 For recent work on
agencies see Kenneth J. Arrow, "The Economics of Agency," in Principals and Agents:
The Structure of Business, ed. J. Pratt and R. Zeckhauser (Boston, Mass., 1984), 27-51; N. Strong and M.
Waterson, "Principals, Agents and Information," in The Economics of the Firm, ed. R. Clarke and T. McGuinness (New York, 1987), 18-61; M. Jensen and W. Meckling, "Theory of the Firm: Managerial Behavior, Agency
Costs and Ownership Structure," Journal of Financial Economics 3 (Nov. 1978): 305-11; S. Ross, "The Economic Theory of Agency: The Principal's Problem," American Economic Review 63 (May 1973): 134-49;
Williamson, Economic Institutions, chs. 2, 3, 8; E. Fama and M. Jensen, "Separation of Ownership and Control," Journal of Law and Economics 26 (June 1983): 301-26.

CARLOSAND NICHOLAS:TRADINGCOMPANIES407
ties in distant lands to their wholesaling in Europe. These transactions

included the purchase of trade goods for export from Europe, the requisitioning of ships and manpower for the transportation and subsequent
sale of these goods abroad,and finallythe procurement of imports,which
required grading and standardizationfor shipment and sale in Europe.
Each of these cycles of activity normally took eighteen months to twoand-a-half years to complete, making it important for the company to
have good information about the level of supply and demand and about
the preferences and tastes of consumers. These activities could have
been undertaken by separate firms transacting through the market, but
as this section shows, it was the efficient processing of informationabout
transactions in each of these areas that gave the early trading companies their advantage over the market.
In the seventeenth-century internationaleconomy, with markets separated by time and space, market information was highly imperfect. In
such a world the domination of the market by many individual traders
would have led to large fluctuations in both price and quantity. In fact,
as Davies points out, when the RoyalAfricanCompany collapsed in 1712,
"separate traders ... neglected small colonies, starved Barbados, and
by competition in Africahelped to force up prices."24The need to equate
supply and demand in markets with imperfect information is integral
to our understanding of why trading companies existed. As Chaudhuri
rightly argued in regard to the English East India Company, "with supplying and consuming markets separated by thousands of miles and
served by slow means of communication, it was of utmost importance
that a systematic solution should be found to the problem of maintaining equilibrium between supply and demand."25The frequent and recurrent nature of transacting led to the rise of a specific governance structure, the trading company, which used hierarchies of salaried managers
to economize on the market. By collecting and processing information
about different markets, the charter companies drew up the "indents,"
or lists of commodities to be procured, in both Asia and Europe, giving
the companies an enormous advantage over the market as the means
of equating supply and demand.
From the beginning the Courts of Directors organized trade on the
basis of a committee system. For example, the Amsterdam chamber of
the Dutch East India Company had four committees in 1602: for the
signing on of the crews, for victualling, for procuring ships, and for merchandise.26The Court had to gather information by monitoring the official correspondence with the foreign outposts. This correspondence
specified stock levels, amounts of advances, debts, and credits; it also
24 Davies,
Royal African, 312.
25 Chaudhuri,
World,37.
Trading
26J. R. Bruijn, F S. Gaastra,and I. Schoffer,Dutch-Asiatic
Shipping(The Hague, 1987), 19.

408 BUSINESSHISTORYREVIEW
contained letters and reports on the nature of the trade, import and
export invoices for all goods, including cost-price data, and samples collected, which were sent to the European head offices.27 In addition to
this official intelligence, the companies relied on informal, unofficial
reports sent privately and confidentially by their servants.28
This great flow of information quickly overwhelmed the Court of
Directors, limiting their ability to process the data and to make decisions. One solution to this problem was the growth of the subcommittee system, staffed by salaried managers from the home office. Within
a decade of its formation in 1600, the English East India Company had
evolved the correspondence subcommittee as the "central problemscanning body ... which first read all letters and reports."29 Four years
after its formation, the Dutch East India Company formed a committee to process data on receipts and accounts, and in 1649 it created a
separate correspondence committee "as a means for relief, especially
of the very time-consuming and important task of reading and answering reports and letters from India."30 Both the Royal African Company
and the Hudson's Bay Company had a subcommittee system from the
beginning.31 The administrative organization created at home by the
charter companies was mirrored in the system of local head and subordinate factories in the Indies, North America, Russia, and Africa.
For each of these early trading companies the basic administrative
structure solidified quickly, although there were improvements as the
committee structure evolved over time. According to Chaudhuri, as early
as the 1620s the English East India Company had established a stable
administrative organization in the Indies; "By 1640 the company had
almost fully developed the institutional and commercial framework for
its trading needs, and the structure of its operations in the restoration
period and even in the early eighteenth century appears to have contained very little modification to the basic system created during the
early seventeenth century"32 The rapid establishment of subcommittee organization demonstrates not only the managers' adaptation to a
high volume and frequency of transactions, but also their ability to learn
from other trading firms. The Dutch East India Company organization
of 1602 reflected the structure of the voorcompagnieen, and joint directorships in the English chartered companies provided a mechanism for
the transfer of managerial expertise between firms.33
27 A.
An EconomicAnalysisof Relationsbetweenthe Indians

Rayand D. Freeman,"GiveUs GoodMeasure":
and the lIudson's Bay Company before 1763 (Toronto, 1978), 81-87; Chaudhuri, Trading World, 28, 58, 74-75;
Prakash,Economyof Bengal, 262-65; Glamann,Dutch-AsiaticTrade,89.

28Chaudhuri,TradingWorld,75; Willan, Russia Company,23-24.
29
Chaudhuri,TradingWorld,29.
30 Glamann,Dutch-AsiaticTrade,5.
31Davies, African Company,158.
32 K. Chaudhuri,TheEnglishEast India Company:TheStudy an EarlyJointStockCompany,1600-1640
of
(New York,1965), 15-20.
33Bruijn,Gaastra,and Schoffer,Dutch-AsiaticShipping,6. The voorcompagnieenwere the predecessors
of the Dutch East India Company.

The committees began to ask for more detailed and specific information on markets, tastes, and local politics in addition to the standard
reports.The Muscovy Company wanted to know what export goods were
the most acceptable, and the East India Company sought detailed and
precise information on the nature of demand, leading the company to
issue a standing order that "Lists be yearly sent us, of the several sorts
of goods and their quantities that are vendible."34Similarly, the Hudson's Bay Company wrote to GovernorJohn Bridgarin 1683, "we expect
to receive a very exact account from you of all our concerns and particularly of what goods you have traded and what remains with you of all
sorts of provisions and stores as well as of goods and Merchan[d]ises
which you must carefully observe to do every year that we may the better know how to supply you."35 These information flows reduced risk
and uncertainty,attenuating the costs of transactingthrough the market.
As trade grew, the frequency and repetition of transactions called into
existence a managerial hierarchy, which used the regular and detailed
flows of information to coordinate the movement of goods by administrativefiat. The companies had to establish a causal relationshipbetween
the sale price in Europe and the cost price abroad, given the customs
duties, freight costs, and fixed costs related to their factories. On the
basis of the information flows, the companies in Europe made investment decisions, instructing the factories abroadwhat quantity and quality of goods to purchase. Like today's modern corporation, the trading
companies forecast future demand on the basis of historical levels of
demand and prices, and these projections formed the basis for the orders
placed in their annual lists of goods for procurement abroad. The factors of the Muscovy Company, for example, were told the prices of the
goods sent so they could judge the best price for them in Russia, and
the English East India Company sent printed sales books of auction
prices to India to help their factors determine buying prices.36The Hudson's Bay Company set the standardsof trade,specifying the actual prices
to be paid for furs.37
In addition, all the companies established rules on procurement,
which remained in force for up to eighteen months, the turn-around
time on communications with Asia. Each ship of the English East India
Company brought back exact details about the stock in the warehouses
and the amounts contracted for but not delivered, so the London auctions could be planned.38 Similarly,the trading companies had to estimate the future demand for European goods in distant export markets,
and they faced the problem of matching the supply of export goods to
34Willan, Russia Company,31; Chaudhuri,TradingWorld,221.
35Ray and Freeman, "Give Us Good Measure'",

87.
36 Willan, Russia
Company,31; Chaudhuri,TradingWorld,299-300; 457.
37Rich, Iludson's
Bay Company,145.
38Chaudhuri, TradingWorld,303.

410
HUDSON'S BAY COMPANY

TRADE TOKENS
the te
and i
These tokens, called "beavers"

because of their representationof
the value of beaver pelts, became
an accepted medium of exchange
throughout the territories in
which the Hudson's Bay Company traded. (Reproducedfrom
sketches in Beckles Willson, The
Great Company,being a History
of the Honourable Company of
Merchants-AdventurersTrading
into Hudson's Bay [Toronto,
1899], 458.)
the tastes and demands of Asian, African, and North American consumers. How well the companies' orders in the list of goods for export
and import were filled depended, in the first instance, on the system
of procurement.
To procure exports, the companies employed a number of modes,
including spot markets (where goods were bought and delivered "on
the spot"), customary arrangementswith independent traders,and longterm contracts with manufacturers.In Europe, the companies were able
to use the already well-established marketing networks for the purchase
of copper, iron, woolen cloth, coral, ivory,knives, guns and gunpowder,
amber, and crystal beads. Nevertheless, many of the companies sought
ways of reducing the costs of using spot markets. For example, the Royal
African Company instituted forwardcontracts for iron and copper that
specified the quantities, quality,prices to be paid, and the dates of deliv-

ery.39Both the Hudson's Bay Company and the RoyalAfrican Company

put out tenders, and encouraged the establishment of local production.
The charter companies, particularly those trading in Asia and Russia, dealt with a much larger range of commodities in the import trade
than in exports; the English East India Company required over two
hundred pages in its ledger book simply to list the goods purchased.
Abroad, each company had to use differently organized and much less
familiar trading networks than those utilized in Europe. Both the Hudson's Bay and the Muscovy companies created a new market, whereas
the other companies plugged into trading systems already in existence.
But in each case it was the frequent and recurrent nature of transacting and the type of trade goods that allowed the companies to invest
in specialized physical capital in the form of factories (outposts). Of
course, the factories fulfilled military and diplomatic functions, providing protection for the companies' men and goods and flying the flag
in distant and hostile lands; but more significantly, this forwardintegration reduced the costs of transactingbelow those of market trading.The
factory acted as both a symbolic and a physical bond, representing the
companies' long-term commitment to a new market as well as providing a building for holding inventories of trade goods to supply the foreign market and to fill the yearly shipments to Europe.40Only for the
RoyalAfricanCompany did the costs of factories outweigh their benefits.
The volume of the company's trade and the type of cargoes-slaves and
perishable foodstuffs-did not argue for the establishment of factories,
but political rather than economic considerations seem to have been
paramount in the Royal African's case.41
The frequency of transacting explained not only the need for physical capital in outposts, but also for the investment by the charter companies in specialized human capital. Skilled traders, expert in trade
negotiations, foreign languages, assessing the quality of goods and determining their proper handling, storage, and loading, allowed the trading
companies to reduce their transacting costs below that of the market.
Since there were, for example, four different kinds of cloves, the Dutch
East India Company found that it required detailed knowledge for the
purchase of spices, and the Muscovy Company sent specialized craftsmen, with a knowledge of wood and furs, to oversee the purchase of
those goods in Russia.42
The Asian factors and expert buyers employed spot markets, but they
too reduced the costs of market transactingby entering into agreements
with customary traders and middlemen and by contracting for imports
39 Davies,
African Company, 171.

The only case in which European companies did not establish factories was in the trade with Imperial
China, where supercargoes were used to trade with the Hong.
41 Davies, African Company, 240.
42 Glamann, Dutch-Asiatic Trade, 16; Willan, Russia
Company, 39.
40

412
YORK FACTORY,
c. 1700
YORK FACTORY,
c. 1840
One of the early Hudson's Bay Company outposts, Yorkfactory was on the western side
of the Bay and served as a jumping-off point into the interior. The later sketch shows the
development of thefactory. The early tents have been replaced by sturdier buildings, which
housed warehouses and a trading post as well as factors. (Reproducedfrom sketches in
Beckles Willson, The Great Company, being a History of the Honourable Company of
Merchants-Adventurers Trading into Hudson's Bay [Toronto,1899], 355 and 502.)
directly with local manufacturers.In Bengal, the Dutch East India Company wrote contracts with local merchants for the supply of textiles,
specifying the quantity, price, delivery date, and advance that the company would supply to the weaver.43The local merchants also oversaw
production. In by-passing the market, the company had to assess the
reputation of the merchant and guard againstbad debts, poor workmanship, and late delivery. To overcome these problems of opportunism by
the local merchants, the company terminated the contracts of agents
who cheated, kept cash advances to merchants low, inspected looms
to ensure quality, and reduced agreed prices for poor quality and late
delivery.44The English East India Company avoided the problems of
dealing with local merchants by making contracts directly with Bengali
weavers.45Direct contracting meant that the company had to invest in
a local factory and arrange to transport the cloth from the weaver to
43Prakash,Economyof Bengal,98-110.
44 Ibid., 108-12.
45Chaudhuri,TradingWorld,353.

the factory,and from the factory to the seaport, tasks that had been part
of the merchants' job.
Finally, the trading companies replaced the market by vertically
integrating into production. In Russia, the Muscovy Company established a factory for making cordage, employing English craftsmen. As
a result, though the company often complained about the poor quality
of other export goods, it reported that its cordage was always good.46
Both the Dutch and the British East India companies owned saltpeter
and silk spinning factories in India.47Transaction cost theory suggests
that when the frequency of transacting in a particular product is high
and product quality difficult to assess, then local production should
replace subcontracting. Indeed, the chartered companies undertook
local production under precisely these circumstances.
After the companies' managers had procured the trade goods abroad,
the scheduling of the fleets required the transmittal of detailed instructions regarding loading and sailing, if supply and demand were to be
equilibrated in Europe. In each outward letter the English East India
Company sent orders for the efficient disposition of ships, specifying
sailing times and giving orders for the maximum utilization of space
and capacity48The Muscovy Company set down a precise sailing schedule, with ships leaving London at the beginning of May,reaching Russia about 1 June, staying for thirty days before leaving Russia to return
home by August.49Similarly, the English East India Company scheduled sailings to ensure that their ships would catch the global trade
winds, and they set 13 January as the date beyond which the servants
in India were not, at least theoretically,allowed to delay sailings.50Careful
scheduling of sailings was particularly important for the Hudson's Bay
Company, because "experience had already taught that if the ships left
London later than 25th May they would be too late for the return voyage
to be made in the same year, there would be no furs for sale and captains and crews would have to be paid for the whole year."51
Besides coordinating sailings, the managers also supervised the loading of ships. The Dutch East India Company "continually supervised
the effective use of the tonnage, not least the ballast, and made complaints when the Bataviangovernment e.g. used old iron instead of merchandise."52Particularly important were the instructions for the loading of the mixed commodities that were sent by Asian and African
traders.The East Indian companies were anxious to prevent the product
deterioration that had occurred in the early years of the trade, when
46 Willan, Russia
Company,40, 78.
47Prakash,Economyof Bengal, 112-17.
48Chaudhuri,TradingWorld,71-72.
49 Willan, Russia
Company,49.
50Chaudhuri, TradingWorld,72.
51 Rich, lHudson'sBay Company,91.
52Glamann,Dutch-AsiaticTrade,25.

414
silks arrived discolored from moisture, coffee was placed in ships carrying pepper, which contaminated the coffee and reduced prices by 8 to
10 percent, and pepper was used as ballast, enduring rough handling
that reduced its value.53
In all of these functions the trading companies were institutions for
economizing on the costs of using the market. Called into existence by
frequent and recurrent transacting, their administrative hierarchies
reduced risk and uncertainty by collecting information, and they
replaced the market as the device for transacting in long-distance trade.
In the place of decentralized and fragmented trading relations, the
charter company imposed a bureaucratic and hierarchical organization.
But tradingcompany organizationdid not eliminate costs, since the need
to monitor and assess the performance of the companies' salaried
managers generated costs of its own.
MANAGING THE MANAGERS
The primary activity of the companies' managers abroad was trading, but they also supervised the work force of general servants, oversaw the sailing and loading of ships, and carried out quasi-political and
diplomatic functions as representatives of European governments. In
the area of trade, the problems of hidden action, hidden information,
and opportunistic behavior loomed large, requiring the principals in
Europe to monitor and assess the performance of their agents abroad.
To attenuate opportunism and to encourage the managers to work in
the best interests of the company, the principals wrote a generous
employment contract for their managers. Besides a wage component,
The English
the companies provided housing, food, and transportation.54
East India Company, Chaudhuri found, motivated its senior servants
by "high and generous salaries."55The Agent-General of the RoyalAfrican Company in 1680 received ?600 per year, free board and lodging,
plus a gratuity of ?200 at the end of three years' service in exchange
for abstainingfrom privatetrade.56The method of payment varied among
the companies: the Hudson's Bay and Dutch East India companies held
money in London and Amsterdam on their agent's accounts; the Muscovy Company paid some wages in rubles; and the Royal African paid
its men from the gold collected in Africa.57
53Ibid., 149, 193; Chaudhuri,TradingWorld,368.
54 Ann Carlosand
Stephen Nicholas,"Managingthe Manager:The Hudson'sBayCompanyand the Economics of Agency,"mimeo, 1988, 10-11;Willan, Russia Company,37-38.
56 Davies,
African Company,252.
57Bruijn,Gaastri,and Schoffer,Dutch-AsiaticShipping,150; Willan, RussiaCompany,249; Davies, African Company,253.

In addition to providing a high real wage component, most companies, at least in the beginning, permitted private trade. Designed to call
forth a high level of effort, private trade also encouraged opportunismmanagers' maximization of their private welfare at the expense of the
company. Vertical integration merely internalizes transaction costs
between contracting parties in the market, thus decreasing, but not
eliminating, these costs. Opportunism by the firms' managers was
quickly recognized as a problem. After only two years of operation in
Canada, the Hudson's Bay Company banned private trade; the Royal
AfricanCompany,after first curbing privatetrade, abolished it after eight
years of operation.58According to J. S. Willan, the Russia Company was
concerned about "horedom, incontinency, drunkeness and idellness,"
but the greatest evil was private trade.59In 1710 the Dutch East India
Company accused the Bengali factories of putting aside the most profitable assortment of textiles for their own benefit, and the English East
India Company complained that the inter-Asian trade was poorly developed because of private trade.60Private trade, then, was a major area
of conflict between the companies' "official objectives and the private
interests of its agents."61
In response to the problem, the trading companies either curtailed
or abolished private trade. The Hudson's Bay Company, the RoyalAfrican Company, and the Muscovy Company tried to end private trade by
requiring their managersto take an oath promising not to trade privately,
by assigning pursers on ships, searching all vessels, and reading their
servants' private correspondence to detect violations, and by requiring
bonds from their managers as insurance against private trade.62Despite
these steps, none of the companies was successful. In 1691, nine years
after it banned private trade, the Royal African Company wrote, "We
have reason to complain that our factors and some of the chiefs manage
private trade, which is the way to encourage interlopers and ruine our
stock by bearing the charge without having the advantage."63All three
companies continued to monitor the private trade of their agents by
carefullymarkingand checking outwardand inwardcargoes and by offering rewards to ships' captains who detected illegal goods.
Both the Dutch and English East India companies allowed private
trade, but they tried to restrict it within acceptable limits. When the
English East India Company increased its trade with China, the freedom of its servants and ships' captains to purchase tea privately was
58Carlos and Nicholas, "Managingthe Manager,"11;Davies, African Company,111.
59Willan, Russia Company,37.
6 Glamann,Dutch-AsiaticTrade,147; Chaudhuri, TradingWorld,208.
61
62 Davies,
AfricanCompany,256; Willan, RussiaCompany,27, 37, 247; Carlosand Nicholas, "Managing
the Manager,"12-14.
63 Davies,

416
TRADING AT CANTON, 1785

Most European trading companiesfirst used supercargoes-agents who traveled back and
forth with shipmentsof goods-rather than residentfactors in dealing with China. Nevertheless, the companies gradually built warehouses, offices, and otherfacilities, and in the late
eighteenth century supercargoes began to remain behind in China to manage the procurement of goods for the next year's sailings. (Colored lithograph by W Daniell, reproduced
in Hosea B. Morse,The Chronicles of the East India Company Tradingto China, 1635-1834
[Cambridge, Mass., 1926], 2: facing p. 144).
severely curtailed.64The chief factorwas responsible for obtaining a high

level of effort from the company's servants and for ensuring that private
trade did not dominate official trade. Chief factors who failed in these
functions were dismissed, jeopardizing their bonds and, in the case of
the Hudson's Bay Company,where no alternative employment existed,
paying their own way home.65To identify the shirkers, the companies
relied on the information flows used to regulate supply and demand.
The Hudson's Bay, East India, and Royal African companies set down
precise regulations governing every aspect of the keeping of accounts
and correspondence, enabling the companies to monitor its agents carefully.66The irregular accounts kept by the Bencoolen factory,for example, convinced the Court of the English East India Company that the
managers there were corrupt.67
In addition, the companies examined order lists and manifestsof goods
received to calculate the difference between quantities ordered and
those actually delivered, and they used the size of the gap as an inverse
measure of performance.68The companies in the Asian trade used the
ratio of capital to tonnage to assess performance, and the Hudson's Bay
64 Chaudhuri,
65 Carlos and
TradingWorld,386.
Nicholas, "Managingthe Manager,"20-21; Chaudhuri,TradingWorld,302.
66 Carlos and Nicholas,

"Managingthe Manager,"16.
67 Chaudhuri,
World,65.
68 Ibid.,
Trading
61, 304.

Company calculated each post's ratio of trade goods to furs to evaluate

profitability69Bad debts and the actual quantity of goods delivered also
identified possible opportunism.The Dutch and English East India companies used the amount of outstanding credit on advance contracts to
local merchants to assess performance, and the Hudson's Bay Company
kept a careful watch on the "overplus, the difference between the actual
price paid to the Indians and the "Official Standard."70
Inventory lists and surveys also allowed the principals in Europe to
monitor their agents. When the Dutch East India Company experienced
low stocks of pepper in Europe, the company complained that its agents
in Batavia had failed to utilize the available tonnage efficiently. In the
1620s, the company found that it had stockpiled between five and seven
years' supply of cloves, a problem attributed to oversupply by its agents
in Batavia.7'Performance in some areas could be assessed directly by
whether the ships sailed on time, their load factor, and the care used
in loading mixed cargoes. The companies gave their managers abroad
regular reprimands over failures in each of these areas, with dismissals
and demotions for recidivist factories.
Returns were a powerful informationsource for controlling managers,
and they could be used either as a relative or as an absolute standard.
The growth of the Bengal factories of the Dutch East India Company
was restricted because of poor returns, for example, whereas the
Coromandel factory was encouraged to expand.72 On the basis of its
poor performance relative to other factories, the Bengal Council was
dismissed by the East India Company in 1732.73The RoyalAfricanCompany measured performance by output, calculating the charge for the
whole voyage according to the number of live slaves landed in the West
Indies, no separate charge being made for the London-African run.74
There were, of course, other absolute standardsfor judging performance.
When the Bengal President of the East India Company was found to
have large borrowingsfrom Calcutta cloth merchants, which turned him
into an agent acting for them and subordinatingthe company'sinterests,
his service was terminated in 1739.75The Royal African Company dismissed its chief merchant at Sherbro in 1705 when he saved his own
belongings, and neglected the company's, during a French attack; two
years later the chief factors at Sekondi, Dixcove, and Anomabu were
dismissed on similar charges of inefficiency and pusillanimity.76
69 Carlos and
Nicholas, "Managingthe Manager,"18.

Chaudhuri,TradingWorld,457; Carlos and Nicholas, "Managing
the Manager,"15-18.
71 Glamann,Dutch-AsiaticTrade,87, 93-95.
72Ibid., 66.
74Davies,
75
76 Davies,
African Company,256. Sherbrois in modern SierraLeone; Sekondi, Dixcove, and Anomabu
are along the coast of present-day Ghana.
70 Glamann,Dutch-AsiaticTrade,147;

418

CONCLUSION
The defining characteristic of modern business enterprise is a hierarchy of salaried managers who make basic decisions over production,
distribution, and prices. Their innovations in this new form of business
organization-the managerial hierarchy-make the sixteenth- and
seventeenth-century trading companies analogues to the modern multinational. The managers who controlled the early trading companies
grappled with the problem of coordinating the flow of goods, services,
and information over long distances and with the need to extend head
office control over the company's managers abroad. The same necessity confronted the managers of the late-nineteenth-century multinationals, who derived central functional and multidivisional forms of
organization to counteract similar problems. The managers of the largest internationalfirms today still search for new structures to overcome
the problems of coordinating goods and people at a distance as they
innovate into global product and area divisions. The charter companies
shared a common business organization with modern firms, and they
are important both historically and economically.
The rise of managerial hierarchies in both the early trading companies and today's multinationals was the result of the frequency and
volume of transacting. The market, with imperfect information and
uncertainty, is not a costless institution for transacting the exchange of
goods and services. When the transaction frequency is high, then teams
of managers can coordinate the flow of goods and information more
cheaply than the market. This transaction cost explanation of the
operation of firms applies to the development of the charter companies
of the sixteenth and seventeenth centuries as much as to their modern
counterparts in the nineteenth and twentieth centuries.
Applying the transaction cost approach, we argue that in an uncertain world, where informationwas imperfect, the charter companies had
to equate supply of foreign goods to European demand and of European goods to the needs of consumers in Canada, Africa, and Asia. With
markets separated by time and space and linked only by slow and uncertain means of communciation, the salaried managers economized on
the marketby collecting and processing informationon tastes, commodities, and prices to ensure an equilibrium in supply and demand. A
sophisticated committee system collated information, sent out orders
for trade goods, organized the shipping schedules, and determined the
prices for goods. Vertical integration in the form of the charter company replaced the market as a system for exchanging goods and services internationally.However,though it economized on the market, the
managerial hierarchy itself generated costs-those of monitoring and
assessing the performance of its managers abroad. These early multina-

tionals experimented in high real wage labor contracts, bonding of

managers, and the use of incentives to motivate and control overseas
factories.
The early trading companies are often viewed as failures. Some, like
the Royal African Company, had checkered careers and failed, but the
Hudson's Bay Company,formed in 1670, remains a successful firm even
today, claiming to be the world's oldest surviving multinational. The
English and Dutch East India companies were large and successful firms
for nearly two hundred years, and the extent of economic and political
power that they held remains unsurpassed even by today's large multinationals.Conversely,not all modern multinationalshave been unqualified successes. Recent work on pre-1939 British multinationals has
assessed their performance as "poor,"uncovering evidence of deficient
top management and inadequate home office control.7 The chartercompanies did not always successfully control overseas managers, but the
early trading companies developed incentive contracts, oaths and bonds,
and informationflows on work performance,which are standardmechanisms for evaluating managerialeffort in modern multinationals. For over
two hundred years the great charter companies successfully brought
into equilibrium the demands of Europe for spices, textiles, furs, tea,
and coffee with the supply of these goods in Canada, Russia, Africa,
and Asia. This success was the work of a "modern" business organization, committees of salaried managers, and in this crucial respect the
trading companies were analogues to today's multinationals.
77GeoffreyJones,ed., BritishMultinationals:
and Performance
Origins,Management
(Brookfield,Vt., 1986),
18-19.


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

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"Giants of an Earlier Capitalism":

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CARLOS AND NICHOLAS: TRADING COMPANIES 399

Despite the work of these historians,data on the charter companies have

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BUSINESS HISTORY REVIEW

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CARLOS AND NICHOLAS: TRADING COMPANIES 401

single-product, one-plant firm, producing in one foreign market.10In

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ManagerialRevolutionin AmericanBusiness (Cambridge,Mass., 1977), 7.

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The sixteenth and seventeenth centuries saw the evolution of the

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THE DUTCH EAST INDIA HOUSE, AERIAL VIEW

COSTS AND THE ECONOMICS

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CARLOS AND NICHOLAS: TRADING COMPANIES 405

EAST INDIA HOUSE, c. 1840

costs in arms-length markets include the costs of gaining information

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BUSINESS HISTORY REVIEW

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ties in distant lands to their wholesaling in Europe. These transactions

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An EconomicAnalysisof Relationsbetweenthe Indians

Prakash,Economyof Bengal, 262-65; Glamann,Dutch-AsiaticTrade,89.

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CARLOS AND NICHOLAS: TRADING COMPANIES 409

35Ray and Freeman, "Give Us Good Measure'",

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HUDSON'S BAY COMPANY

These tokens, called "beavers"

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CARLOS AND NICHOLAS: TRADING COMPANIES 411

ery.39Both the Hudson's Bay Company and the RoyalAfrican Company

African Company, 171.

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MANAGING THE MANAGERS

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TRADING AT CANTON, 1785

severely curtailed.64The chief factorwas responsible for obtaining a high

66 Carlos and Nicholas,

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CARLOS AND NICHOLAS: TRADING COMPANIES 417

Company calculated each post's ratio of trade goods to furs to evaluate