This article throws light upon the eleven main causes of business combination. The causes are:- 1. Waste of Competition 2. Economies of Large-Scale Operations 3. Transport Revolution 4. Joint-Stock Company 5. Dominance in the Market 6. Protective Tariffs 7. Technological Progress 8. Trade Cycles 9. Patent Laws 10. Government Pressure 11. Desire for Self Sufficiency.
Cause # 1. Waste of Competition:
Abuses of cut-throat competition brought about the tendency towards association or amalgamation of firms into some form of common unit. Competition which was regarded as the automatic and rational regulator of economic activity became wasteful. This meant narrowed profit margin for all the firms in the competitive run.
In the words of Kimball and Kimball, “Business Combinations came into existence in order to hold ruinous competition in check.”
Through voluntary restraint on production, allocation of markets, price agreements, etc. attempts were made to avoid wastes of competition.
Cause # 2. Economies of Large-Scale Operations:
With different firms coming together to pursue common business policies, the scale of operations becomes larger and hence the costs will be spread over larger output. With self-regulated competition through business combinations firms have assured market with the reduced or spread-over burden of selling costs.
Thus business combinations create scope of realising the economies of large size. As Beacham puts it, “Desire underlying the combinations is to reap economies of scale plus the necessity to ensure a market of additional output.”
Cause # 3. Transport Revolution:
Modern media of transport and communications opened up far distant markets and made it possible to organise production on an expanding scale consistent with requirements of widening market. Ambition on the part of large enterprises to exploit the resources in different areas of the country and the world and the desire to explore the markets in distant areas has been responsible for growth of large firms.
Transport facilities have accelerated the pace of large-scale production. Large firms thrive by steady absorption of small firms operating within limited but scattered areas catering to local markets. Business Combinations were conceived to forestall competition and share the resources and the market through common policies, control policies, or ownership.
Cause # 4. Joint-Stock Company:
A joint-stock company has the characteristics of separate and continuous entity, limited liability, transferability of shares, possibility of raising more capital etc. Large companies with enormous capital subscribed by numerous members with limited liability came into being for undertaking large- scale business in different industries.
These big companies thought of absorbing other companies or in some form controlling other companies relates to their business so as to earn more profits and secure dominant position in the market. Corporate system of enterprise made it easy for aggregation of companies.
By purchase of more than 50 per cent of voting shares, large companies secured substantial control over relatively smaller companies. For example, holding companies, amalgamation and absorption of companies, interlocking of directorates etc. are some forms of combinations thriving with ease on the basis of corporate enterprise.
Cause # 5. Dominance in the Market:
Business Combinations are also the outcome of the desire of industrial magnates to dominate the market, influence the price and earn excessive profits, through monopolistic hold over the market.
Beacham observes, “A more important factor which frequently motivates combination is possibility of exploiting monopolistic control of the market.” A firm which is growing in size and engaged in a business for which market is widening would become the leader of the market.
By virtue of its large size and bulk operations it would be in a position to influence the price in the market by adjustments in output. In due course such large firms seek to consolidate their hold in the market by association with other firms or by absorbing them outright.
Cause # 6. Protective Tariffs:
Tariffs are often described as the ‘mother of combination’. Behind the tariff walls firms tend to expand their scale of operations considerably which may spell undesirable competition. To check the wayward growth of firms, combinations are formed to monopolise the domestic market.
Cause # 7. Technological Progress:
The use of necessary technology by all firms leads to the possibility of over production and its deterrent effects on sales, prices, profits. This situation can be mitigated by combination of firms in suitable form. By pooling their resources they can adopt new techniques and may also come to agreement on output, price and profits so as to avoid over -production.
Cause # 8. Trade Cycles:
Business Combinations also came into being as a sequel to cyclical fluctuations. During depressions small firms become weaker in falling market and may be absorbed by large firms having reserves to fall back upon.
Particularly in industries which are heavily capitalized and where demand is subject to cyclical changes, combinations occur as a revulsion against risk of burdensome overhead costs, glut, low turnover and lesser prices during the depression phase of the trade cycle.
Cause # 9. Patent Laws:
Giving exclusive right of use to the inventors of any new machine, method of idea are one of the reasons favouring combinations of monopolistic nature.
Cause # 10. Government Pressure:
Government may bring pressure on the existing weak units to amalgamate with the bigger and stronger firms so as to improve the overall efficiency of the industrial undertakings. Whenever the government feels that competition is proving wasteful and obstructive to common interests, it may, through proper legislation, force the smaller firms to be absorbed in bigger firms to make them viable.
Frequent changes in Government policies are sometimes risky to industrial enterprises. They may therefore form their associations or come together in a more formalised manner to protect themselves against the effects to uncertain policies of the government.
Cause # 11. Desire for Self Sufficiency:
Many industries depend on other industries or firms for their raw materials, semi-finished (industrial) goods, tools etc. To ensure that they get uninterrupted supply of all the required materials there may come about integration of all or some of the different processes of any industry under the unitary control of a big firm.
There would be no dependence on outside firms for things needed from the raw material stage to the final marketing stage.