A few weeks ago I discussed The Rise of the Global Superstar Company based on a recent special report on the subject by The Economist. The report noted that the decade-long trend toward increasingly concentrated global firms is somewhat surprising.
“The rise of the giants is a reversal of recent history… In the 1980s and 1990s management gurus pointed to the demise of size as big companies seemed to be giving way to a much more entrepreneurial economy. Giants such as AT&T were broken up and state-owned firms were privatised. High-tech companies emerged from nowhere. Peter Drucker, a veteran management thinker, announced that ‘the Fortune 500 [list of the biggest American companies] is over.’ That chimed with the ideas of Ronald Coase, an academic who had argued in ‘The Nature of the Firm’ (1937) that companies make sense only when they can provide the services concerned more cheaply than the market can.”
Professor Coase’s views on the firm changed quite a bit over the years. In 1937 he published The Nature of the Firm, a seminal article which along with other major contributions earned him the 1991 Nobel Prize in economics. In the article, Professor Coase provided a simple answer to the question: Why do firms exist? He explained that, in principle, a firm should be able to find the cheapest, most productive goods and services by contracting them out in an efficient, open marketplace. However, markets are not perfectly fluid. Transaction costs are incurred in obtaining goods and services outside the firm, such as searching for the right people, negotiating a contract, coordinating the work, managing intellectual property and so on. Thus, firms came into being to make it easier and less costly to get work done.