Avoiding “Negligence and Profusion”: The Ownership and Organization of Anglo–Indian Trading Firms, 1813–1870

The directors of such [joint-stock] companies, however, being the managers of other people’s money than their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own … negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.¹

The rescinding of the East India Company’s monopoly on trade between Britain and India in 1813 opened new opportunities for British trading firms. The volume and value of the Anglo–Indian trade grew and the range of products imported and exported became progressively more varied, enabling increased opportunities for specialization and integration. The trading firms expanded their activities and integrated into manufacturing, transportation, and construction of infrastructure, resulting in many becoming highly diversified organizations, particularly after 1850.

In the period from 1813 to 1870, different types of firms emerged to undertake the trade. Entrepreneurs used a range of ownership forms, including partnership, joint-stock, and hybrid models. There was also wide variation in organizational structures and governance mechanisms employed, ranging from integrated hierarchies to networks of firms and partners. Novel forms of firm organization emerged, such as the “managing agency,” which saw trading firms function as both investors and managers of manufacturing, mining, and plantation operations.

The selection of ownership form became a significant choice for entrepreneurs in the mid-nineteenth century after changes in legislation substantially lowered the costs of incorporation.² Entrepreneurs had to weigh the pros and cons of different ownership and organizational forms that would best enable them to carry out their various activities. They experimented with different forms to better maximize opportunities and overcome the constraints they faced as the economic and business environment developed in both Britain and India.

The use of a range of firm types in this period opens a number of questions that this dissertation explores:

1. 1. How did the ownership, organizational structures, and governance arrangements of Anglo–Indian trading firms change between 1813 and 1870, and did one or another form proliferate?

2. 2. Why were certain forms of ownership and organization preferred, and which factors determined an entrepreneur’s choice of form?

3. 3. Did the choice of ownership and governance affect the performance of the firms?

Authors, including Chapman and Jones, have analyzed changes in these firms over this period.³ They described an evolutionary transformation, from small partnerships conducting a wide range of trading activities to diversified business groups known as managing agents. The key factors that affected the decisions regarding ownership and organization were identified as access to credit, capital, and managerial talent, while the capacity to diversify risk yet allow the retention of control and capacity to extract profits by small numbers of owners was also important. The managing agents’ capacity to solve these challenges saw them come to dominate the organization of Indian industry by the beginning of the twentieth century.⁴

Using an analytical framework drawn from the economic theory of the firm literature, the dissertation reassesses the narrative of the Anglo–Indian trading firms. Drawing on transaction and agency cost theory, a different—although potentially complementary—reading of the development of the firms is proposed. The dissertation analyzes how entrepreneurs experimented with different forms of business organization that allowed them to lower the costs of transacting for credit, capital, and information while also lowering the costs of controlling agents separated by distance and time.

This analysis contributes to the debates in business and economic history focused on the role played by business ownership and organizational forms on the performance of firms, industries, and economies. The importance of hierarchical managerial structures and joint-stock ownership in enabling an unprecedented expansion of the scale of business in the late nineteenth century is widely debated, and a growing literature has looked at the role played by different forms of business organization, such as the partnership and cooperative, in enabling economic growth.⁵ This dissertation demonstrates the important role played by hybrid forms of...