Corporations Exist Corporations and Organizations

¶ … Corporations Exist

Corporations and Organizations

Corporations are legal entities with different personalities from its members. They are juristic persons with rights and obligations, such as:

the right to hold assets;

the right to hire employees/the obligation to remunerate employees;

the right to sign contracts/the obligation to respect its contracts;

the right to make by-laws that help them coordinate the internal functioning; the right to sue and be sued; other rights and obligations imposed by court of laws.

The theories about firms date back in time in the first part of the 20th century. Berle and Means (1932) were among the first to observe that management has separated from the ownership for U.S. companies and this is one of the main characteristic of corporations. Later on, in the 1970s the agency theory was formalized (Ross, 1973) and it mainly paid respect to the relationship between owners and managers and various layers of management. The nexus of contracts view of organizations argues that is misguided to create a strong delimitation between markets and organizations (Alchian & Demsetz, 1972; Fama, 1980). Thus, the difference between a company firing an employee and a customer 'firing' its supplier is that the former has a legal status and the owners have a continual association.

Holmstrm and Milgrom (1994) described the company as a system, a set of complementary contractual arrangement that mitigate/incentive conflicts. According to them, the company is characterized by the employee not having ownership of the firm's assets, the employee as part of a low power-incentive scheme and by the employee being under the employer's authority. Wernerfelt's (1997) modern employment-related theory of the firm suggests that governance mechanisms are institutional mechanisms through which employees and employers adapt to environment-related changes and communicate about them.

The governance mechanism as described by Williamson (1975) is based on transaction costs. Basically, these ones dictate whether transactions are made through markets or by internalizing activities. Market-based transactions are subject to uncertainty, which generate transaction costs, whereas hierarchies generate higher costs associating with controlling a wider range of activities. The central piece of his theory is the asset specificity. The higher the specificity of a company's assets is, the more agents are likely to behave opportunistically, which is an incentive for the company to internalize activities along the value chain to protect its assets.

The traditional contract theory of the firm has recently been enriched with a more recent type of contacts: relational contract. This latest contribution suggests that each party behave in such a manner to reach the other party's expectations and the behavior is maintained by fear of retaliation of the other party(ies). Such contracts occur both between firms and within the same firm, between employees and employer (Baker, Gibbons and Murphy, 1997).

In the information era, a communication theory of the firm was developed. The theory according to which firm is a communication-hierarchy is developed around the idea that firms adapt to and process information and the focus is not on incentive conflicts, but rather on communication and coordination (Cremer, 1990; Radner, 1992; Casson, 1997).

Some of the critiques brought to the modern theory of the firm pay respect to the overemphasis on 'soft issues' such as communication, organizational cultures and such similar notions, which overlooked important factors relevant for any firm, such as: implicit/relational contracts, bounded rationality - the individual has bounded rationality, failing to get important information due to simple reasons, such as language barriers; uncertainty - which is increasing in the modern times due to the permanent change in technology.

According to Gerhard Schulmeyer, Siemens Nixdorf's CEO corporations exist "to provide "a place where the individual can do what she is good at, at a lower cost than she could do it alone." For individuals, corporations represent places where other individuals with similar interests work together building a challenging environment that stimulates creativity. Moreover, corporations offer individuals access to resources that would be unreachable to them if they were to pursue their purposes on their own. Also, corporations offer employees a certain financial comfort that again it couldn't be achieve by an individual on its own. The financial comfort refers to situations such as unproductive moments that are remunerated anyway by a salary while working for corporations.

Basically, the corporations insure the continuity of business activity during unproductive moments and manage to optimally take advantage of highly productive moments. Corporations are more efficient than individuals and they have the power to move other people and goods and have a deep impact on a country's economy. An economy based on individual wouldn't be able to efficiently engage its resources in order to obtain optimal results.

Automobiles

Most of the automobile's definitions pay respect to its initial design purpose: to run on the roads and to transport people, but not necessarily goods. To fulfill their functions, automobiles have wheels, seats and carry their own engine. They have a given capacity to transport other people according to the specific needs that inspired its design: comfort, space, speed, fashion, etc.

According to WorldMapper, in 2002 there were 590 million cars in the world.

FIG. 1 - PASSENGER CARS 2002

Source: WorldMapper (2002) those with the lowest concentration.

The statistics also show that the areas with the highest car concentrations are also the most developed from the economic point-of-view (see fig. 2).

FIG. 2 - CAR CONSUMPTION 2002

Source: WorldMapper (2002)

Nevertheless, there are studies that suggest that excessive automobile dependency may reduce economic growth (Litman & Laube, 2002). An indicator of automobile dependency is a high rate of automobile travel/capita. Automobile dependency is usually associated with high transportation costs, significant land and financial resources - roads, parking, traffic congestions and the worsening of the environment.

Some if the reasons that lead to automobile dependency are summarized in table 2.

TABLE 1 - MARKET DISTORTIONS THAT CONTRIBUTE to AUTOMOBILE DEPENDENCY

Market Requirements

Common Transport Market Violations

Choice. Consumers need viable choices, and information about those choices.

Consumers often have few viable alternatives to owning and driving an automobile, and living in automobile-dependent communities.

Competition. Producers must face competition to encourage innovation and efficient pricing.

Most roads and public transit services are provided as public monopolies. There is often little competition or incentive for innovation.

Cost-based pricing. Consumers must bear the costs they impose. There should be no significant external costs unless specifically justified.

Automobiles use is underpriced: most costs are either fixed or external. Lower-density, automobile-dependent land use patterns are also underpriced.

Many public policies favor automobile use, including dedicated road funding, road designs that favor motor vehicle traffic over other road uses, zoning laws that provide generous free parking and lower density development, and a lack of cost-based pricing.

Source: Litman & Laube, 2002

Studies also suggest that some countries experienced their highest economic growth rates when the automobile consumption was low and the growth rates started to decrease as the automobile consumption increased (Talukadar, 1999 - see table 2).

TABLE 2 - ECONOMIC DATA on GLOBAL CITIES, 1990

Source: Litman & Laube, 2002

GRP = Gross regional product

Figure 3 is giving a graphic representation of the automobile consumption and economic growth relationship. Thus, in the economic developing phase, both traffic and GRP/capita are increasing. The traffic starts to decrease as the country reaches a maturity point in its economic development.

FIG. 3 - VEHICLE-KMS vs. GROSS REGIONAL PRODUCT in 37 CITIES, 1990

Source: Litman & Laube, 2002

Explanations for this phenomenon range from pure practical reasons - increased need of mobility synchronized with increased traffic congestion - to social implications, such as environmental issues and a healthier lifestyle.

To summarize, automobile consumption increases with economic growth in a country's economic development phase and decreases as the same country reaches a certain maturity. Nevertheless, automobile consumption has a positive impact on a country's economic outlook given by its intrinsic transportation function. Cars move people and goods and the mobility of these is essential to maintain an economy dynamic.

The passenger cars consumption increased by more than 100 times in U.S. since the beginning of the century (see fig. 4). The trucks consumption had the same evolution.

FIG. 4 - U.S. AUTOMOBILE REGISTRATIONS PER PERSON 16 or OLDER

Source: Hess, 1996

This implies that people have started to use automobile transportation both for their transportation and for the goods needed to be transported.

Alternative modes of transportation have been developed in parallel with the automotive one as the need for transportation in general increased with the emergence of technology, knowledge and globalization.

Airline transportation has increased exponentially in the last 30 years and the statistics nowadays for U.S. look as follows:

TABLE 3 - AIRLINE ACTIVITY: NATIONAL SUMMARY (U.S. FLIGHTS)

Source: Bureau of Transportation Statistics

12 months ending June of each year

The transportation industry creates jobs that in turn contribute a country's GDP (Gross Domestic Product) and implicitly generate income for the economy.

TABLE 4 - EMPLOYMENT in TRANSPORTATION OCCUPATIONS (THOUSANDS) U.S. 1985-2001

Total workers, 16 years and over Total workers in transportation occupations

Transportation occupation as percent of total workers, 16 years and over Motor vehicle operators, total

Rail transportation, total

Water transportation, total

Air transportation, total

Public transportation attendants

Source: Bureau of Transportation Statistics

According to table 4, transportation jobs have registered a weigh between 3.4% and 3.6% in the total number of jobs from 1985 to 2001. The trend is increasing for most types of transportation modes (see fig. 5).

FIG. 5 - EMPLOYMENT in TRANSPORTATION OCCUPATIONS (THOUSANDS) U.S. 1985-2001

Source: Bureau of Transportation Statistics

Automotive transportation is flexible, comfortable and is probably the most suitable means of transportation given the increasing distances between workplaces and residential areas. The social studies point to the fact that the urban agglomerations determine workers to live further away from the workplace than they used to live a few decades ago.

The social phenomena that took place in the 2nd half of the 20th century and the beginning of the 21st century led to an increase in the number of workers as more women started to work and the access to education was facilitated. The need for transportation increased as more workers needed to move from one location (e.g. home) to another (e.g. work).

FIG. 6 - PRINCIPAL MEANS of TRANSPORTATION to WORK (THOUSANDS)

Source: Bureau of Transportation Statistics

Fig. 6 reflects the number of workers that use different means of transportation to move from home to work. The red line indicates the number of workers that use automobile transportation as the main means of transportation to work.

A closer examination of the automobile usage as the most popular means of transportation used by workers indicates that around 15% of those use a different kind of transportation (see fig. 7)

FIG. 7 - AUTOMOTIVE TRANSPORTATION as a MEANS of TRANSPORTATION to WORK U.S.

Source: Bureau of Transportation Statistics

Why do corporations and organizations exist?

This paper argues that corporations, like automobiles, exist to move people and goods and fuel the economy. However, these two are now equal as corporations are those that create automobiles. The relation between these two is similar to that between the whole and a part of it. Corporations create automobiles to fuel the economy, but they also create other "tools" to reach the same goal, such as professionals and financial products.