Business combinations came into existence in order to hold ruinous competition in check. Great organizing ability, strategic genius, or personal ambition on the pan of one or a number of men may account; in part, for the rise of certain business combinations.
Firms can opt to combine to survive, grow and to achieve their objectives. The causes of combinations need not be any one factor but a multiplicity of factors. Haney had classified these forces into three categories. They are:
- Driving Forces: The driving forces include Lesser scope for speculative gains, Desire to avoid wasteful competition.
- Beckoning Forces: The beckoning forces include chance for gain, protection to industries, chances of gain by over capitalization.
- Impelling causes: The impelling causes include influence of tariff, development of the joint stock company form of organization.
The above mentioned factors and certain other causes, which lead to the growth of business combinations are discussed below:
Factors and causes responsible for growth of business combination
1. Lesser scope for speculative gains: When business firms were few in number, there was opportunity for gains by speculation. But when the number of firms increased, the gain through speculation became less. This led business to combine among themselves.
2. Desire to avoid wasteful competition: The industrial revolution which took place in the 19th century facilitated large scale production. Many new firms entered into the market. Large scale production resulted in a situation of surplus, as supply was more than demand. Businessmen began to resort to cut-throat pricing to retain and attract customers. Many businesses failed and existing businesses also were facing a doubtful future. This created the desire among businessmen to combine and avoid wasteful competition,
3. Better means of transport and communication: The invention of the steam engine boosted the industrial revolution and resulted in better means of transport. The invention of the telephone and telegraph resulted in faster communication. Due to faster transport and communication, both local trade and international trade grew. This resulted in intense competition. To avoid such intense competition, businessmen felt the need for combinations.
4. To benefit from large scale production: Large scale production results in lower cost per unit. The fixed costs are spread over a number of units. Lower cost benefits both the producer and the consumer. If there are a number of small firms they cannot enjoy the benefits of large scale production. Therefore businessmen began to combine and form large firms to benefit from large scale production.
5. To enjoy monopoly power: When there are a number of firms in a market selling similar products, each firm enjoys limited control. In case all the firms combine to form a single entity, they can enjoy monopoly power. The benefits of monopoly such as control over supply and prices can be achieved. They can aim for high profits.
6. To survive during business cycles: Business cycles refer to the fluctuations in economic and business activity. Business cycles have four stages. They are: boom, recession, recovery and depression. During depression, when there is low demand due to less purchasing power, many firms would have to close down. In case firms combine among themselves, they would have the financial strength to overcome the evil effects of business cycles.
7. Desire for big profits: Large organizations enjoy more reputation in the market. They are able to build a better brand image. Their products and services are preferred over products offered by small firms. They can also export their goods, set up factories abroad and grow to become multi-national organizations (MNC’s). Such global companies enjoy huge profits. This might motivate small organizations to combine and create a large organization.
8. Influence of tariffs: Tariffs are levied by government to protect their home industry. High duties are imposed on imported goods, making them costlier when compared to home country goods. Such duty protection, encourages many entrepreneurs to start small firms. Competition grows and beyond a stage, degenerates into cut-throat competition. Then businessmen realize the need to combine so that all of them can benefit from tariffs.
9. Growth of join stock enterprise: The increasing popularity of joint stock companies has also resulted in combinations. Businessmen acquire controlling interest in companies by buying shares in large quantities. Later they can combine all the companies in which they have controlling interest.
10. To benefit from patents: Patents grant exclusive right to the holder to manufacture and sell the product for a certain number of years. To benefit from the patent held by a business, other businesses might combine with it.
11. Pooling of risks: Combinations might also result when businessmen plan to pool their risks. An individual firm may not be able to take much risk. If business units combine, the combined unit would have greater capacity to withstand risks.
12. To acquire control over distribution: Businesses which have a local character do not have much difficulty in distributing their goods. But, for businesses which have international operations, the major problem lies in distribution. To acquire control over distribution, business firms might combine together.
13. To benefit from skills and abilities: Each firm might have certain strengths, skills, and abilities. When firms combine, the weaknesses of some firms can be complemented by the strengths of the other firms. Such combined firms can benefit from better managerial skills, knowledge and ability.
14. To get benefit of modern technology: To grow and prosper, businesses have to be innovative and introduce new products and services. Innovation requires investment in research and development. Individual firms may not have the funds to invest in research and development. If they combine, they can pool their resources and undertake research activities.
15. Desire for self sufficiency: Some firms may desire to have their own source of raw materials. So they combine with those firms which produce raw materials required for their production process.
16. Ambition: Some businessmen may have the desire to control a large business empire. They would like to control many businesses and enjoy high sales and profits. Such businessmen go for combinations to increase the size of their business enterprise.