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Causes of Business Combination

According to Prof. L.H. Haney, 'competition is the mother of combination'. Various causes of business combination are classified by L.H. Haney into three categories. Such as-
 (A) Driving or impelling forces, which includes :
          (i) The decrease in the opportunity for speculative for gains.
               (ii)Intense competition.
 (B) Deckoning conditions include :
          (i) Opportunity to gain
          (ii) Protection to industries
               (iii) Possibilities of gain by over capilatization
 (C) Facilitating causes are :
                (i) Tariff
           (ii) development of the joint stock company etc.
       Below these causes along with some other causes are discussed in details-
(i) Wastes of competition : Cut throat competition is a danger for many business and industrial units. In order to provide them security from cut-throat competition, the combination amongst them is immensely important. Emergence of large scale production based on modern machinery, carried on in big mills and factories and the appearance of the world market created enormous increase in business risk. Ever increasing intense competition between the sallers led to the buyer's, market. Modern large scale capitalistic production led to over production and very keen competition to capture the available market. Inthe last of 19th century the severity of competition among producers led to price cut war and general fall in prices. Mass production in anticipation of demand also created considerable risk of loss which was further accentuated due to unhealthy competition. The producers in their own interests introduced the idea of combination or cooperation in place of cut-throat competition in production as well as direction and management of various units.
(ii) Economics of large slale operarion : Combinations are also motivated by the desire of the films to avail themselves of economic resulting from enlarged scale of operations. Increase in the scale of operation generally leads to reduction in the cost of production per unit of output. The amalgamating or combining units can bein the aggregate, save overheads costs through common operational, managerial, financial policies. With different films coming together to persue common business policies, the scale of operations becomes larger and hence the cost will be sperad over large output. With self regulated competition through combination films have assumed market with the reduced or spread over burden of selling costs. Hence, combinations create scope of realising the economics of large size. According to Beacham, 'desire underlying the combinations is to reap economics of scale plus the necessity to ensure an market for additional output'.
(iii) 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 have been reponsible for growth of large films. Transport facilities have accelerated the pace of large scale production. Large films thrive by steady absorption of small films operating within limited but scattered areas entering to local markets. Combinations were conceived to forestall competition and share the resources and the market through common policies, control policies or ownership. Phenomenal development of transport and communications during the last 100 years brought about ever expanding markets and international competition. The combination movement become a convenient instrument to capture the international market by means of international cartels, and establishment of giant multinational enterprise with subsidiaries in many countries.
(iv) Joint stock company form of organization : The structural merits of joint stock companies as a form of organisation greatly stimulated the combination movement. A joint stock company has the characteristics of separate and continues entity, limited liability, transferability of shares , possibility of raising capital , etc. Large companies with enormous capital subscribed by numberous 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 related 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% 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. The history of the development of combinations has beeen closely related to the development of joint stock enterprises.
(v) Dominance in the market : Combinations are also the outcome of the desire of industrial magnates to dominate the market influence on the prices and earn excessive profits, through monopolistic hold over the market. According to Beacham 'A more important factor which ferquently motivates combinations is possibilities of exploiting monopolistic control of the market.
(vi) Influence of tariffs: The tariff policies of different countries facilitated the formation of combinations. The introduction of customer tariff greatly increased the ability of protected industries to form cartels etc. By making it possible for them to monopolies the market. With the elimination of foreign competition, new units come into existence to take advantage of high prices. This leads to competition among such units, and when it becomes too intensive producers combine to reap the advantage of monopoly prices. The sugar inudustry of India and iron industry of Germany are such examples. Protection adopted by many countries to secure quick industrialization of the nation also encouraged combinations. It is said that protection in the form of prohibitive important duties acted as the mother of combinations. Outside protection was eliminated due to protection and within the country various vested interests were created. These forces were set in nation and they encouraged integration in industry working behind protection and the national combinations gave a united front to perpetuate protection. Behind the shelter of the tariff wall over investment in industry took place which led to competition and ultimately the need for defensive combination arose behind the wall of protection given by the country. Tariff protection induces the rise and growth of combination, the incentive to form a monopoly is the strongest where the branch of industry is able to supply the whole market single handled but can take only full advantage of tariff protection by forming a cartel. Industries enjoying protection can easily form cartels initially for securing control of national market and later on secure similar command in international markets.
(vii) Technological progress: Modern scientific technology calls for large scale operations. Adoption of superior technology requires investment of enormous capital which may be beyond the reach of individual firms. This may induce amalgamation of competing firms to derive the benefits of new techniques. Moreover the use of necessary by all firms leads to the possibility of over production and its different effects of sales, prices,n profit. This situation can be mitigated by combination of 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. 
(viii) Trade cycles: Trade cycles on the "ups" and "downs" occur at regular intervals and capitalist economies. They in turn results in fluctuation in economic activity which enhances the movement towards concentration. Trade cycles, as is well known, consists of booms or the periods of highest prosperity and depressions or periods of minimum economic activity. Although combinations take place, both during boom and depression periods the combination movement appears to be most active in periods of prosperity, risk prevention being the defensive weapon. During depression there is weeding out of inefficient firms which are usually absorbed by the efficient ones. In times of boom, combination takes place on account of the expansion of existing units by means of horizontal vertical or diagonal integration and also to prevent risk.
(ix) Lust for power: Many dynamic businessmen and powerful industrialists motivated by the philosophy of power and ambition for superlatives for all spheres of active life desired to build up industrial empires and once they attained success their lust increased power led them to establish still bigger and bigger sizes for of business units and control over a large number of such units resulting in some sort of combination. In India a handful of business houses by virtue of managing agency system created industrial empires through various types of combinations and these business houses created concentration of economic power and wealth in a few hands through the combination movement.
(X)  potentialities of Monopoly and trade: Business combination movement has a natural tendency to gain monopoly in production and or in trade.  Potential gains by regulating production, price and trade conditions encouraged business combinations. Realization of possibilities of profit on mass-scale production of common necessaries of life and similarly mass scale distribution even at a small margin of profit per unit after getting the monopoly prices pointed out that combinations are very profitable for producers and manufacturers. So,  combination movement sooner than later led to monopolistic business combinations and they could secure all the advantages of monopoly over supply and over the market. 
(Xi) Lack of monopoly restraints: In India till recently we had no specific legislation restraining or controlling monopolistic combinations. Absence of some legislative restrictions gave ample scope for combinations movement in India, particularly under the multipurpose institution of managing agency, which could bring about financial,  managerial as well as business integration on a large scale in India. 
(Xii) Respect for business: The mid 19th century brought in its wake the cult of the colossal. Everything 'big' began to enjoy respect and everything small was looked upon with contempt. Bigness today confers respectability, it gives power over fellow beings. The more one commands big things the more respectable he becomes. In the business world also "bigness" has become the vogue or fashion. Concentration of control over a large number of business by different means of integration or combination gives increased power and so the race of combinations. 
(Xiii) Individual Organizing Ability: Shields mentioned in his book entitled. "The Evolution of Industrial Organization" that great organizing ability, strategic genius and personnel ambition on the part of one or a number of men may account in part for the rise of certain business combinations. The scarcity of business talent become one of the causes of centralization of power in fewer hands, endowed with business insight, business talent,  and business courage. Dearth of business talents and managerial ability have become important causes of centralization of power in a few hands. Thus, the lag between technical and administrative development of industry because and additional factor encouraging combination movement. 
(XiV) Rationalization : According to Sargant Florence, 'Rationalization is a movement to eliminate waste and inefficiency scientifically and logically by some sort of joint action between all the firms within one industry'. That is why any scheme of rationalization invariably involves combination of inefficient units with efficient units or amalgamation of small enterprises to form a viable industrial unit. Every programme of rationalization is found to lead to the formation of industrial combinations as well as commercial combinations primarily to eliminate wasteful competition and also to secure maximum profitability. 
(XV) Instability of Economic policy: An experimental and vacilating economic policy leads to instability. It is subject to continual changes in currency, trade, fiscal and wage policies etc., which have in term considerably increased the element of uncertainty in the planning of individual firms. This instability of economic policy is another factor that has greatly encouraged economic concentration. The greater the risks the grater the incentive to combine, especially concerns embracing different industries or different parts of the same industry and trade. 
(Xvi)  Government pressure: Under the section 396 of the companies Act 1956, it is provided that where the central Government is satisfied that it is essential in public interest that two or more companies should amalgamate, it may order such on amalgamation. So, by virtue of this act or by other 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 industries,  it may, through proper legislation, force the smaller firms to be absorbed in the bigger firms to make them viable. Frequent changes in government policies are something risky to industrial enterprises. They may therefore form their associations or come together in a more formalized manner to protect themselves against the effect to uncertain policies of the Government. 
(xvii) Patent laws: Giving exclusive right of use to the inventors of new machine, method of idea are one of the reasons favouring combinations of monopolistic nature. Concentrations has been greatly fostered by patent laws. patents give monopoly position to individual firm. Many times combinations, are resorted to for enjoying the benefits of patents rights standing in the name of a particular unit.
(xviii) 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 intergartion of all or some of the different processes of any industry under the unitary control of a big film. There would be no dependence on outside films for things needsd from the raw material stage to the final marketing stage.
(xix) Possibility of gain by over capitalisation: In most of the cases, promoters promoted combinations of business units with a view to reaping speculative profits. Periods of speculation and of steep price rises normally encourage the formation of combinations.
(xx) Emergence of International Market: To be able to complete in international markets the size of the units must be very large. Combination of different units would reduce the risks involved in buyuing and selling in markets of international character.
(xxi) Miscellaneous: In addition to above causes there are some other causes which are emerged in different cases, such as combination in a certain section of an industry is likely to lead to combination in other section too. Haney is of the view that with the markets acquiring an international character, the function of marketing goods over wide are as and long distances has become more important than the technical problems of production. The producers may find taht the only way to control the situation and reduece the risks of buying and selling lies in their combination. This way combinations of producers may be formed to meet the risk arising out of the increasing importance of the function of distribution. Moreover, combinations with foreign firms are also made to get the benefits of foreign capital and newly developed techniques and to use them in the progress of country. Requirement of huge capital and dearth of managerial & enterpreneurial talent are also other causes of the business combination.


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