Causes of Business Combinations

The causes of combinations are as follows:

(i)    Destructive Competition. Destructive competition may result into the stoppage of many firms. In order to remove the fear created by strong competition, the competing firms arrive at some sort of understanding to regulate prices and eliminate over-production. In other words, combination may be created as a means of furthering self-interested by common action.

(ii)    Economies of Large Scale. A large number of economies are achieved if a business is carried on a large scale. These economies relate to production, management, financing and marketing. Small business units may combine together to reap the benefits of large scale operations and organization. This will reduce the cost of production and increase the profits of the business.

(iii)    Joint Stock Enterprise. The evolution of company form of organization has also facilitated the combination of various units by acquiring shares of various companies to control their affairs. The companies under the common control through the system of inter-locking directorship can be easily combined to get many benefits of combination.

(iv)    Control of Market. Combinations are created to secure steady market. Sometimes, combinations are created to control the entire market and create a monopoly which is detrimental to the interest of the consumers. By controlling the market, they can sell their products at higher prices and earn huge profits.

(v)    Individual Ability. According to Shield, “Great organizing ability, strategic genius, or personal 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 a few hands, endowed with business insight, business talent and business courage. “Many a time, business combinations are created due to the initiative and organizing ability of an individual or a number of individuals.

(vi)    Lust for Power. Some businessmen have a lust for economic power which can be satisfied by creating industrial empires. Desire to bring up industrial regime lies at the back of many combinations. Individual ambition of becoming the pioneer member or co-ordinator of a huge combine is also one of the factors favoring combination.

(vii)    Business Cycles. In uncontrolled economies, there are trade cycles. During booms, firms expand to take advantage of rising demand, and during depressions, inefficient and weak firms find it difficult to survive because of lower demand. Business ups and downs generally lead to business combination. Particularly in industries, where huge capital is employed and where demand is subject to cyclical changes, combinations occur as a revulsion against risk of burdensome overhead cost, glut, low turnover and lower prices during depression.

(viii)    Protective Tariffs. Protective tariffs are used to encourages home industries. When the Government imposes import duty on certain items, the home manufactures of such items are encouraged to form combination to develop their business and exploit the domestic market fully. Sometimes, national level combination are formed to provide a united from to perpetuate protection.

(ix)    Government Pressure. The Government policy may concept weaker units to amalgamate with the stronger units so as to improve the overall efficiency of the industry. Even the Government may take over the sick units and combine them to form a viable unit and introduce rationalization in it.

(x)    Miscellaneous Factors:

(a)    Dearth of managerial talents may lead to managerial integration of business units. Many companies have common directors which in fact mean their common control.

(b)    If an enterprise wants to be self-sufficient, it may combine with other units. Vertical integration is the result of desire for self-sufficiency. Under this, various units producing the related raw materials and semi-finished products are combined together so that they produce the finished products at economical prices.

(c)    Growth of transport and communication has increased the intensity of competition not only in the national market but also in the international market. This has resulted into eh formation of multinational enterprises having subsidiaries in different countries.

(d)    Sometimes, firms in an industry join to avail of the categories which are as follows:

(i)    Driving or impelling forces consisting of cut-throat competition and decrease in the opportunity for speculative gains;

(ii)    Beckoning forces which include opportunity for profits, protective tariffs and gains of over capitalization; and

(iii)    Facilitating forces comprising of joint stock enterprises and other forces.

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