Structuring Your Paper

How might the adoption of the corporate form of business organization have contributed to (or delayed) modern economic growth?

Introduction

The corporate form of business is mostly common among the large organizations; however, small businesses also embrace the incorporation. In this sense, corporation denotes a type of business organization that has a separate legal entity from the owners.  Today, most organizations are embracing incorporation as a way to improve their competitiveness in the market. Further, corporate entities are considered to attract more investors compared to small business enterprises. This is because of economies of scale needed to enhance the competitive advantage of an organization. However, the owners (shareholders) do not take part in the running of their companies. Instead, they are represented in a corporate organization by the board of directors whose responsibility involves the fiduciary duty to shareholders (Demirguc-Kunt, Inessa, & Vokislav, 2006). On the other hand, hired professionals manage the corporation as a separate entity and their responsibility involves carrying out the daily operations in corporate organizations.  As such, the success of a corporate organization depends largely on the commitment of the hired personnel. In this sense, a poor management system can lead to shareholders losing their investment in a corporate organization. However, because shareholders have limited liability in a corporate organization, any loss is not attached to their personal assets, but the asset owned by the company as a legal entity. Since corporate organizations have an impact on the economy, there is a need for the establishment of balances and checks to ensure they are efficiently managed. However, where such measures lack, there is a possibility of mismanagement and the apparent collapse of large corporations (Demirguc-Kunt, Inessa, & Vokislav, 2006). This paper explores how the adoption of the corporate form of business can delay modern economic growth.

Slower incorporation process

There is a lot of paperwork required for incorporation of business, and this denies some companies the opportunity to expand. The paperwork involved in the incorporation is as a result of the government regulations regarding the formation of corporations. However, the bureaucratic nature of the authority responsible for incorporating companies means that, it takes longer for a company to begin operating as a corporate organization. As such, most companies are denied the chance to attract investors that are more public and improve their competitiveness in contemporary markets dominated by large organizations.  This derails economic growth that, for instance, largely depends on both local and foreign investment.  Accordingly, the more a government incorporates businesses, the more it is likely to collect income tax from both the companies and the shareholders. In turn, the revenue collected can be channeled to improve the services provided to citizens such as health care and education. The income generated could also be used to improve infrastructure, which is necessary for driving economic growth (Yeoh, Richards, & Shan, 2014).

Corporate organizations in any given country play a major role in attracting FDI depending on their performance; however, where there is a slower process of incorporation tends to scare away foreign investors. In different countries, the regulations established for incorporation are stringent and affects negatively on investment.  This leaves a country with few investors in both large and medium size organizations seen to propel economic development. In essence, where the incorporation process is not efficiently management, then, embracing a corporate form of business can be detrimental to the economic growth of a country. For instance, where there is lack of investment in large organisations within a country because of a slower and incompetent process of incorporation, the existence of few investors means that the government may be forced to bail out struggling companies. Consequently, the resources needed in other areas are channeled to save corporations viewed by the government as drivers of economic growth. Efficient and competent management of the incorporation process is critical in ensuring that the incorporation process is flexibility and less time is wasted on bureaucratic formalities (Yeoh, Richards, & Shan, 2014).

The mismanagement of corporate organizations

The mismanagement of corporate organizations can also delay economic growth, particular in the event that shareholders lose their investments.  In corporate organizations, accountability and transparency are a critical measure to ensure the resources of an organization are properly managed. However, there are incidents where the management is only focused on serving their interests. In this regard, the management of a corporate organization can take advantage of the lack of checks and balances to defraud shareholders of their investment in a corporate organization. In most cases, both the government regulators and shareholders are ignorant regarding how the resources of a corporate organization are managed. Corporations in any given country are critical to improving economic growth because it gives the public the opportunity to invest in publicly listed companies. As a result, the public can improve their living standards from the dividends they earn from their investment in publicly listed companies. On the contrary, the mismanagement of resources in a corporate organization denies the shareholders an opportunity to improve their living standards. This is because their investment is lost because of fraudulent practices by the top management in the corporate companies that the public invests (Yeoh, Richards, & Shan, 2014).

 In some countries, the government regulators are also complacent in terms of ensuring that malpractices in corporate organizations are minimal and cannot derail economic growth. The board of directors on their side is also reluctant in their fiduciary duty on behalf of the shareholders. The consequence in this sense is that, the top managers with intentions to advance self-interest can take advantage of such lapses to defraud the companies they manage.  The act of managers advancing their self-interests in corporate organizations is a key reason for the collapse of large corporations across the globe. A good example is the collapses and scandals that have affected American corporations in recent times. The collapse and scandals can be directly associated with mismanagement of a company’s resources by those in charge (Yeoh, Richards, & Shan, 2014). On the other hand, the imminent collapse of larger corporations seen to drive the economy of a country, often forces their governments to initiate a bailout.  Such bailouts impact negatively on the economy because, resources meant for other areas that serve citizens are channeled to save big corporations that have a direct influence on a country’s economy. In addition, investors often suffer heavy losses, and it takes longer to recover.  In countries where inefficient management is common, investors’ confidence is also low, and this tends to affect the economic growth in a given country. Where there are no proper checks and balances in the management of corporate organizations, adopting a corporate form of business is counterproductive in terms of enhancing economic growth of a given country. In this regard, it is necessary for corporate organizations to seek the services of independent regulators such as external auditors who can help companies to improve in terms of establishing accountability and transparency measures (Yeoh, Richards, & Shan, 2014).

Taxation

A key factor in derailing economic development is heavy taxation by the government. As such, taxation has a direct influence on the increase of the underground economy.  As a result, an unfair competition emerges where the legal economy pay tax while the underground economy evade taxes. Where the underground economy continues to increase, it is the government that losses in terms of revenue collection that can be used to finance various governments projects and improve the lives of citizens. Conversely, the double taxation directed at corporations and shareholders can also impact negatively on the economic growth of a given country (Winton, 1993). In corporate organizations, both the company’s income and the dividend earned by the shareholders are taxed. This leaves investors with no alternative, but to stop investing in publicly listed companies. On the same note, economic growth is affected because investors may move to other regions where the tax can be waivered. On another note, the government can also lose in terms of revenue collection. This is because corporations in a given country can engage in malpractices such as adjusting their accounts to pay less tax. Such a practice can be detrimental to a country’s ability to support various services provided to citizens. In addition, the government can also suffer in terms of infrastructure development due to insufficient funds that are mostly sourced from tax collection (Winton, 1993).

Corporations forces small businesses to drop out of the market

The large corporate organizations tend to force small business out of the market because of their economies of scale. Small business does not have the resources available to large organizations and thus, cannot compete at the same level with corporations.  This situation hinders economic growth because SMEs cannot thrive in an economy dominated by large corporations. Governments need to play an important role in protecting small businesses against the practices of larger corporations (Sadri, 2014).

Corporations are expensive and complicated

Forming corporations tends to be expensive and complicated compared to other forms of businesses. For instance, the initial costs for setting up a corporation and maintaining operations appear to be high. There are many laws that corporations in a given country needs to follow in terms of fillings and making payments. In addition, there is rigidity because corporations are slow in distributing their profits and losses compared to other forms of businesses.  Corporate organizations are also costly compared to other forms of business because different states will require such organizations to obtain a license. As such, conducting business in other states is a challenging task for corporations that cannot afford the fee asked by different state authorities.  Economic growth is enhanced when there is flexibility to operate in different states and without many restrictions from the responsible authorities such as, for instance, licensing corporations in every state that they intend to operate (Yeoh, Richards, & Shan, 2014).

Creation of monopoly

Because of various regulations of incorporations, only a few companies may meet the requirements. As such, monopoly is created because the few incorporated companies have less competition in the market. Because of the lack of stiff competition, organizations enjoying monopoly are reluctant in improving the quality of products or services provided to the public. Consequently, the public is often left with no option, but to move to substitute products or services. In addition, the government can also create a monopoly market by preventing new entrants. However, the corporations with a monopoly in the market in most cases do not embrace changes and often remain static.  In terms of national competitive advantage, governments that support a monopoly market find difficulties competing at the same level with other multinational corporations that operate in a global context (Demirguc-Kunt, Inessa, & Vokislav, 2006). Instead of creating a monopoly market, governments needs to liberalize the market to allow other competitors to join.  Because of liberalizing the market, quality of services or products improves, and businesses adapt to the frequent changes in the business environment. Economic growth requires adaptability to the changes in the business environment.  Further, adaptability ensures that large corporations in a given country remain relevant with regard to conducting their businesses on a global front. On the other hand, while governments need to open up their markets to minimize the monopoly, it is also important that they protect smaller businesses from large multinational corporations joining a liberalized market (Demirguc-Kunt, Inessa, & Vokislav, 2006).

Exploitation by foreign investors

Where there is a lack of proper regulations for incorporation, investors in a corporation and, in particular, foreign investors tend to take advantage of the inexistence of proper regulations regarding investment by foreigners in publicly listed corporations.  While the investors bring the much need capital to propel growth or expansion, they can also opt out because of a number of reasons that include, for instance, political instability. When such investors decide to opt out of a business, they normally sell their shares to other unknown persons who may either improve growth or lead a corporation to its downfall. As such, the lack of government control regarding the procedure for foreign investors to buy shares of a publicly limited company can sometimes affect the growth of such companies (Demirguc-Kunt, Inessa, & Vokislav, 2006).

 There are investors who are only interested in the short-term gains they can derive from an organization before deciding to opt out when things are not working. In other cases, where the foreign investors holds the majority shares in a corporation, it is important for the governments of different countries to ensure that the new majority shareholder is reputable and  capable of moving a public corporation to greater heights. However, where the governments of different countries do not play an active role in vetting the prospective investors in a public corporation, there are chances that unscrupulous foreign investors can buy a public corporation. The same process should also target local investors because there are those who may not be interested in the long term prospects of in corporations that they intend to own as the majority shareholders (Demirguc-Kunt, Inessa, & Vokislav, 2006).

Corporations impact on the implementation of a balanced national budget

In most countries, corporations may affect the implementation of a balanced budget especially when there is a need to bail out struggling state corporations. In order to save state corporations from collapse, for instance, various governments are forced to intervene by allocating more funds to struggling corporations to improve their performance; however, most of these bailouts tend to fail in terms of meeting their objectives and results to the eventual closing down of some state corporations. Policy makers in some cases lack knowledge regarding the operations of large corporations and often make mistakes in an attempt to save such corporations from collapse (Demirguc-Kunt, Inessa, & Vojislav, 2006). In addition, the operations of most corporations are tightly guarded and, as a result, it is difficult for policy makers to know the extent of problems existing in struggling corporations. Consequently, including bailouts in the implementation of a national budget causes constraints in allocating resources to various sections of the economy by various governments across the globe. The result in such cases is a delay in fast tracking economic growth in the important sectors of the economy that includes, for example, education, health care, and infrastructure development. In addition, stimulus packages also tend to increase inflation in the economy and if not properly managed can slow down economic growth in a given country (Demirguc-Kunt, Inessa, & Vojislav, 2006).

The need for proper management of corporate businesses

While the malpractices evident in the corporate world appear to slow down economic growth, a focus on efficient management of such corporations can improve growth in an economy. Corporations if properly managed can help to improve economy growth in a given country (Sadri, 2014). In this sense, some of the benefits of incorporation of businesses in an economy include:

Limited liability

As a benefit, corporations provide protection to shareholders in terms of limited personal liability. This is because corporations operate as a separate legal entity and shareholders are not accountable for the debts incurred by such organizations. In the case that mismanagement leads to a collapse of corporations, the assets of shareholders are not confiscated to offset the debts accrued by corporations.  In most cases, economic growth is enhanced where corporations operate as a separate legal entity. This is because fully incorporated businesses know there are consequences for poor management and malpractices that include litigations against the top management who hold the highest responsibility in a corporation (Winton, 1993).

Perpetual existence

As a separate entity, corporations have the opportunity to continue existing regardless of what happens to some of the owners. The only was a corporation stop existing is through a legal dissolution or when it is acquired by another company. In corporations, the risks associated with sole proprietorship or partnerships is minimal, and this plays a role in attracting more investors to corporations compared to other forms of businesses. As a result, corporations are in a vantage position to contribute towards the economic growth of a given nation. This is because they operate in large scale and provide a source of employment to a larger section of the public. In addition, there large-scale operations that include involvement on the global front are beneficial in terms of improving profitability. In turn, the revenue that the government collects from highly performing corporations can be used to provide efficient services to the public (Sadri, 2014).

Improving capital investment

Properly managed corporations are in a position to attract capital investment from both local and foreign investors.  In the modern day, liberalization of the global business environment has led to an increase of foreign investment in different regions of the world.  In this regard, an efficient management of corporations is important in attracting reputable investors whose investment in corporations can enhance the competitiveness of such organizations. An increase in foreign investment in a given country also plays a role in improving economic growth because of the finances and other resources that foreign investors can pump into an economy embracing liberalization of the market (Sadri, 2014).

Flexibility in conducting business

Where efficient management is emphasized, corporations provide prospective investors with the easiest form of transferring shares compared to other forms of businesses in an economy. Since corporations operate as a separate entity, the side dealings between shareholders do not affect the operations of corporations.  Because the corporations are not involved directly in the transfer of shares between shareholders or selling of shares to other prospective investors, flexibility is enhanced in terms of attracting more investment into a corporation. In turn, the transfer of shares between shareholders help to improve the corporation’s performance in the stock market and this contributes to economic growth in terms of improving the value of shares held by owners of a corporation (Sadri, 2014).

The centralized management of corporations improves efficiency and growth

Corporations have board of directors and the CEO at the helm that ensures such organizations are managed efficiently. While the board of directors protects the interests of shareholders, the CEO is tasked with managing the daily operations of the corporation. A centralized management of corporations allows the top management to update the board of directors on the corporations’ performance and areas that require changes. In turn, the board of directors also updates the shareholders. In this sense, investor confidence is enhanced because the key stakeholders are aware of what is going on in an organization.  In addition, where the board of directors conducts their fiduciary duties on behalf of shareholders appropriately, cases of mismanagement of shareholders’ interests in a corporation are minimized. As a result, a corporation is in a position to attract more investors and in turn, expand its business and gain competitive advantage and expand to other regions. In addition, coordination between the top managers and the board of directors is also critical in enhancing responsible practices. For instance, accountability and transparency are critical in ensuring that the resources of a corporation are efficiently managed to realize success (Sadri, 2014).

 Further, the public image or reputation of a corporation is critical in attracting prospective investors. The growth of corporations depends on how the top management embraces responsible practices. Where the management only serves their interests, it is difficult for corporations to realize success in its ventures. As such, the public who invest in such corporations may suffer losses in the event that an organization collapses due to mismanagement by the top officials (Mason & Simmons, 2014). Other than efficient management in improving performance of corporations, the management can also provide direction in terms of emphasizing corporate social responsibility. For instance, corporations are under pressure also to engage in practices that improve the living standards of communities where such corporations are situated. As such, corporations engaged in CSR have embraced practices such as employing the local communities, improving or providing social amenities to communities and implementing initiatives to protect the environment.  Engaging in CSR not only improves the image of corporations, but also contributes to a better economic status for communities where corporations are located (Mason & Simmons, 2014).

Conclusion

The mismanagement of corporations across the globe has resulted in a delay in modern economic growth. This is because large corporations are considered as key economic drivers and their collapse adversely affects most economies. For instance, the collapse of state corporations means that many people are left jobless, and this increases the poverty level in a given country. However, where these corporations are properly managed, economic growth is realized because efficiently managed corporations attract both foreign and locally investors who contribute capital that is necessary to expand such corporation and increase the competitive advantage of corporations both locally and internationally.

HTM2010 Week 9