The Evolution of Organizations

Francois de la Rochefoucauld is attributed with the saying “The only constant in life, is change.” Not only is this true of humans, it also applies to the evolution of organizations. In the Preface to this book, I declared that trade has been conducted in one form or another for all of recorded history. In all probability, it happened before then as well but one thing is certain, the development of trade has contributed to the modern, globalized world in which we live.

From the earliest times of business exchange, the trader, or peddler of goods, was known as a merchant. He, for he was almost universally a male, was a businessperson engaged in retail trade. The merchant would more often than not travel and traffic his wares between disparate ­communities. The Middle Ages saw the rapid expansion of trade as new land routes were opened by the Radhanites, the Frenchman Andrew of Longjumeau, the Flemish William of Rubruk as well as the Polo family from Italy, and many others. Later, expansion by sea was led by Vasco da Gama, ­Ferdinand Magellan, and, of course, Christopher Columbus. Although they may have been financed by others, all of them were, essentially, ­individual traders who became rich from trade. That the roads the merchants traveled were dangerous and full of pitfalls is an understatement and to combat this they formed the Merchant Guilds whose purpose was to negotiate for safe passage through the payment of regulated trade levies.

Later, these Guilds formed joint-stock companies, the earliest of which in the context of international trade were the East Indies Companies: both the British and the Dutch versions. Both companies were the enterprise of businessmen who joined forces to make money out of trade with South East Asia. From their formation on the cusp of the 17th century, these two companies grew to become imperial powers in their own right. Regrettably, abuse of market power, corporate greed, judicial impunity, and the destruction of traditional economies forced their national governments to rein them in toward the end of the 18th century. In both profound and disturbing ways, they provided the model for international trade and were the forerunners of the present day multinational enterprises (MNEs) even though they had one distinct advantage—they only paid taxes to one government—their one at home.

Present-day MNEs, which are those organizations that are based in one country (the home country) and have business operations in other countries (the host countries), continue to wield significant influence but it is perhaps a more insidious influence than that of their 17th-century counterparts. The current MNE has long been considered a threat to the egalitarianism of the free world simply because governments compete to win their investment. These commercial organizations have so much influence in generating jobs and revenues that a range of social issues such as accounting practices, labor relations, taxation policies, development plans, and community infrastructure are determined by their concerns. They are rarely concerned with the interplay of supply and demand but are simply looking for ways to maximize returns to owners, more of which later, by squeezing the sources of supply.

As we stagger through the early years of the 21st century, in ­commercial situations other than where the investment required is significant, individuals, entrepreneurs, and big companies are mixing and matching together all sorts of technologies, markets, and innovations to start new businesses out of nowhere or give old businesses some totally new dimension. This trend is becoming one of the most powerful drivers of the global economy, nurturing more small- and medium-sized enterprises with a global reach than anyone realizes. How does this happen? Rather simply actually for, with a modest amount of capital, the right imagination, and sufficient Internet bandwidth, anyone can assemble a global commercial enterprise by matching providers and customers from anywhere to do anything for anyone.4 Conceivably, we have come a full circle, returning to the world of the individual merchant. The key difference is the technology available to conduct trade, which these days just happens to be so much more than peddling goods.

If this really is the case, the notion of transfer pricing may have become irrelevant for it is a business concept that typically only applies to organizations, either singular or in a group, with a presence in more than one location, whether they are in the same country or in different nations, and where there are business transactions between those locations. That would seem to rule out the relevance of this book to many but please keep reading anyway because there are still an awful lot of huge organizations for whom the discussion is useful as well as many situations in smaller enterprises where application of the principles I’ll discuss later may lead to a better understanding of their value chain.