Economist contrasts old and new corporate structures

Corporations lend themselves to all sorts of labels, depending on one’s point of view.

They can be innovative or exploitative; creative or conniving, and perhaps for MSNBC watchers, they’re just symbols scrolling across the bottom of a television screen, ripe for investment.

But for Richard Langlois, an award-winning UConn economics professor, corporations are like Lego toys, structures that can be configured in any number of ways.

He often sees them as “vertical” or “horizontal,” simple labels that make a convenient jumping-off point for the kind of discussion economists have been having for at least 100 years.

Much of his research focuses on the work of the prominent economist Joseph Schumpeter, who died in 1950, and a business historian named Alfred Chandler Jr., who taught at Harvard and died earlier this year.

Langlois’s 2004 book, Dynamics of Industrial Capitalism, received the 2006 Schumpeter Prize of the International Joseph A. Schumpeter Society.

In the book and in other research, Langlois looks at the views of Schumpeter and Chandler and assesses how well they have stood the test of time.

Often, he finds bends in the economic road that they could not have foreseen.

“Chandler was writing in the middle of the 20th century, when protectionism was common and markets were more closed,” Langlois says.

“He saw the rise of the large, vertically integrated company as the inevitable product of economic development. His argument would be less persuasive today.”

Economists call a company vertically integrated if it tends to handle most stages of production by itself.

An example, Langlois says, is the IBM of yesterday. “IBM used to make its own transistors, its own motherboards,” he says.

“It owned divisions that made almost every part of the computer, and the company was structured like a silo.”

No longer. “Today, corporations are mostly horizontal, with production spread out among many companies and entrepreneurs everywhere,” he says. “That’s the idea of the new economy.”

Langlois is interested in how corporations evolve, and why. In the case of IBM, he says, the company started keeping all the components of a computer under its corporate roof, but before long had to yield to specialist companies that were moving different computer technologies forward faster and more economically than the large corporation could.

A similar situation evolved with the oil companies, Langlois says.

They used to handle all aspects of production, from exploration to refining to distribution and sale to consumers, or, as Langlois puts it, “They did it all, everything but making the steel that went into the drills, or the typewriters in their offices.

Langlois argues that it’s wrong to see a large vertically integrated corporation as “the apotheosis of organizational form.” Instead, he sees it as the second-best form, “the form you would get when markets can’t catch up to supply what is needed for success,” he says.

“If you specialize in only doing a few things,” he adds, “that’s better than trying to do everything, particularly in view of the possibilities created by globalization.”