The Nature of Firms in Different Economic Systems - Essay Example

?Are firms the same thing everywhere? Discuss with reference to the nature of firms in different economic systems Introduction The economic system ofa nation refers to the system of allocating the resource endowment of the country among the different activities taking place within the country. In this process, resources are allocated to firms for making productive activities. These resources act as the factors of production for the firm. Thus, it is an important task for researchers to identify the pattern in which the resources are allocated among different sectors (Albert, 1993). Traditionally four factors of production can be identified. These are natural resources, labour, capital and entrepreneurs. The way in which these resources are allocated to the different manufacturing units depends on the forces that drive the economy. In the current world economy, three different types of economic systems can be identified. These are command economy, market economy and mixed economy. Depending upon the type and pattern of the economy, the characteristics of firms varies from one country to another (Dore, 2006). The type of economic system would prescribe the way in which natural resources would be allocated to the firms, the method of employing labour force and determining their remuneration, the methods of selling goods and services in the market, pricing of goods and services and determining the equilibrium position between quantity and price (Koen, 2005). This paper is dedicated to the discussion of the nature of firms in operating different economic systems. It also establishes the fact that all firms are not the same; rather vary according to the economic system in which it operates. Characteristics of firms Firms are the production units that lead to income generation for the economy. Although the basic responsibility of firms can be encapsulated through the above definition, there are vast differences in the pattern of firms operating in different economies. Different firms have different organizational structure, mission and objective, usage of raw materials, profit objective, type of products or services produced, and also environmental foot print made by the firm through its activities. The characteristic of a single firm is described by the market share (or market power) it possesses, number of other sellers in the industry, nature of market demand faced by the firm, price mechanism followed and the target market served (Plesch and Blakenburg, 2008). Variation in some or all of these factors creates different types of firms. Some of these factors are internal to the firm while others are related to the external environment of the firm. Customer purchase behaviour (or customer preferences) is the chief external factor that affects the operations of the firm. The pattern of exchange of goods and services and transaction of knowledge (referring to symmetry or asymmetry of information in the market structure) also determines the types of firms in different markets. It influences the production pattern of the firm and also reflects the kind of profit enjoyed by the firm. Nature of firms in different types of economic systems Some economists distinguish each type of economic system from one another according to the concept of economic surplus. While various types of economic systems have been prevailing in different periods of time in history, only a small number of economic systems have played significant role in the shaping up of productive units in the economy. In the current global economy, three different market systems are can be distinguished from one another (Plesch and Blakenburg, 2007). Since the characteristics of each of these economies vary, it indicates that the type of firm that operates in these economies would not be the same. The types of economic structures have been elaborated below with reference to the type of firm that can operate in these economic systems. The first kind of economic system is market economy. In this type of economy, the market acts as the prime economic thrust. The forces of demand and supply act simultaneously in order to equilibrium position in the market between price of commodity and quantity demanded for the commodity. Government plays a minimalistic role in this economic structure (Wan, 1991). Since every independent nation has its own government, there is an active government in all market economies. But it does not interfere into the activities of the market actively. It acts as a protector of law and order in the country. Firm operate according to their profit maximization objective. This type of economic structure is also termed as capitalism (Hall and Soskice, 2001). The Unites States of America is an example of capitalist economy. In capitalistic economic structure, the types of firms that operate are monopoly, monopolistic and oligopoly and also perfectly competitive firms. These firms decide their amount of production according to the demand faced by them and also selects a price level determined through interaction of forces of demand and supply. Another type economic system is command economy. This economic structure is characteristically opposite to the market economy. This economic system is also known as socialism. In this economic structure, the government plays a central position. The marketplace is a connector between the buyers and suppliers that operates under the regulation of the government. In a strictly socialist economy, the processes of production, distribution and consumption of goods and services within the economy are monitored by state regulations (McNutt, 1996). The key concept that guides the economic principles operating in the country is that all consumers in the economy are equal and would therefore, consumer goods and services of equal utility (Mooney, Knox and Schacht, 2012). Almost all the enterprises in the economy are owned by the public sector. The firms are owned by either the state government or national government of the country (Aras and Crowther, 2007). Hence, firms operate with the objective of making social benefit and not with a profit motive. Under strict command economy, all firms are state monopolists. China is an example of socialist economy. However, at present the country is opening up to waves of globalisation and the private sector is gradually gaining importance. Private sector firms have started to operate in the economy and recently, the government has also been encouraging participation of the economy in international trade. Private firms are operating in the country thereby introducing competition in the market place (Turner, 2012). The third type of economy is the mixed economy. This is an economy that reflects certain characteristics of both capitalist economy and socialist economy. The mixed economy is a form of economic structure in which the market plays a significant role in determining the production and distribution pattern in the market. Firms determine their level of production according to the resources that they might utilise for the production process and also according to the demand they face in the market (Wellington, 2000). Mixed economy also allows the government to play an important role in market. The government can interfere into the operations of the market by making various regulations and policy changes. The policies of the government are directed towards maintaining effective function of the market forces. Although the forces of the market act with one another to reach the equilibrium position, sometimes the equilibrium is disturbed (Aswathappa, 2010). In some cases the equilibrium is reversible while in other cases the equilibrium has to be corrected by some external force. The government acts as an external agency that makes policy changes to correct market distortion. Firms are either directly or indirectly affected by the policy changes (M. V. Rosser, J. B. Rosser and Kramer, 1999). All four types of firms might operate successfully in a mixed economy, such as, competitive firms, monopoly, oligopoly and monopolistically competitive firms. India is an example of mixed economy. These are the three major types of economic systems that can be observed around the world. Apart from these, there is another form of economic system that is present in many countries. This is the traditional form of economic system and it is present in the agro-based societies around the world. This was the prevalent form of economy in all countries when agriculture was the basic economic activity. However, since the industrial revolution, economies and societies in different countries are modernising rapidly (David, 1996). Therefore, societies are transforming rapidly from the traditional economic structure to one of the three dominant economic structures as described above. Thus, the nature of firms varies according to the type of economic structure with which the new developments of the economy coincide. The economic systems have been discussed above to allow the readers to gain a clear understanding of the basic economic systems around the world and the type of firms that are compatible with these economic systems. The issue that is being discussed in this paper is whether all firms have the same nature in every economy in which it operates. According to R. H. Coase, the nature of firms is not a constant attribute (Coase, 2012). It varies depending on certain internal as well as certain external factors. Economic system can run without intervention from any other individual or agency. Supply in the economy is adjusted to the demand created by consumers, or in other words, production is adjusted consumption. The process in which a firm operates in the economy, according to scholars, is elastic and automatic (Coase, 1937). All firms in an economic system are coordinated by the price mechanism. Thus, they are integrated with the economic structure of the country (Grandori, 2013). Hence, if the economic structure varies from country to country, the nature of firms would also vary. In the view of some economists, the economy is not considered as an assortment of different firms but as a whole organism which is constituted of the different firms. Although the theory proposed by Coase on nature of firms looks similar to the economic structure followed in market economy, the scholar has also added t this proposition that it does not rule out the function of the government. The inclusion of government indicates the role of planning in a market economy (Seabright, 2010). Planning by individual agents is represented by the planning by a sovereign government. Since the basic objective of all firms is to earn revenue by satisfying its customers, they are bound to abide by the preferences of the economy in which it is operating, rather than following a predetermined structure of running the organization (Lazonick, 1993; Gal, 2009). This shows that it is not feasible for any growth oriented firm to portray characteristics which are very identical to another firm located in some other region that follows a different economic structure than the current country. The modern world is rapidly closing the gaps in space and time through globalization hence the characteristics of the firms operating internationally is also gradually becoming similar. However, they are different in their missions, visions, and company goals and rational for operating in the particular region. Conclusion The issue that has been taken up for this paper is whether the nature of firms is the same everywhere. Through the discussion presented above, it has been emphasised upon the fact that the nature of firms are highly integrated with the nature of the economy in which the firm operates (Dominique, 2001). In this paper all the three main kinds of the economic structures have been disc used in detail with reference to the pattern of firms that operate in the economy. The main economic systems that can be identified in the contemporary business world are the market economy (following capitalist system of production), the command economy (following socialist production system) and the mixed economy. The traditional economic system (based on agriculture) has also been discussed. The problem adopted for research has been answered towards the end of the discussion when it has been established that every firm is dependent on the economic system of the society in which it operates. Different forces might lead to resource allocation in an economy (Schlag and Mercado, 2012). Depending upon the type of resource allocation the pattern of economic system is determined. This in turn affects the type of firm that can operate in the economy. Depending on factors such as availability and allocation of raw materials, changing preferences of customers, culture and tradition of the economy and basic infrastructure; the missions and short and long term goals of the firms are decided. Thus nature of firms varies from economy to economy. Reference List Albert, M., 1993. Capitalism vs. capitalism. New York: Four Wall Eight Windows. Aras, G. and Crowther, D., 2007. What level of trust is needed for sustainability? Social Responsibility Journal, 3 (3), pp. 60 – 68. Aswathappa, K., 2010. International business. New Delhi: Tata McGraw-Hill Education. Coase, R. H., 1937. The Nature of the Firm. Economica, 4 (16), pp. 386-405. Coase, R. H., 2012. The firm, the market, and the law. Chicago: University of Chicago Press. David, H., 1996. Entrepreneurship and the market process: An enquiry into the growth of knowledge. London: Routledge. Dominique, C. R., 2001. Market economies and natural laws. Connecticut: Greenwood Publishing Group. 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