Introduction

Abstract

The determining factors and process of the growth of modern business corporations are two of the most salient topics for historians studying the development of modern economies. Corporate growth requires that transformations occur in such areas as technology, production equipment and facilities, human resource skills and knowledge, managerial capacity, marketing networks, as well as, relationships among upstream and downstream industries; and the overall success of these transformations leads to impressive rises in the productivity of individual firms, which forms the backbone of the development of modern economies.

Appendix: A Growth Accounting Analysis of TISCO During the Colonial Period

Let us begin with a review of the iron and steel market of colonial India , in which TISCO was a dominant player. Figure 1.1 shows the domestic production of pig iron and steel (1909/10 to 1936/37), while Fig. 1.2 depicts the net demand for pig iron and steel. Figure 1.3 illustrates national self-sufficiency ratios during the same period. There were three leading pig iron-producing companies in India up through 1936/37, the Bengal Iron and Steel Company (BISCO) , the Indian Iron and Steel Company (IISCO) , and TISCO²²; however, TISCO was practically India’s only steel -producing company up to the mid-1930s.

Fig. 1.1

Sources Tata Iron and Steel Company (TISCO) figures from Annual reports of TISCO, Tata Steel Archives . Data on the pig iron production of Bengal Iron and Steel Company (BISCO) figures from 1917/18 to 1929/30 from Reed , The Indian year book, Bennett, Coleman and Co. Ltd. BISCO figures before 1917/16 from an interpolation of production data in 1904 and 1917/18. 1904 figures from C. P. Perin and C. M. Weld , Perin and Weld Report , 1905, Tata Steel Archives. 1917/18 figures from Reed, The Indian year book, op. cit. Production data on Indian Iron and Steel Company (IISCO; founded 1918) figures from 1919/20 to 1929/30 from ibid. Pig iron production data in British India from 1932/33 from Government of India , Statistical abstract for British India. ¹There were a few pig iron producers in colonial India using modern western technology, among whom TISCO , BISCO and IISCO were the leading players. Annual pig iron production before 1929/30 is the sum of the output of these three companies. For pig iron production after 1932/33, annual figures are available in Government of India, Statistical Abstract for British India. ²TISCO was virtually the only steel -producing company using modern Western technology in colonial India prior to the mid-1930s; thus, the steel production figures in Fig. 1.1 are equal to that of TISCO

Domestic pig iron and steel production in colonial India : 1909–1937 (1,000 tons).

Fig. 1.2

Sources Import and export figures² from Government of India , Annual statement of the sea-borne trade of British India. Domestic production figures from the same sources as for Fig. 1.1. ¹Net demand = total domestic production + imports − exports. ²Annual statement contains three different types of data (quantity and value): imported and exported iron (I), imported and exported steel (S), and a combination of iron and steel (IS). Unfortunately, more than half of the data are included in the third type. Individual figures for iron and steel were estimated from the third category, assuming the data in the third category can be divided into iron and steel figures in the same proportion as the first two categories. In short, estimated iron imports = I + (IS) * ((I)/(I + S)) and estimated steel imports = S + (IS) * ((S)/(I + S)). Exports were calculated in the same manner

Net demand¹ for pig iron and steel : 1909–1937 (1,000 tons).

Fig. 1.3

Sources Same as Figs. 1.1 and 1.2

Pig iron and steel self-sufficiency ratios (%).

According to the figures, TISCO was indeed successful during the colonial period, increasing its saleable steel production from 20,000 tons in 1912/13 to 680,000 tons in 1936/37. TISCO’s share of the Indian steel market, which is equivalent to India’s self-sufficiency ratio in steel, also rose sharply from 2% in 1912/13 to 66% in 1936/37.

The figures, however, also show that India suffered from a substantial disparity in performance between pig iron and steel production (Fig. 1.3). In the case of pig iron production, where TISCO was a leading player, India’s self-sufficiency ratios exceeded 100% during the early years of the 1920s. Despite such an early attainment of full self-sufficiency in pig iron , India’s corresponding figure in steel was only 10% during that same time. This discrepancy did not diminish substantially during the whole period represented by the data. This indicates that Indian pig iron was highly competitive internationally as early as the early 1920s; however, Indian steel completely failed to achieve the same status prior to the mid-1930s. Since pig iron is the essential input for the production of steel ingot and other steel products, pig iron and steel are typically produced in a set of continuous production processes for efficiency (viz., a blast furnace for pig iron production is followed by an open hearth furnace for steel ingot production), in which regard TISCO was no exception. Consequently, the figures collectively imply that TISCO failed in exploiting the availability of cheap pig iron to expand its steel production .

In brief, the history of TISCO during the colonial era is the story of the company’s successive efforts to overcome its difficulties in steel production and to reduce the discrepancy between the market competitiveness of pig iron and steel production. The company succeeded in overcoming such difficulties to some extent by the beginning of the 1930s, while further improvement suddenly halted from the mid-1930s on.

How then should we evaluate the development of TISCO during the first half of the 20th century? Growth accounting analysis helps answer the question. Following the work of R. M. Solow , growth accounting analysis has been broadly utilised by economic historians and economists to clarify the causes of growth at various levels of economic activity. In growth accounting analysis , the proximate sources of economic growth are explained by the growth of inputs, such as labour, physical capital and land, and the productivity of those inputs. The factors of production are weighted to provide measures of total factor inputs. Under a neoclassical framework, factor income shares usually take the form of weights. The portion of growth attributed to changes in TFP is the residual that is unexplained by changes in factor inputs. Normally, the residual is considered to represent technological and managerial efficiency enhancement and is an excellent indicator to evaluate the development of a modern business corporation like TISCO over time.

We begin with the standard Cobb-Douglas production function and competitive assumptions,

$$ {\text{Y}} = {\text{AK}^{\text{a}}} {\text{L}}^{{ 1 {\text{ - a}}}} $$

TISCO’s annual growth in production is explained by

$$ {{\Delta}} {\text{Y/Y}} = \Delta {\text{A/A}} + {\text{SK}}\Delta {\text{K/K}} + {\text{SL}}\Delta {\text{L/L}} $$

where Y, K, and L indicate net value added, real gross block capital , and size of the workforce, and SK and SL are the factor income shares of capital and labour, respectively. TFP is indicated by ΔA/A and signifies everything that contributes to growth, except that real fixed capital and size of the workforce are composed of factors such as economies of scale , technological innovation, improvements in resource allocation efficiency , or the development of economic institutions and corporate organization that enabled TISCO to improve in efficiency. TFP is computed as

$$ \Delta {\text{A}}/{\text{A}} = \Delta {\text{Y}}/{\text{Y}} - {\text{SK}}\Delta {\text{K}}/{\text{K}} - {\text{SL}}\Delta {\text{L}}/{\text{L}} $$

The results in Table 1.1 can be summarized as follows. Initially, Period 1 represents an overview of the years following 1913/14. During Period 1 TISCO ’s TFP growth rate accounts for 45.5% (5/11) of the company’s overall growth. Since TFP includes such factors as economies of scale , technical innovation, improvements in resource allocation efficiency , and improvements in economic institutions and corporate organization , the results imply that various successive efforts to increase transactions and production efficiencies explain TISCO’s growth.²³

Table 1.1 Results of TISCO growth accounting analysis^a (%): 1913/14–1939/40

In addition, growth in fixed capital formation, whose income share was 0.45 on average, accounts for another 41% [(10 * 0.45)/11] of TISCO ’s growth during Period 1, suggesting that both capital formation and TFP are two leading sources of the growth of the modern business corporation .

The analysis of sub-periods is enlightening. During Sub-period 1 (1913/14 to 1916/17), TISCO began producing pig iron and steel under the protection naturally provided by the outbreak of the First World War . Table 1.1 implies that almost 58% (15/26) of growth during this sub-period can be explained by a high rate of TFP growth, while fixed capital formation explains 31% [(18 * 0. 45)/26]. This was the initial period of product development when TISCO increased yield through the process of learning-by-doing.

Sub-period 2 (1917/18 to 1922/23) was epoch-making in TISCO ’s history for the introduction of a new internal financing system for long-term capital expenditure, as we will explore in Chap. 4. Although TISCO was able to advance its capital formation to attain economies of scale during this time, it failed to expand production capacity via sufficient managerial efficiency , in particular its labour management system . Table 1.1 shows that TISCO’s high rate of growth in capital formation was completely offset by negative TFP growth and resulting small increases in annual growth rates.

Efforts to overcome such failures in coordination and monitoring became leading sources of growth in productivity in Sub-periods 3 and 4 (1923/24 to 1932/33), as evidenced by outstanding TFP growth for both. Chapters 5 and 7 show that it was the transformation effected in the labour management system which contributed to such high growth.

The gradual, robust development of TISCO , however, slowed during Sub-period 5 (1933/34 to 1937/38). The production of saleable steel increased almost 50% during the decade of the 1930s, as Fig. 1.1 shows, while growth maintained pace with the increasing ratio of domestic demand, but the market occupancy ratio of steel stagnated (Figs. 1.2 and 1.3). What checked TISCO’s increasing market share in the 1930s? Table 1.1 suggests that gross real block capital , which had been one of the determining factors of the company’s growth prior to the 1930s, did not increase appreciably during Sub-period 5. Why did TISCO not expand production capacity to achieve further development and obtain a higher market share ? This is an interesting question since during a decade when its was enjoying considerable gross profits (gross profit—gross fixed capital ratio and dividend -gross profit ratio were on average 7.2 and 60.2%, respectively, in the 1930s, in contrast to figures of 3.5 and 23.3% during the 1920s), TISCO had plenty of capacity to raise block capital if it so wished. We will examine the reasons why in Chap. 8.

Although the above statistical review of TISCO’s development produces possible causes for the growth/stagnation of the company during the colonial period, such analysis is insufficient to provide the necessary details regarding the company’s development. Such details will be the subject matter of the chapters that follow.