Isabella Brown

JSIS 200 AE

William Bamber

4 December 2015

A Comparison of the World’s First Joint-Stock Companies and

Their Subsequent Effects on the World System

In the seventeenth century, a new global force emerged, eclipsing the strong naval

empires of the Spanish and the Portuguese. The Dutch East India Company, or the VOC

(Vereenigde Oost-Indische Compagnie,as the Dutch would say), was created to profit from the

spices prevalent in the Asian trade market, and quickly monopolized this sector through strategic

acquisition of territories as well as incredibly violent exploitation and decimation of natives. For

almost two centuries, the VOC made incredible profits and united much of Indonesia and the

surrounding areas in the production and export of spices. Its main rival was the British East India

Company, also known as the EIC, formed by the crown in 1600 as the "Governor and Company

of Merchants of London trading into the East Indies." The two competed in the shipments of

assorted peppers, coffee, tea, tobacco, and more, and for almost two hundred years, both

companies had a variety of successes. However, in 1800 a series of financial and political

difficulties led to the dissolution of the VOC, leaving the East India Company as the main

corporation in the East Indies. The EIC went on to gain prestige and profit for almost two

hundred more years, most infamously through opium trade with China. These two corporations

together embodied the initial structures of modern day joint-stock companies1, and brought

1
Goetzmann, William N. The Origins of Value: The Financial Innovations That Created

Modern Capital Markets. Oxford: Oxford University Press, 2005.

places that at the time were peripheries of the world system into a truly global trade. Yet one of

the companies thrived for centuries after the other. As the EIC expanded its reach, its

connections and partnerships helped to fuel British global trade, which in turn fueled the

industrialization that was transforming the nation at a dizzying pace. This paper seeks to explain

why the EIC had successes even after the VOC began to decline, for its successes are a part of

the explanation of why England pulled ahead of the world through a great divergence, and

subsequently why European hegemony prevailed. The British East India Company maintained its

power through strategic corporate organization, geographic fortuity, and a series of calculated

tactical moves that allowed its endurance even after the fall of the VOC, fueling English

industrialization and improvement rather than Dutch.

The VOC and the EIC were two of the world’s first successful joint-stock companies, and

although they experienced many similar problems, the unique differences in their corporate

layout were detrimental for the VOC. The organization of shared ownership that both companies

had allowed for the spread of liability and risk among shareholders, so that dangerous and long

journeys to new frontiers could have funding without upfront costs from only one funder2.

However, this tiered organization created problems for both companies, and eventually proved

fatal for the VOC. Corruption in the upper ranks of the organization led to loss of efficiency and

slowed performance in the VOC and in the EIC. Salaries for those not at the top were dismal,

and employees had a high mortality rate. However, the true hindrance that the VOC experienced

and the EIC avoided was the dividend policy. As Niall Ferguson writes, “[VOC] shareholders

were mollified by the decision, in 1632, to set a standard 12.5 per cent dividend, twice the rate at

which the company was able to borrow money. The result of this policy was that virtually all of

2
Ibid.
the Company’s net profits thereafter were distributed to the shareholders.”3 These dividends

were not adjusted when profits went down at any point, leading to major deficits and

necessitating large loans to be taken out. Contrastingly, the EIC had a lower dividend rate that

was flexible as profits fluctuated. The structure of the VOC was therefore only sustainable if

profits saw accelerated growth, or at least stagnation, for any decrease in profits would therefore

mean a larger loss for the company as payouts remained constant to keep investors happy.

Another structural advantage was that the British East India Company was receiving a

protection of its funds directly from the Crown, which provided an “insurance policy” of sorts

that the VOC did not have. Although both the Dutch East India Company and the British East

India Company were originally given power and support from their respective monarchies

through the form of charters, the VOC funding was not continuously backed by the monarchy.

Although founded before the VOC, and thereby the first official joint-stock company in the

world, the EIC was more famous for being the first limited liability corporation (known today as

an LLC).4 This meant that the royal coffers covered any debt that was created, so that investors

were guaranteed to not have to ever bail the company out. Additionally, if the corporation

completely failed, any investors besides the crown would only have to pay the amount of money

they had originally invested. While the VOC was also an LLC, it was not covered by the royal

monarchy. So, when debt inevitably crept onto the company, as tends to happen with

3
Ferguson, Niall. The Ascent of Money: A Financial History of the World. New York:

Penguin Press, 2008.

4
Petram, Lodewijk. The World's First Stock Exchange How the Amsterdam Market for

Dutch East India Company Shares Became a Modern Securities Market, 1602-1700. S.l.:

Columbia Business School Publishing, 2011.

investments on agricultural goods such as spices due to fluctuations in demand as well as

unforeseeable weather patterns, there was no deep pocket to cover the company in paying back

the investors and financial ruin was imminent5. As joint-stock companies and LLCs, the two

companies were innovative financial and economic institutions that helped to form how markets

work today. However, the EIC’s unique roots in the British monarchy proved to be a saving

grace whenever times were tough, which, given the nature of the trade, was not a rare

occurrence, whereas the VOC had no upper organization to fall back upon when they began

losing money. So, the fall of the VOC was not prevented, whereas the EIC was able to

successfully bounce back even after failures.

Another factor that came into play in why one company was more successful than

another was the choices made regarding the geographical areas that the two simultaneously

found success in. The Dutch had chosen modern-day Jakarta as a center, but the need to process

all spices through this central location (then Batavia) added the inefficiency of a middle-man6.

The VOC therefore was unable to gain the productivity of direct trade. For a short while, the

geographical territory of the two companies overlapped in this region. In 1620, the arrival of the

EIC in Batavia actually resulted in a partnership between the two joint-stock companies, but it

was short-lived. In 1623 there was an uprising by the Dutch, a massacre that caused the EIC to

5
Goetzmann, William N. The Origins of Value: The Financial Innovations That Created

Modern Capital Markets. Oxford: Oxford University Press, 2005.

6
Nierstrasz, Chris. In the Shadow of the Company the Dutch East India Company and Its'

Servants in the Period of Its' Decline 1740-1796. Leiden: Brill, 2012.

abandon their posts and relinquish control to the VOC once more7. This turned out to be both a

blessing and a curse, as the EIC was never again able to break into this region and was forced to

explore other areas. The lack of access to Jakarta had deep consequences for the EIC, discussed

later in this paper. For the VOC, however, it allowed a monopoly of the region. Its monopolistic

and exertive control over Indonesia and Jakarta and surrounding islands was created using

exploitation and fear tactics, often through the promise of protection from neighboring islands in

exchange for trade. There was access to multitudes of spices such as cloves, mace, and nutmeg,

and “an effective and highly lucrative monopoly”8 was established. For the 18th century, the

VOC’s geographical choice of Jakarta was fortuitous.

However, the tides soon shifted as the tastes of the European emerging middle class were

changing beginning around the middle of the eighteenth century9. The desire for teas and for

porcelain began to grow more and more, and this became a geophysical problem for the VOC as

the agriculture and existing infrastructure in Jakarta did not support either of these products.

Jakarta itself was not a captive market for any Dutch goods, as the exploitation of spices was a

one-way flow facilitated by the VOC10. In addition, the changing political schema of the world

7
Nierstrasz, Chris. In the Shadow of the Company the Dutch East India Company and Its'

Servants in the Period of Its' Decline 1740-1796. Leiden: Brill, 2012.

8
Ferguson, Niall. The Ascent of Money: A Financial History of the World. New York:

Penguin Press, 2008.

9
Balk, G.L., and F. Van Dijk. Archives of the Dutch East India Company (VOC) and the

Local Institutions in Batavia (Jakarta). Leiden: Brill, 2007.

10
Lawson, Philip. The East India Company: A History. London: Longman, 1993.
began to geographically limit the VOC’s access to other Asian territories that they had traded

with such as Bengal and Persia, so the trade was confined, along with profitability, to this port

center11. The geographical attributes of the VOC stronghold soon contributed towards its

downfall.

The British EIC, on the other hand, had chosen strongholds in the geographical regions of

China and India, which proved extremely fortuitous. After the EIC relinquished control of

Jakarta to the VOC, they were forced to explore other areas. These areas were to the North and to

the West of the Dutch strongholds, in parts of South East Asia as well as China. These choices of

place had lasting repercussions on the future of the EIC and on all of Britain. As the cotton

industry in England boomed, the EIC’s captive market of India proved incredibly important in

soaking up the British-produced cotton. This cotton is a significant part in the rise of England as

a higher world power, as its production was simultaneously fueling the Industrial Revolution of

the time.12 Factories and technologies were abounding in order to meet the demand, and in turn

transportation inventions helped distribute the coal needed to power the factories. The evolution

of railroads played a huge part in the Industrial Revolution, as they allowed coal to be more

effectively brought to where it was needed. The EIC’s territory in India was therefore a massive

asset in its ability to industrialize, while the VOC had no such captive market in any of their

strongholds.

The EIC’s choice of territories in China also proved more profitable than the VOC

territories. Chinese demand for silver was so great, a captive market hardly needed to be

11
Ibid.
12
Pomeranz, Kenneth. The Great Divergence: China, Europe, and the Making of the

Modern World Economy. Princeton, N.J.: Princeton University Press, 2000.

created.13 Silver was traded for luxury goods, such as teas and porcelain and other goods, which

were highly demanded as the rise of consumerism and luxury fashion evolved parallel to the rise

of the new middle class.14 The Atlantic Trade allowed for the transportation of the silver from

mines in the New World, where Britain exploited human capital in order to strip the earth of

many precious metals, to places such as Europe and China. However, the vast majority of the

silver went to China, where it was used as both a commercial product and a monetary tool. The

fortuitous choice of territory in the United States that was colonized by Great Britain proved in

turn equally important as a captive market for the EIC, as it bought teas exported from China. A

similar interconnection of global trade was inexistent for the VOC and the Dutch, who focused

mainly on European-East Indies trade with relatively minor positions in the New World. So,

there was a relative lack of global trade for the VOC to profit off of. Geographic choices of

England of where to colonize and exploit brought success through captive markets and the trade

of a diverse range of goods that were differentiated by geography and climate for the British East

India Company, while a focus on Jakarta proved too narrow-minded and financially detrimental

to the VOC. The choice of territories of the EIC created higher and longer lasting profits than the

VOC strongholds, and so the British economy was fueled into industrialization even as the Dutch

began to falter.

13
Lawson, Philip. The East India Company: A History. London: Longman, 1993.
14
Pomeranz, Kenneth. The Great Divergence: China, Europe, and the Making of the

Modern World Economy. Princeton, N.J.: Princeton University Press, 2000.

 The British had no rival in naval and military power at the time15, allowing for a more

successful conquest and exploitation carried out by the EIC than the VOC by sea. The

technological prowess of the British on the sea was evident in the ease in which only a handful of

EIC ships were able to quickly take over almost any port that did not have gunpowder. The

Chinese invention of gunpowder came to a historical full circle, as it allowed Britain to succeed

in conquest of ports in China as well as around the world. Although successful in defeating the

EIC on land in Batavia, the Dutch lagged behind Britain in naval technology; in fact, they lagged

behind forces such as Spain and Portugal as well.16

Another reason for EIC success was a series of incredibly savvy and yet incredibly

exploitative choices that strategically gained the company fortune and power. Both the EIC and

VOC chose extremely violent tactics towards natives and locals. The beginnings of trade were

not peaceful for either company; in fact, one VOC leader stated “We cannot make war without

trade; nor trade without war.”17 However, the British EIC chose an even more strategic and

premeditated path of violence. The Indian opium trade was monopolized, and Chinese citizens

were methodically brought to addiction in order to fill English pockets. The country was

basically spoon fed opium, and in exchange goods and teas were taken, which then were brought

15
Parthesius, Robert. Dutch Ships in Tropical Waters the Development of the Dutch East

India Company (VOC) Shipping Network in Asia 1595-1660. Amsterdam: Amsterdam

University Press, 2010.

16
“Acknowledgements.” The Dutch East India Company and the Economy of Bengal,

1630-1720, 1985.
17
Ferguson, Niall. The Ascent of Money: A Financial History of the World. New York:

Penguin Press, 2008.

to Europe and to the Americas (specifically to the present day United States of America). The

opium trade allowed for a large amount of profit for England, and in order to maintain these

profits, ethically questionable tactics were used in order to keep the addictions of up to one fifth

of the nation’s population alive. The opium trade had devastating effects on much of China and

became an integral part of its economic functioning:

“The nineteenth century opium trade not only destroyed the integrity of social and

political structures in China and Southeast Asia, but it also helped to build and to finance

the creation of new and alternative structures. In Southeast Asia, these were the colonial

states, most of which were supported by opium revenues… At the end of the nineteenth

century opium was thoroughly embedded in the political economies of every Asian state

east of Suez.” 18

In fact, the same author states that without “opium income and opium profits from the Indian

budgets, from the merchant’s balance sheets, from the other colonial fiscal structures, I believe

we need to ask how else to superstructures of the European enterprise would have been

financed.”19 The exploitation and monopoly of the opium trade on South East Asia clearly had an

integral part in funding the ability of England to hegemonize much of the world through its

colonization, as well as created a hindrance for many Asian powers from independent self-

sufficiency in trade and economic development. These deliberately created interconnections in

global trade were not to be seen in the VOC, and add to the explanation of how the EIC was able

to maintain financial stability and power long after the VOC fell.

18
“Acknowledgements.” The Dutch East India Company and the Economy of Bengal,

1630-1720, 1985.
19
Ibid.
 The rise and fall of these powerful multi-national corporations highlights the changing

relationships of East and West, and shows how the world economy was transforming towards a

capitalistic, profit-driven multitude of corporations. The success of the British East India

Company left the legacy for joint-stock corporations, and the VOC can be attributed as the

forefather of the first stock exchange. Today’s financial markets have much to thank these two

corporations for. The lasting impacts of such state-controlled corporations can be seen today:

“State-controlled companies account for 80% of the market capitalization of the Chinese

stock market, more than 60% of Russia's, and 35% of Brazil's. They make up 19 of the

world's 100 biggest multinational companies and 28 of the top 100 among emerging

markets.” 20

However, the furthered success of the EIC in comparison to the VOC left another lasting legacy.

Higher profits, capital accumulation, and global interconnections propelled England further

forward during its takeoff in the Industrial Revolution. Transitions in the Eurasian economy, as

well as the European rise into a period of hegemony, can be correlated to the success of the

colonies and markets created by the British crown, which protected the EIC and used its profits

to fuel its global interconnections. As the addition of the New World to the global picture began

to expand trade, the EIC soared in comparison to the VOC, and can help explain the shift

towards capitalism, crusaded by England’s industrialization and progress, that has characterized

much of the world ever since.

20
“The East India Company: The Company that Ruled the Waves.” The Economist,

December 17th, 2011.

 Citations

“Acknowledgements.” The Dutch East India Company and the Economy of Bengal,

1630-1720, 1985.

Balk, G.L., and F. Van Dijk. Archives of the Dutch East India Company (VOC) and the

Local Institutions in Batavia (Jakarta). Leiden: Brill, 2007.

Ferguson, Niall. The Ascent of Money: A Financial History of the World. New York:

Penguin Press, 2008.

Goetzmann, William N. The Origins of Value: The Financial Innovations That Created

Modern Capital Markets. Oxford: Oxford University Press, 2005.

Lawson, Philip. The East India Company: A History. London: Longman, 1993.

Nierstrasz, Chris. In the Shadow of the Company the Dutch East India Company and Its'

Servants in the Period of Its' Decline 1740-1796. Leiden: Brill, 2012.

“The East India Company: The Company that Ruled the Waves.” The Economist,

December 17th, 2011.

Parthesius, Robert. Dutch Ships in Tropical Waters the Development of the Dutch East

India Company (VOC) Shipping Network in Asia 1595-1660. Amsterdam: Amsterdam

University Press, 2010.

Petram, Lodewijk. The World's First Stock Exchange How the Amsterdam Market for

Dutch East India Company Shares Became a Modern Securities Market, 1602-1700. S.l.:

Columbia Business School Publishing, 2011.

Pomeranz, Kenneth. The Great Divergence: China, Europe, and the Making of the

Modern World Economy. Princeton, N.J.: Princeton University Press, 2000.