Main Causes of Business Combination


Causes of Business Combination:

There are multiple causes of business combinations which have led to the formation of business combinations. They, in brief, are as follow;

  1. Elimination of competition :

The 1st main causes of a business combination are to the elimination of competition among the businesses. Nowadays, a large number of firms produce particular types of commodity. The competition among the rival firms leads to goods being sold at a cut-throat price. The stiff competition among the procedures has increased the capital risk and lowered the profits of the firms.

Some firms do not survive the competition and initially, close the business. The overextension of plant and equipment and unrealistic pricing has forced the operating enterprises to unite and save themselves from the competition.

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  1. Change in economic policy:

Another cause of business combination is a change in economic policy. If there is political instability in the country and the economic policies of the govt are subject to frequent changes, it promotes businessmen to combine and chalk out policies which reduce risk in business.

  1. Economics of large-scale production:

The rival units combine together to reap the benefits of large scale production. They purchase raw material in bulk, produce standard goods with specialized knowledge, reduce the operational costs of business and sell the produce at a price which gives them maximum profit.

  1. Fluctuations in business activity:

If the economy is passing through a phase of low production, low prices, low employment, low capital, the firms then make efforts to combine together to save themselves from the bad effects of depression. Similarly, if the prices are rising and the margin of profit is high, it gives incentive to the firms to combine and enjoy the benefits of monopoly.

  1. Influence of Tariffs:

The imposition of customs duties on the imported goods is also an important factor in the formation of a combination. The protected industries having no fear of the competition of foreign goods combine together and are able to sell the goods at a price higher than the competitive market.

  1. Transportation development:

The development of fast means of transport has also led to the growth of industrial combinations. The transportation development has made it possible to build up a large business in various parts of the country. These big industrial units being small in number easily from industrial combinations.

  1. Formation of joint stock companies:

The small scale industries lay scattered and cannot combine easily. The big concerns operated through joint stock companies. They can easily contact each other by direct telephone, telegrams and can also call a joint meeting at a very short notice. They formulate policies of protecting their economic interests and carry them effectively through combinations.

  1. Rationalization:

The business units may combine for standardization of products. Planned utilization of resources and the introduction of automation in industry.

  1. Patent Laws:

Patent laws have also led to the growth of business combination patent laws give monopoly position to concerns and also lead to the formation of cartels to resist competition of the outsiders.

  1. Competing in the international market.

If a business is to stay and compete in the international market, then its size must be very large. The combination of successful enterprises reduces the risks involved in buying and selling of goods in the international markets.

  1. Respect for bigness:

the last but not the least causes of a business combination are that the small or new business respect the bigger business. The business units of bigger size command more respect than of smaller units. The business units, therefore, aspire to combine to have respect for bigness.