An Indian prince reviewing East India Company troops, 1781.
Photo: AlamyChinese state capitalism as it exists today poses a special challenge to a world used to clear divisions between governments and private companies. But while role-swapping and hybridization between states and firms might seem new, it actually represents the return of a once-pervasive model. After the European voyages of discovery in the 15th and 16th centuries, the most important trading networks between West and East weren’t built by kings or private merchants but by “company-states” like Britain’s East India Company, which combined the profit motive of corporations with the governmental powers of sovereign states.
That history can shed light on the challenges posed by enterprises like China’s Belt and Road Initiative, which promises to unite poor and fragile partner countries in a Sinocentric web of “win-win” commercial exchange. Yet as Chinese companies build the Belt and Road with the help of state-backed soft loans and imported Chinese workers, recipients of the aid have become concerned about colonization by stealth. In part, that is because these investments are increasingly protected by Chinese private security companies, charged with defending Chinese infrastructure and workers abroad. Nominally private, for-profit entities, these companies have strong ties to the Chinese state and are typically staffed by veterans of the People’s Liberation Army.
It’s not just developing countries that are wary of the Chinese model. Huawei, the world’s largest manufacturer of telecommunications equipment, presents itself abroad as a private corporation driven purely by profits. But back home, Huawei is seen as a national champion, deeply rooted in the Chinese military-industrial complex. This fluid identity, coupled with its complex and deliberately opaque ownership structure, has made Western countries especially fearful of Huawei’s expanding control over the digital infrastructure on which modern commerce depends.
The corporate headquarters of Huawei in Shenzhen, China, May 2019.
Photo: Kyodo News Stills/Getty ImagesThe original company-states had a more clear-cut official role. They were founded under royal or parliamentary charters to undertake the long-distance trade and colonization that rulers were too poor to finance themselves but too ambitious to forgo. These companies disposed of wealth and firepower that rivaled and sometimes even eclipsed that of their state patrons. At the peak of its power in the early 19th century, the East India Company maintained an army of over 250,000 troops and ruled one-fifth of humanity. The Hudson’s Bay Company controlled approximately one-tenth of the world’s terrestrial surface, in what is now Canada, while the Royal African Company was pivotal in funding and coordinating the trans-Atlantic slave trade.
If these Frankenstein institutions seem hard to categorize now, they also confounded their contemporaries. In the late 18th century, Edmund Burke denounced the East India Company as “a state in disguise of a merchant, a great public office in disguise of a counting house.” For the company-states, however, this ambiguity wasn’t a bug but a deliberate and highly profitable feature, allowing them to play up whichever aspect of their dual identity served their interests best. When officers of the East India Company were questioned in Parliament about the Bengal famine that killed up to 10 million people from 1769 to 1773, they invoked the sanctity of private property rights to shield themselves from scrutiny.
Company-states were even more confusing when their representatives pitched up on the shores of India, China, Japan and other countries seeking embassies and trading privileges. Who did these interlopers represent, monarchs or merchants? Company-states deftly manipulated local confusion over their identity to overcome resistance and extract the maximum commercial and diplomatic benefit. When necessary, company employees would humiliate themselves before the powerful, kowtowing to the Chinese emperor or trampling crucifixes for the amusement of the Japanese Shoguns. But in Africa and the Spice Islands, company-states didn’t hesitate to deploy soldiers to enslave and exterminate.
Company-states can be seen as the first multinationals. They pioneered the limited liability corporation and the separation of ownership from management through a joint-stock structure, while managing employees and production networks across the globe. They also anticipated the Enron-style corporate accounting scandal and the stock market crash. In 1720, massive speculation in the shares of Britain’s South Sea Company, a new company-state chartered to trade with South America, almost brought down the government amid a welter of bribery and insider trading. The companies’ hybrid public-private identity created an irresistible temptation to privatize their profits and socialize their losses.
“ In 1637, the Dutch East India Company was valued at the equivalent of $7.9 trillion today. ”
At their height in the 17th and 18th centuries, European company-states dwarfed today’s multinationals. In 1637, the Dutch East India Company was valued at the equivalent of $7.9 trillion today. But in the 19th century, changing ideas about the proper spheres of state and business fatally diminished their legitimacy; the East India Company was effectively nationalized in 1858.
Today’s Asian corporate chameleons lack anything resembling the official charters of the old company-states. Instead, they are linked to their home governments by Byzantine ownership and governance arrangements. But as Donald’s Trump’s America and Xi Jinping’s China face off over geopolitics and commerce, the lines between those realms are blurring, allowing these Janus-faced entities to thrive once again.
The failure of states to manage global threats like Covid-19 have made some observers celebrate the prospect of multinational corporations playing a more direct role in global governance. Others look hopefully to China’s state-owned titans to build the infrastructure that Western capital markets have so far failed to fund.
But history should make us cautious. Whenever corporations have straddled the public-private divide, they have ruthlessly exploited the confusion to dodge accountability, undermine sovereignty, worsen international tensions and fleece governments and investors. To hope that a modern-day return to corporate sovereignty might end happily is to neglect globalization’s tumultuous history—and to ignore a not-so-distant era when companies really did rule the world.
—Mr. Phillips is an associate professor of international relations at the University of Queensland and Mr. Sharman is a professor of international relations at the University of Cambridge. This essay is adapted from their new book “Outsourcing Empire: How Company-States Made the Modern World,” published by Princeton University Press.
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