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Technological progress and the future of the corporation

Belenzon, S., Hamdani, A., Kandel, E., Niron, H. and Yafeh, Y.

The evolution of the corporation, its ownership and structure has followed major business, market and legal developments, including the antitrust legislation in the United States in the late 19th century, to the dissolution of corporate pyramids in the 1930s and 1940s, and the unravelling of diversified conglomerates in 1960s to 1980s.

Throughout, however, the basic structure of the corporation has remained the same. Today, many corporations are threatened by disruptive technological changes, while technology giants seem to grow stronger, threatening many industries.

These changes have become more drastic, driven by the ability to rapidly collect and process vast amounts of data and then combine them with Artificial Intelligence (AI) to make smarter decisions. Data and knowledge have dispersed away from large corporations, undermining their traditional advantages, and the cost of digital innovation has dramatically declined. At the same time, online platforms gather data from users over whom they have considerable control, and analyse and use the information to dramatically affect consumer and producer decisions. Regulators, meanwhile, struggle to keep pace with these trends.

The structure and governance of future corporations are very likely to be impacted by technological changes as competitive threats, but also by technologically improved contracts, increased labour productivity along with some labour replacement (by robots), improved organisational efficiency and the technologically-increased ease of market transactions.

Traditionally, novel technologies have been developed in house (within companies), but increasingly corporations are collaborating with outsiders, altering organisational structures and the ways in which business is done and. New hybrid forms of the corporation, such as public benefit firms, are evolving, albeit still on a very small scale. Technological developments might facilitate these forms (reducing agency costs, for example), but the basic legal construct of the corporations is likely to remain unchanged.

Using a ‘nexus of contracts’ framework, the paper identifies some technologies which likely to disrupt large businesses in the next decade and describes their possible effects on corporations. Examples of technologies which are significant in this respect include Big Data/AI, Blockchain and Smart Contracts, computer vision, drones, quantum computing and 3D printing. These technologies are different from innovations of the past in that they substitute for human senses and brains, rather than muscles. Sophisticated algorithms are already performing more consistently, more fairly and more accurately than humans in some domains. Other technologies are also set to replace and reallocate labour, with significant social implications.

The rate of technological change appears to intensify over time and is perhaps becoming less predictable. Most economic models suggest that there is no real threat to the corporation as the entity of choice for organising economic activity. But is the current wave of disruptive technology qualitatively different? The authors note the hazard that well-known economic models may be missing the possibility of ‘cataclysmic’ events provoking political responses which could endanger the future of the corporation.

Aside from the nature, pace and effects of technological changes on the structure and purpose of the corporation, the paper also addresses several possible socio-political effects, including upheaval in labour markets and further increase in inequality, leading to a bifurcated economy, where small atomistic companies coexist with giant companies that become increasingly distrusted by the public and governments, as happened numerous times in the past.

New market or regulatory paradigms need to be developed to address these negative effects; the authors suspect that the existing regulatory tools (e.g. antitrust enforcement) are insufficient and inadequate and, as in previous historical episodes (e.g. the introduction of US antitrust in 1890; the dissolution of pyramidal business groups in the 1930s), new measures will have to be introduced. Without such measures, which should be designed in good time and after thorough consultation, public frustration may bring about poor regulation and policies.

Although both regulators and corporate boards often fear change and uncertainty, the future of the corporation as an institution, and of human societies within which corporations operate, may well depend on how well the current wave of radical technological change is addressed.

For further information please contact the Project Manager on FOTC@thebritishacademy.ac.uk.

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