The Dutch East India Company Was the World's First Multinational Corporation

The Dutch East India Company Was the World's First Multinational Corporation

Studying the history of business is a fascinating exercise. The origins of many of the finance and business products that we utilize today were perfected during centuries past in countries sprinkled far and wide around the world. One of the most important, inventive and skilled business cultures was created in the Netherlands during the 17th century.

As the world was discovered, mapped and colonized by the early Spanish and Portuguese explorers, new trade routes were pioneered and many high value products came to market in Europe as demand for exotic imports exploded. This boom in international trade required a corresponding expansion of novel financing mechanisms to fund this commerce.

The first great merchant traders were the Portuguese. They used Lisbon as their trade center. However, their trade apparatus was primitive even for the age. The principal imports and the most valuable products of 1600's trade were East Asian spices and silks. Because the Portuguese were inefficient in distribution and in financing methods the Italians, Spanish and Dutch were all interested in circumventing Portuguese merchants and overtaking their trade relationships.

The Dutch were particularly enterprising. They were also committed to espionage. Use of spies enabled the Dutch to discover the state secrets of the Portuguese trade routes. With knowledge of the well documented Portuguese trade routes in hand, a great level of risk was removed from the international commercial trade equation.

In 1598 Jakob von Neck organized a group of five companies into a trade expedition. He left with 22 ships, visited the Spice Islands in Indonesia and managed to negotiate and secure a cargo of pepper and other valuable spices. By the time he had returned to the Netherlands, von Neck had lost eight ships but still earned his investing partners a 400% return on their stakes.

At that time each voyage was a stand-alone business entity. Piracy, disease, weather and simple navigation error made these trips highly speculative. Also, the commodities being traded were highly elastic in valuations. A successful voyage could generate staggering profits, but losses were common and could be steep.

The Dutch saw opportunity to create a cartel. The result was the Dutch East India Company formed in 1602. This was the world's first multinational company. The enterprise was the worlds first to be owned by investors through the issue of stock equity.

The Dutch East India Company did not simply send ships to negotiate one off trade deals. The Company became fully integrated to mitigate risk and maximize profits. In addition to owning, manning and operating a shipping fleet, the Company fielded a phalanx of trading agents in countries all over Asia. They built and maintained fixed trading posts near the farms, plantations and sources of production of their trade goods. Having a permanent team of buyers, sellers and facilities on location cemented trade relations at a time when communication was horribly inefficient. This gave Dutch traders huge advantages over competitors.

The Dutch became ensconced in the regions that they cultivated for trade. In addition, owing to the immense travel distances required to complete each voyage, they established a system of logistics, strategically placed supply outlets, repair facilities and provisioning points to support the growing ship traffic that the Dutch East India Company maintained. The outposts were dotted along the African coasts, Madeira, Madagascar, India and Indian Ocean Island Archipelago's. The presence of these commercial facilities only served to increase trading opportunities for the Company in regions where these plants were positioned.

For almost 200 years the Dutch East India Company paid a dividend to shareholders of 18%. This was the most valuable enterprise in the world at that time. The success of this business model made tiny Holland the richest state on earth. They pioneered the use of letters of credit, bills of lading and receivable financing. These, and many other finance mechanisms created by the Dutch, enabled this tiny kingdom to enjoy status as one of the world's great colonial powers while much larger nations stumbled and declined.

For 200 years the Dutch East India Company was the international gold standard for corporate governance, performance and profitability. To this very day, the trade routes, trading terms and conditions, and marketing techniques perfected by Dutch merchants are in use. This entrepreneurial nation is an example that modern states can study to learn the massive positive capabilities inherent in creating open trading systems.



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