What is it called when a Corporation purchases the rights to something to prevent it's production, to increase profit

What is it called when a Corporation purchases the rights to something to prevent it's production, to increase profit

What is it called, when a Large Business or Corporation sees that some product, invention, or medicine will destroy or reduce the size of their market or consumer base; and they either purchase the rights to it, or pay them not to make it; so that they can continue business or enlarge their profit.

I remember hearing about stuff like this happening multiple times, I can't remember the citations, nor can I remember if anyone actually gave a name to this phenomena.

If you can't find a name for it, I will accept a list of 2 or more occurrences as an answer.

There's no specific word for it, but you can call it "buying out the competition" or "keeping a stranglehold on the market".

We call it "unfriendly acquisition".

Defective Products and Consumer Rights

Dangerous or otherwise defective products cause injury to countless numbers of consumers each year. If you purchase a product that simply does not perform as advertised, causing no actual injury, then you may be covered by a warranty or at the very least have the option of returning it for a refund or exchange. See Product Warranties and Returns for more details.

However, you may have a personal injury claim if you have sustained an injury from a defective product. FindLaw's extensive Product Liability section, within the main Accidents and Injuries center, contains a wide variety of articles and resources to help you better understand and respond to a recall or injury from a dangerous product.

This article provides a general overview of your rights as a consumer with respect to recalled or injury-causing products. See our main Consumer Protection section for more topics.

Types of Product Defect Claims

The three main types of product defects are design defects, manufacturer defects, and defects in instructions or warnings. The legal remedy for injuries sustained from a defective consumer product varies from case to case.

    - Example: A bicycle manufacturer's design specifies brake cables that tend to come apart when the rider applies the brakes during normal use. - Example: A car has an accelerator that is prone to sticking, due to a defective manufacturing process, creating the possibility of a serious accident and injuries or death. - Example: An adequate written warning is required for a space heater that is prone to overheating and causing a fire hazard if left on for more than 12 hours.

Legal Remedies for Defective Products

The law provides numerous remedies for the effects of dangerous consumer products, depending on the situation. The two main legal theories for product defect cases are negligence and strict liability:

Negligence:Plaintiffs may collect damages from a liable defendant (i.e. the manufacturer and/or retailer) if he or she can prove that the manufacturer breached a duty owed to a plaintiff, that this breach caused an injury, and that the plaintiff suffered actual damages as a result. For example, a motorcycle that wasn't tested properly and loses a wheel, causing serious injury to the rider, would most likely result in the plaintiff receiving a monetary award for damages. See "Proving Fault: What is Negligence?" for more information.

Other legal avenues include the assertion of one's warranty rights (implied or express) and the theory of tortuous misrepresentation. See "Legal Basis for Liability in Product Cases" for a concise overview of these different legal theories.

Dangerous Products: From Cribs to Cigarettes

FindLaw provides targeted information about various different categories of defective or dangerous products, listed below:

See the U.S. government's Recalls.gov Website for information about recent product recalls and a searchable database of past recalls. You can also learn about consumer protection laws by state on our consumer protection attorney answers page.

Getting Legal Help for a Defective or Dangerous Product

If you have been injured by a defective product, you may want to consider contacting a personal injury lawyer to learn about the legal remedies that may be available. See "Product Liability Legal Help" for more information about hiring an attorney for a product claim, plus links to consumer protection agencies and applicable laws.

Stock Market Crash Sparks Criticism

After World War I, during the “Roaring 20s,” there was an unprecedented economic boom, during which prosperity, consumerism, overproduction and debt increased. Hoping to strike it rich, people invested in the stock market and often bought stocks on margin at huge risk without federal oversight.

But on October 29, 1929 — "Black Tuesday" — the stock market crashed, along with public confidence as investors and banks lost billions of dollars in just one day. The stock market crash caused nearly 5,000 banks to close and led to bankruptcies, rampant unemployment, wage cuts and homelessness which triggered the Great Depression.

To help determine the cause of the Great Depression and prevent a future stock market crash, the U.S. Senate Banking Committee held hearings in 1932, known as the Pecora hearings, named for the committee’s lead counsel, Ferdinand Pecora. The hearings determined that numerous financial institutions had misled investors, acted irresponsibly and participated in widespread insider trading.

Advantages and Disadvantages of S Corporations

Advantages of Filing Under Subchapter S

The big advantage of registering as an S corporation is the tax benefit: not having to pay federal taxes at the entity level. Saving money on corporate taxes is beneficial, especially when a business is in its early years.

S corp status can lower the personal income tax tab for the business owners as well. By characterizing money they receive from the business as salary or dividends, S corporation owners often lower their liability for self-employment tax. The S corp status generates deductions for business expenses and wages paid their employees too.

S corp shareholders can be company employees, earn salaries, and receive corporate dividends that are tax-free if the distribution does not exceed their stock basis. If dividends exceed a shareholder's stock basis, the excess is taxed as capital gains—but these are taxed at a lower rate than ordinary income.

Other advantages include being able to transfer interests or adjust property basis, without facing adverse tax consequences or having to comply with complex accounting rules.

Finally, S corporation status may help establish credibility with potential customers, employees, suppliers, and investors by showing the owner’s formal commitment to the company.

Disadvantages of Filing Under Subchapter S

Because S corporations can disguise salaries as corporate distributions to avoid paying payroll taxes, the IRS scrutinizes how S corporations pay their employees. An S corporation must pay reasonable salaries to shareholder-employees for services rendered before any distributions are made.

When it comes to making those distributions to stakeholders, the S corp must allocate profits and losses based strictly on the percentage of ownership or number of shares each individual holds.

If an S corp doesn't—or if it makes any other noncompliance moves, like mistakes in an election, consent, notification, stock ownership, or filing requirement—the IRS could terminate its Subchapter S status. This happens rarely, though. Usually, a quick rectification of non-compliance errors can avoid any adverse consequences.

Filing under Subchapter S also requires time and money—or more precisely, the business of setting up a corporation does. The business owner must submit articles of incorporation with the Secretary of State in the state where their company is based. The corporation must obtain a registered agent for the business, and it pays other fees associated with incorporating itself.

In many states, owners pay annual report fees, a franchise tax, and other miscellaneous fees. However, the charges are typically inexpensive and may be deducted as a cost of doing business. Also, all investors receive dividend and distribution rights, regardless of whether the investors have voting rights.

Finally, there are the qualification requirements. The limits on the number and the nature of shareholders might prove onerous for a business that's growing rapidly and wants to attract venture capital or institutional investors.

Tax benefits: no or lesser corporate and self-employment tax for owner, no double taxation for shareholders

Protections of incorporation: limited liability, transfer of interests

Potentially growth-inhibiting qualifications to maintain status

Multinational Corporation (MNC)

A multinational corporation (MNC) is a company that operates in its home country, as well as in other countries around the world. It maintains a central office Corporate Structure Corporate structure refers to the organization of different departments or business units within a company. Depending on a company&rsquos goals and the industry located in one country, which coordinates the management of all its other offices, such as administrative branches or factories.

It isn&rsquot enough to call a company that exports its products to more than one country a multinational company. They need to maintain actual business operations in other countries and must make a foreign direct investment Foreign Direct Investment (FDI) Foreign direct investment (FDI) is an investment from a party in one country into a business or corporation in another country with the intention of establishing a lasting interest. Lasting interest differentiates FDI from foreign portfolio investments, where investors passively hold securities from a foreign country. there.

Characteristics of a Multinational Corporation

The following are the common characteristics of multinational corporations:

1. Very high assets and turnover

To become a multinational corporation, the business must be large and must own a huge amount of assets, both physical and financial. The company&rsquos targets are high, and they are able to generate substantial profits.

2. Network of branches

Multinational companies maintain production and marketing operations in different countries. In each country, the business may oversee multiple offices that function through several branches and subsidiaries Subsidiary A subsidiary (sub) is a business entity or corporation that is fully owned or partially controlled by another company, termed as the parent, or holding, company. Ownership is determined by the percentage of shares held by the parent company, and that ownership stake must be at least 51%. .

3. Control

In relation to the previous point, the management of offices in other countries is controlled by one head office located in the home country. Therefore, the source of command is found in the home country.

4. Continued growth

Multinational corporations keep growing. Even as they operate in other countries, they strive to grow their economic size by constantly upgrading and by conducting mergers and acquisitions Mergers Acquisitions M&A Process This guide takes you through all the steps in the M&A process. Learn how mergers and acquisitions and deals are completed. In this guide, we'll outline the acquisition process from start to finish, the various types of acquirers (strategic vs. financial buys), the importance of synergies, and transaction costs .

5. Sophisticated technology

When a company goes global, they need to make sure that their investment will grow substantially. In order to achieve substantial growth, they need to make use of capital-intensive technology, especially in their production and marketing activities.

6. Right skills

Multinational companies aim to employ only the best managers, those who are capable of handling large amounts of funds, using advanced technology, managing workers, and running a huge business entity.

7. Forceful marketing and advertising

One of the most effective survival strategies of multinational corporations is spending a great deal of money on marketing and advertising. This is how they are able to sell every product or brand they make.

8. Good quality products

Because they use capital-intensive technology, they are able to produce top-of-the-line products.

Reasons for Being a Multinational Corporation

There are various reasons why companies want to become multinational corporations. Here are some of the most common motivations:

1. Access to lower production costs

Setting up production in other countries, especially in developing economies, usually translates to spending significantly less on production costs. Though outsourcing is a way of achieving the objective, setting up manufacturing plants in other countries may be even more cost-efficient.

Due to their large size, MNCs can take advantage of economies of scale and grow their global brand. The growth is done through strategic manufacturing/service placement, which allows the corporation to take advantage of undervalued services across the globe, more efficient and inexpensive supply chains, and advanced technological/R&D capacity.

2. Proximity to target international markets

It is beneficial to set up business in countries where the target consumer market of a company is located. Doing so helps reduce transport costs and gives multinational corporations easier access to consumer feedback and information, as well as to consumer intelligence.

International brand recognition makes the transition from different countries and their respective markets easier and decreases per capita marketing costs as the same brand vision can be applied worldwide.

3. Access to a larger talent pool

Multinational corporations are also known to hire only the best talent from around the world, which allows management to provide the best technical knowledge and innovative thinking to their product or service.

4. Avoidance of tariffs

When a company produces or manufactures its products in another country where they also sell their products, they are exempt from import quotas and tariffs.

Models of MNCs

The following are the different models of multinational corporations:

1. Centralized

In the centralized model, companies put up an executive headquarters in their home country and then build various manufacturing plants and production facilities in other countries. Its most important advantage is being able to avoid tariffs and import quotas and take advantage of lower production costs.

2. Regional

The regionalized model states that a company keeps its headquarters in one country that supervises a collection of offices that are located in other countries. Unlike the centralized model, the regionalized model includes subsidiaries and affiliates that all report to the headquarters.

3. Multinational

In the multinational model, a parent company operates in the home country and puts up subsidiaries in different countries. The difference is that the subsidiaries and affiliates are more independent in their operations.

Advantages of Being a Multinational Corporation

There are many benefits of being a multinational corporation including:

1. Efficiency

In terms of efficiency, multinational companies are able to reach their target markets more easily because they manufacture in the countries where the target markets are. Also, they can easily access raw materials and cheaper labor costs.

2. Development

In terms of development, multinational corporations pay better than domestic companies, making them more attractive to the local labor force. They are usually favored by the local government because of the substantial amount of local taxes they pay, which helps boost the country&rsquos economy.

3. Employment

In terms of employment, multinational corporations hire local workers who know the culture of their place and are thus able to give helpful insider feedback on what the locals want.

4. Innovation

As multinational corporations employ both locals and foreign workers, they are able to come up with products that are more creative and innovative.

Foreign Direct Investment

Foreign direct investments are prevalent within multinational corporations. The investments occur when an investor or company from one country makes an investment outside the country of operation.

Foreign investments most often occur when a foreign business is established or bought outright. It can be distinguished from the purchase of an international portfolio that only contains equities of the company, rather than purchasing more direct control.

Additional Resources

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  • Articles of Incorporation Articles of Incorporation Articles of Incorporation are a set of formal documents that establish the existence of a company in the United States and Canada. For a business to be
  • Board of Directors Board of Directors A board of directors is a panel of people elected to represent shareholders. Every public company is required to install a board of directors.
  • Economies of Scale Economies of Scale Economies of scale refer to the cost advantage experienced by a firm when it increases its level of output.The advantage arises due to the
  • Spin-off Spin-Off A corporate spin-off is an operational strategy used by a company to create a new business subsidiary from its parent company.

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Types of Mergers

There are various types of mergers, depending on the goal of the companies involved. Below are some of the most common types of mergers.


This is a merger between two or more companies engaged in unrelated business activities. The firms may operate in different industries or in different geographical regions. A pure conglomerate involves two firms that have nothing in common. A mixed conglomerate, on the other hand, takes place between organizations that, while operating in unrelated business activities, are actually trying to gain product or market extensions through the merger.

Companies with no overlapping factors will only merge if it makes sense from a shareholder wealth perspective, that is, if the companies can create synergy, which includes enhancing value, performance, and cost savings. A conglomerate merger was formed when The Walt Disney Company merged with the American Broadcasting Company (ABC) in 1995.


A congeneric merger is also known as a Product Extension merger. In this type, it is a combining of two or more companies that operate in the same market or sector with overlapping factors, such as technology, marketing, production processes, and research and development (R&D). A product extension merger is achieved when a new product line from one company is added to an existing product line of the other company. When two companies become one under a product extension, they are able to gain access to a larger group of consumers and, thus, a larger market share. An example of a congeneric merger is Citigroup's 1998 union with Travelers Insurance, two companies with complementing products.

Market Extension

This type of merger occurs between companies that sell the same products but compete in different markets. Companies that engage in a market extension merger seek to gain access to a bigger market and, thus, a bigger client base. To extend their markets, Eagle Bancshares and RBC Centura merged in 2002.

A merger is the voluntary fusion of two companies on broadly equal terms into a new legal entity.


A horizontal merger occurs between companies operating in the same industry. The merger is typically part of consolidation between two or more competitors offering the same products or services. Such mergers are common in industries with fewer firms, and the goal is to create a larger business with greater market share and economies of scale since competition among fewer companies tends to be higher. The 1998 merger of Daimler-Benz and Chrysler is considered a horizontal merger.


When two companies that produce parts or services for a product merger, the union is referred to as a vertical merger. A vertical merger occurs when two companies operating at different levels within the same industry's supply chain combine their operations. Such mergers are done to increase synergies achieved through the cost reduction, which results from merging with one or more supply companies. One of the most well-known examples of a vertical merger took place in 2000 when internet provider America Online (AOL) combined with media conglomerate Time Warner.

Special Considerations

There may be options available to producers if the cost of production exceeds a product's sale price. The first thing they may consider doing is lowering their production costs. If this isn't feasible, they may need to reconsider their pricing structure and marketing strategy to determine if they can justify a price increase or if they can market it to a new demographic. If neither of these options works, producers may have to suspend their operations or shut down permanently.

Here's a hypothetical example to show how this works using the price of oil. Let's say oil prices dropped to $45 a barrel. If production costs varied between $20 and $50 per barrel, then a cash negative situation would occur for producers with steep production costs. These companies could choose to stop production until sale prices returned to profitable levels.

Production: Meaning, Definition, Types and Factors

Since the primary purpose of economic activity is to produce utility for individuals, we count as production during a time period all activity which either creates utility during the period or which increases ability of the society to create utility in the future.

Business firms are important components (units) of the economic system.

They are artificial entities created by individuals for the purpose of organising and facilitating production. The essential characteristics of the business firm is that it purchases factors of production such as land, labour, capital, intermediate goods, and raw material from households and other business firms and transforms those resources into different goods or services which it sells to its customers, other business firms and various units of the government as also to foreign countries.

Definition of Production:

According to Bates and Parkinson:

“Production is the organised activity of transforming resources into finished products in the form of goods and services the objective of production is to satisfy the demand for such transformed resources”.

According to J. R. Hicks:

“Production is any activity directed to the satisfaction of other peoples’ wants through exchange”. This definition makes it clear that, in economics, we do not treat the mere making of things as production. What is made must be designed to satisfy wants.

What is not Production?

The making or doing of things which are not wanted or are made just for the fun of it does not qualify as production. On the other hand, all jobs which do aim at satisfying wants are part of production.

Those who provide services Such as hair-dressers, solicitors, bus drivers, postmen, and clerks are as much a part of the process of satisfying wants as are farmers, miners, factory workers and bakers. The test of whether or not any activity is productive is whether or not anyone will buy its end-product. If we will buy something we must want it if we are not willing to buy it then, in economic terms, we do not want it.

Importance of Exchange:

So from our above definition it is clear that many valuable activities such as the work done by people in their own houses and gardens (the so-called do it yourself exercise) and all voluntary work (such as free coaching, free-nursing, collection of subscription for a social cause such as flood-relief or earthquake- relief) immensely add to the quality of life but there is no practical way of measuring their economic worth (value).

This being so, and because in economics an important task is to measure changes in the volume of pro­duction, it is necessary to add the qualifying clause ‘through exchange’, i.e., in return for money, to the definition of production.

Three Types of Production:

For general purposes, it is necessary to classify production into three main groups:

1. Primary Production:

Primary production is carried out by ‘extractive’ industries like agriculture, forestry, fishing, mining and oil extraction. These industries are engaged in such activities as extracting the gifts of Nature from the earth’s surface, from beneath the earth’s surface and from the oceans.

2. Secondary Production:

This includes production in manufacturing industry, viz., turning out semi-finished and finished goods from raw materials and intermediate goods— conversion of flour into bread or iron ore into finished steel. They are generally described as manufacturing and construction industries, such as the manufacture of cars, furnishing, clothing and chemicals, as also engineering and building.

3. Tertiary Production:

Industries in the tertiary sector produce all those services which enable the finished goods to be put in the hands of consumers. In fact, these services are supplied to the firms in all types of industry and directly to consumers. Examples cover distributive traders, banking, insurance, transport and communications. Government services, such as law, administration, education, health and defence, are also included.


Any activity connected with money earning and money-spending is called an economic activity. Production is an important economic activity. It results in the output (creation) of an enormous variety of economic goods and services.

Factors of Production:

Production of a commodity or service requires the use of certain resources or factors of production. Since most of the resources necessary to carry on production are scarce relative to demand for them they are called economic resources.

Resources, which we shall call factors of production, are combined in various ways, by firms or enterprises, to produce an annual flow of goods and services.

Table 5.1: A Classification of Factors of Production:

Each factor gets a reward on the basis of its contribution to the production process, as shown in the table.

In fact, the resources of any community, referred to as its factors of production, can be classified in a number of ways, but it is common to group them according to certain characteristics which they possess. If we keep in mind that the production of goods and services is the result of people working with natural resources and with equipment such as tools, machinery and buildings, a generally acceptable classification can readily be derived. The traditional division of factors of pro­duction distinguishes labour, land and capital, with a fourth factor, enterprise, some-times separated from the rest.

The people involved in production use their skills and efforts to make things and do things that are wanted. This human effort is known as labour. In other words, labour represents all human resources. The natural resources people use are called land. And the equipment they use is called capital, which refers to all man-made resources.

The first three factors—land labour and capital do not work independently or in isolation. There is need to combine these factors and co-ordinate their activities. This two-fold function is performed by the organiser or the entrepreneur.

But this is not the only function of the entrepreneur. In fact, production can never take place without some risk being involved the decision to produce something has to be taken in anticipation of demand and there must be some element of uncertainty about that demand materialising.

Thus, risk taking or enterprise can be considered as a fourth factor of production, and those responsible for taking these risks are usually referred to as entrepreneurs (see the box below which is self-explanatory). We may now study the nature and characteristics of four factors against this backdrop. But before we proceed further we may make a passing reference to factor mobility.

(1) Land and Natural Resources:

In economics the term land is used in a broad sense to refer to all natural resources or gifts of nature. As the Penguin Dictionary of Economics has put it: “Land in economics is taken to mean not simply that part of the earth’s surface not covered by water, but also all the free gifts of nature’s such as minerals, soil fertility, as also the resources of sea. Land provides both space and specific resources”.

From the above definition, it is quite clear that land includes farming and building land, forests, and mineral deposits. Fisheries, rivers, lakes, etc. all those natural resources (or gifts of nature) which help us (the mem­bers of the society) to produce useful goods and services. In other words, land includes not only the land surface, but also the fish in the sea, the heat of the sun that helps to dry grapes and change them into resins, the rain that helps farmers to grow crops, the mineral wealth below the surface of the earth and so on.


Land has certain important characteristics:

The total land area of earth (in the sense of the surface area available to men) is fixed. Therefore, the supply of lands is strictly limited. It is, no doubt, possible to increase the supply of land in a particular region to some extent through reclamation of land from sea areas or deforestation. But this is often offset by various kinds of soil erosion. The end result is that changes in the total area are really insignificant. Of course, the effective supply of agricultural (farm) land can be increased by drainage, irrigation and use of fertilisers.

In consequence, the prices of land and natural resources tend to be extremely sensitive to changes in consumer demand, rising sharply if they become more desirable. In this context, we may refer to the sharp increase in the price of building land in Bombay in the last five decades. However, new discoveries are often stimulated by high prices (as in the case of Calcutta’s Salt Lake area), and like that of oil in the U.K.’s North Sea, which tend to moderate price increases.

Although the total supply of land is fixed, land has alternative uses. The same plot of land can be used to set up factories or to grow wheat or sugarcane or even to build a stadium. This means that the supply of land to a particular use is fairly (if not completely) elastic. For example, the amount of land used for growing tomato can be increased by growing less of some other crop (e.g., cauliflower). The supply of building land can be increased by reducing the area under agricultural operation.

3. No cost of production:

Since land is a gift of nature, it has no cost of production. Since land is already in existence, no costs are to be incurred in creating it. In this sense, land differs from both labour (which has to be reared, educated and trained) and capital (which has to be created by using labour and other scarce resources or by spending money).

So, it logically follows that the entire return from land—called rent—is a surplus income (at least from society’s point of view). As Stanlake has rightly put it, “any increase in the value of natural resources due to rising populations and rising incomes accrues to the owners of these resources as a windfall gain—it does not arise from any efforts on their part”.

However, the above argument is not valid today. In fact, much of the services of land required expenditure of resources to obtain or maintain them and hence they are often called capital (i.e. produced means of production). So is land, as a factor of production, ‘really distinct’ from capital.

4. Differences in fertility:

Another important feature of land is that it is not homogeneous. All grades (plots) of land are not equally productive or fertile. Some grades of land are more productive than others. And Ricardo argued that rent arises not only due to scarcity of land as a factor but also due to differences in the fertility of the soil.

5. Operation of the law of diminishing return:

Finally, we may refer to a special feature of land, not shared by other factors. In fact, production on land is subject to the operation of the law of diminishing return. As Alfred Marshall has put it “while the part which nature plays in production shows a tendency to diminishing return, the part which man plays shows a tendency to increasing return”.

This simply means that as more and more workers are employed on the same plot of land, output per worker will gradually fall (because each additional worker will make less and less contribution to total product). The law of diminishing return refers to diminishing marginal product of the variable factor.

Land is not geographically mobile. But, it is occupationally mobile. In most parts of India, for example, land has many alternative uses. It might be used for farmland, roads, rail­ways, airlines, public parks, playgrounds, resi­dential housing, office buildings, shopping complex, and so on. Some of the land, for example, in hill area, of say, Shillong, or Darjeeling, has an extremely limited degree of occupational mobility, being useful perhaps for sheep grazing, golf course or as a centre of tourism.

The income received by the owner of land is known as rent. It may be noted that rent is usually paid for something more than the use of land or another natural resource, but includes also an element of payment for another factor which is involved in making the resource available in a usable form.

An example of this is the labour which assists in the process of bringing minerals to the surface. Iron ore is of no use while it is still under the ground. Productivity and value of land can be increased if it is improved with fertilisers, irrigation and the erection of fences and buildings. So rent paid for this kind of fertile land is rather a mixed type of factor income.

(2) Labour:

Like land, labour is also a primary factor of production. The distinctive feature of the factor of production, called labour, is that it provides a human service. It refers to human effect of any kind—physical and mental— which is directed to the production of goods and services. ‘Labour’ is the collective name given to the productive services embodied in human physical effort, skill, intellectual powers, etc.

As such, there are different types of labour input, varying in effort and skill content, and in particular types of skill content. Thus, like ‘land’, labour is not homogeneous. The term covers clerical, managerial and administrative functions as well as skilled and unskilled manual work.

Labour differs from land in an important way. While land is a stock, labour is a flow. The term ‘labour’ is used to refer to the flow of labour service per unit of time. So labour is perishable. If we do not make use of today’s labour power, a correspondingly large amount is not made available tomorrow (and in future).

A related, but important point should be noted in this context. The worker sells his services in the market, but retains his capital (working ability). In other words, what is bought and sold is the service of labour, not labour itself. A firm cannot buy and sell labour in the same way that it can buy land and capital.

Another important point to note is that labour is not only a factor of production. The supplier of labour—the worker—is also a consumer. Thus, labour plays a dual role in a modern economy. Labour is both the subject and the object of production.

This means two things:

(1) That the production of anything requires the use of labour as a factor, and

(2) That almost everything is produced to satisfy the needs of the workers, who are the main consumers. In fact, any economic activity takes place to satisfy the consumers. And, consumption demand provides the business people with the incentive to undertake production.

Peculiarities of Labour as a Factor:

In examining labour markets, it is important to recognise that labour has a number of special characteristics which distinguish it from ordinary commodities.

1. First, labour market transactions are particularly significant for:

First, labour market transactions are particularly significant for the individual worker. Much of a person’s life style and relations with other people depend on the job he or she does. Furthermore, the employment of labour involves a continuing personal relation­ship between employers and employees, whereas transactions in market for goods are often brief and impersonal.

2. Labour is an end and means in itself:

A commodity is only a means of production and the object of production is its consumption by labour. Labour, therefore, becomes a means to its own end.

3. Thirdly, the individual sells his services but not himself:

The employer, however, must be able to exert some control or authority over the actions of employees. This is not a very simple matter, which can be covered unambiguously by a contract of employment. A great deal of energy has been devoted to planning systems for the direction of employees, and even a brief examination of the state of industrial relations in most countries shows that still much remains to be done.

4. Labour is inseparable from the labourer:

In other words, labour and the labourer go together. When the seller sells a commodity he does not necessarily go with the commo­dity. But the labour can supply his labour only when he goes with it. Moreover, when a seller sells a commodity he parts with it. But when a labourer sells his labour, he retains the quality with him. He may gain the satisfaction of his services, but he cannot be separated from the labour.

5. Fifthly, the individual must be present when the labour services are used and thus a fifth feature is that labour services are not transferable:

For example, a person who has agreed to carry out certain tasks cannot transfer his services to someone else to do the work, while he does something else. This contrasts with commodities which can be transferred among individuals.

One conse­quence of having to ‘deliver’ the services personally is that employees have strong views on how their services should be used. Working conditions are of central importance to workers. It also means that workers must live near their place of work. The location may significantly affect labour market decisions.

6. Sixthly, labour services cannot be stored:

Labour cannot be ‘saved’ or stored for future use (although rest may enhance performance to some extent).

7. Labour is perishable:

A commodity, if it is not disposed off today, can be disposed off the next day and it may not lose its value. Labour, however, is perishable in this that if the labourer is not able to sell his services for a day he cannot get the value for that day. It is lost forever it is because of this that labour has a weak bargaining power.

8. Labour is affected by surroundings:

A commodity is usually very much affected by its surrounding a labourer is very much affected by the surroundings because he is a living being. Therefore, any change in atmos­phere has an effect on his health feelings etc.

9. The supply of labour is independent of its demand:

In case of most commodities we see that supply usually varies with demand but in case of labour its supply is in no way related to demand. Both are determined by different factors.

10. Finally, labour services are enhanced by training:

Skill acquisition is often a lengthy and costly process. However, adjust­ments in the labour market, such as increasing the supply of a particular skill, often requires a long time. This also means that individuals do not usually train for more than one occupation as they only have a limited working life over which to justify the investment.

Mobility of Labour:

The mobility of labour has two aspects:

(a) The spatial or geographical mobility of labour, which relates to the rate at which workers move between geographical areas and regions in response to differences in wages and job availability (e.g., a worker from West Bengal moving to Mumbai) and

(b) The occupational mobility of labour which relates to the extent to which workers change occupations or skills in response to differences in wages or job availability (e.g., a jute mill worker joining a tea garden).

It may apparently seem that labour is the most mobile of all factors—both occupationally and geographically. Workers can move both freely from one industry to another and from one region to another.

The reward or price that is paid to labour in return for the services it performs is known as a wage or salary. A man’s wages are asso­ciated with his productivity or efficiency and this, in its turn, depends on a variety of factors including the education and job training he has received, his innate skill and the extent to which he is motivated to put his best effort in the work he is doing.

In general, the supply of labour varies directly with wages and compensation. Normally, when wages are relatively low, increases in wages will tend to lead to an increase in the supply of labour. However, as wages continue to rise a stage ultimately comes when higher wages (incomes) make leisure more attractive.

When incomes are relatively high, therefore, higher wage rates may actually lead to a fall in the number of hours worked (and, thus, in the amount of labour offered by an individual worker.) This is why the supply curve of labour bends back to the left and this is often cited as an important exception to the (empirical) law of supply.

(3) Capital:

Capital, the third agent or factor is the result of past labour and it is used to produce more goods. Capital has, therefore, been defined as ‘produced means of production.’ It is a man-made resource. In a board sense, any product of labour-and-land which is reserved for use in future production is capital.

To put it more clearly, capital is that part of wealth which is not used for the purpose of consumption but is utilised in the process of production. Tools and machinery, bullocks and ploughs, seeds and fertilizers, etc. are examples of capital. We have already identi­fied certain things described as capital in our discussion on producers’ goods.

Even in ancient times, capital was created for producing food, hunting animals and for the transportation of goods. At that stage capital goods consisted of simple tools and implements. Even in the least developed countries some capital is used. In such countries people make use of simple ploughs, axes, bows and arrows, and leather bags to carry water.

It may be pointed out in this context that the same article may, at one time, be a con­sumption good and, at another time, capital, depending on the use to which it is put. Thus, if a doctor goes out in his motor car to examine a patient he is using his car as capital. But if he goes out for a joy ride in his motor car, he is using it as a consumption good. Similarly, when coal is used in a factory, it is capital, but when coal is used as domestic fuel, it is a consumption good.

Economists use the term capital to mean goods used for further production. In the business world, however, capital is always expressed in terms of money. If a business­man is asked, “What is your capital?” he will always mention a sum of money. But money is not capital because money, by itself, cannot produce anything.

The business-person thinks of money as capital because he can easily convert money into real resources like tools, machines and raw materials, and use these resources for the production of goods. Also capital is measured in terms of money. So the amount of resources used or possessed by a business-person is conveniently expressed as a sum of money.

Classification of Capital:

Capital can be classified in two broad categories that which is used up in the course of production and that which is not.

Fixed and Circulating Capital:

Fixed capital means durable capital like tools, machinery and factory buildings, which can be used for a long time. Things like raw materials, seeds and fuel, which can be used only once in production are called circulating capital. Circulating capital refers to funds embodied in stocks and work-in- progress or other current assets as opposed to fixed assets. It is also called working capital.

Two Features of Capital:

Two important features of capital are:

Firstly, it entails a sacrifice, since resources are devoted to making non-consumable capital goods instead of goods for immediate con­sumption. Secondly, it enhances the producti­vity of the other factors, viz., land and labour.

In fact, it is this enhanced productivity which represents the reward for the sacrifice involved in creating capital. Hence we can predict that new capital is only created so long as its productivity is at least sufficient to compensate those who make the sacrifices involved in its creation. These two features may now be discussed in detail.

Capital Formation:

People use capital goods like machines, equipment, etc. because capital goods are the creators of other goods. But this is not the whole truth. People use capital for another important reason to produce goods with less effort and lower costs than would be the case if labour were not assisted by capital. But in order to use capital goods people must first produce them. This calls for a sacrifice of current consumption.

When people use their labour to produce capital goods like textile producing machines, they can use the same labour for producing consumer goods like textiles. As Stanlake has put it “The opportunity cost of the capital goods is the potential output of consumer goods which has to be foregone in order to produce that capital, the production of capital demands abstinence from current consumption.”

Factors Affecting Capital Formation:

The creation of capital depends on two things:

(a) Savings and (b) a diversion of resources (from the production of consumption goods to meet current needs to the production of capital goods to meet future needs). Saving is the difference between current income and current consumption. In other words, it is the act of foregoing current consumption.

It means that resources otherwise used to produce consumer goods are set aside for producing capital goods. If people choose not to buy some consumer goods, with some part of their current income, they refrain from buying (utilising) the services of the factors required to make those goods.

These factors might, therefore, remain idle. But these savings may be borrowed and utilised by business firms (entrepreneurs) to finance the construction of capital goods. This is the second step—the diversion of resources for the production of consumer goods to the production of capital (producers) goods. It may be noted that savings make possible capital accumulation. It does not cause it.

In short, capital formation depends on savings, which, in its turn, depends on two things:

(1) The capacity to save and

The capacity to save depends on income and the existence of savings institutions like banks, insurance companies, post offices, stock exchanges, etc. If income is low, savings will also be low. Even if income is high savings will be low in the absence of the above-mentioned savings institutions.

The desire to save depends on

(1) the rate of interest and (2) stability in the value of money (i.e., the rate of inflation).

If the rate of interest is high people will be eager to save more by curtailing their current consumption. People will also be eager to save more if they expect that there will exist reasonable price stability in the economy in future.

Mobility of Capital:

Capital is both geographically and occupationally mobile. However, a certain portion of a nation’s capital stock which consists of such things as railway networks, blast furnaces and shipyards are highly specialised equip­ment and are virtually immobile in the geo­graphical sense. It is physically possible to dismantle them and move them to different sites or locations, but the cost of doing so will be so great that it will not be economically feasible to do so.

Such equipment are not even occu­pationally mobile. Each such equipment can only be used for a specific purpose. Many buildings however, can be put to better uses. Many of the old buildings used as cinema house or god-owns in northern area of Calcutta have been dismantled and converted into multi-storeyed buildings.

Some capital equip­ment is mobile in both the geographical and occupational sense. Examples of such capital equipment are electric motors, machine tools, hand tools, typewriters, and lorries. Such equipment can be used effectively in a wide variety of industries and are capable of moving from one location to another at very little cost.

The earning of capital, i.e., the price that has to be paid for it, is known as interest. If it stated as percentage of the principal, represen­ting the sum paid by a borrower who needs finance to purchase a piece of capital equip­ment.

(4) Enterprise (Organisation):

Organisation, as a factor of production, refers to the task of bringing land, labour and capital together. It involves the establishment of co-ordination and co-operation among these factors. The person in charge of organisation is known as an organiser or an entrepreneur. So, the entrepreneur is the person who takes the charge of supervising the organisation of production and of framing the necessary policy regarding business.

Functions or Role of the Entrepreneur:

The entrepreneur in modern business performs the following useful functions:

The primary task of an entrepreneur is to decide the policy of production. An entrepreneur is to determine what to produce, how to produce, where to produce, how much to produce, how to sell and so forth. Moreover, he is to decide the scale of production and the proportion in which he combines the different factors he employs. In brief, he is to make vital business decisions relating to the purchase of productive factors and to the sales of the finished goods or services.

Earlier writers used to consider management control one of the chief functions of the entrepreneur. Management and control of the business are conducted by the entrepreneur himself. So the latter must possess a high degree of management ability to select the right type of persons to work with him. But the importance of this function has declined, as the business nowadays is managed more and more by paid managers.

The next major function of the entrepreneur is to make necessary arrangement for the division of total income among the different factors of production employed by him. Even if there is a loss in the business, he is to pay rent, interest wages and other contractual income out of the realised sale proceed.

4. Risk-taking and uncertainty-bearing:

Risk-taking is perhaps the most important function of an entrepreneur. Modern production is very risky as an entrepreneur is required to produce goods or services in anticipation of their future demand. Broadly, there are two kinds of risk which he has to face.

Firstly, there are some risks, such as risks of fire, loss of goods in transit, theft, etc., which can be insured against. These are known as measurable and insurable risks. Secondly, some risks, however, cannot be insured against because their probability cannot be calculated accurately. These constitute what is called uncertainty (e.g., competitive risk, technical risk, etc.). The entrepreneur under­takes both these risks in production.

Another distinguishing function of the entrepreneur as emphasised by Schumpeter, is to make frequent inventions- invention of new products, of new techniques and discovering new markets—to improve his competitive position, and to increase earnings.

Importance of Enterprise:

The above description indicates the supreme position of the entrepreneur in production. This is particularly true in the capitalistic or even mixed economy which is based on the price-profit system. In the socialistic eco­nomy, the state becomes the entrepreneur the scope of private entrepreneur is extremely limited in such an economy.

It is to be noted that the importance of the entrepreneur has been declining with the growth of joint-stock business and state-undertakings. This is due to the fact that risk is borne by the share­holders and the day-by-day control of the business is generally in the hands of salaried managers or managing directors.

A Separate Factor:

Some economists feel that the above entrepreneurial functions are no different from those of a particular and specialised form of labour. They point out that risk- bearing is not something peculiar to the entrepreneur.

Many types of labour have to take risk. For example, the miner or the air- hostess runs the risk of personal injury and life and most forms of labour run the risk of unemployment. But enterprise is a separate factor because the first three factors are substitutable to some extent, but the fourth factor is a specific factor and cannot be substituted by any other factor.

Enterprise seems to be the most mobile of all the four factors. There is need to train labour for some specific task to be performed in a particular industry (say, road transport service, hotel business or computer operation). Once labour is trained for some specific task appropriate to some particular industry, it cannot be easily and quickly transferred to some other industry to do a completely different job. But the basic functions of the entrepreneur-organisation, management and risk-taking are the same in all industries.

Whatever the nature, duration and extent of economic activity and entrepreneur has to raise capital to organise the factors of production, and take certain fundamental decisions on what, how and where to produce. The efficient operation of an enterprise, irrespective of its nature and form, depends on certain human relations and human qualities such as initiative, leadership orga­nisational ability and controlling capacity.

Very few people have these rare qualities. But those who have such qualities are able to operate effectively and efficiently in almost any industry.

The return to the entrepreneur is profit. Profit is the reward for successful conduct of business.

Why a Good Return Policy Is So Important for Retailers

For obvious reasons, most stores focus on practicing good customer service specifically to enhance sales. But customer service doesn’t end once a purchase is made. Or at least it shouldn’t. The return—that moment when the customer effectively tells the store that the sales transaction was a failure, that they found something better, or a better price—is a test for retailers. And according to my research, it’s a test that retailers often fail. When that happens, shoppers feel tricked, and business suffers.

As a consumer psychologist, professor, and retail consultant, I often interview consumers about their shopping experiences. Sometimes the interview occurs in a formal setting other times, it’s just a casual conversation in the mall. I always promise to keep last names private, with the hopes of getting the most honest answers possible. Over the years, what they’ve told me again and again is that they feel the retailer-customer relationship is just that—a genuine, personal relationship—and that a violation of trust via a bad return experience can ruin this relationship forever.

For example, Rae, a single woman of mixed race woman in her mid-30s, once had to make an emergency purchase at an Apple store in Canada when she forgot the connector that would allow her to play a business presentation. Turns out she didn’t need the connector after all, and wound up trying to return the unopened item at an Apple store in the U.S. “They wouldn’t take it back because I bought it in Canada. That’s just crazy. Aren’t they supposed to be a modern, international brand? Liars.” Rae, who says she has “just about everything Apple makes,” lost her devotion over a measly $35 purchase that Apple refused to allow her to return. “It’s not the money,” she says, “it’s the bull****.”

Many stores have tough return policies. The big problem here is that, in this instance, Apple’s reputation as a worldly brand with outstanding customer service didn’t match the customer’s experience. Apple fell well short of what the customer expected, and the customer felt burned.

Similarly, when Janine, an African-American woman in her 50s, goes to the mall these days, she walks right by a once-favorite store, Williams Sonoma. Why? She wasn’t able to return a gift without a gift receipt. Janine shops at lots of other stores that won’t take returns without receipts, but Williams Sonoma is the only one that gets her cold shoulder. That’s because for years Janine says she had “paid top dollar at Williams Sonoma,” and she’d expected that due to her loyalty as a customer, as well as the amount of money charged by the store, the retailer would have a more flexible return policy. “They put on this air of graciousness,” Janine says, “but they’re acting like a discount store. The sales clerk looked kind of smug about the new policy too—like I was cheap or dishonest or something.”

The tone struck by Rae and Janine isn’t mere annoyance. It suggests deep betrayal. Janine’s longstanding relationship with Williams Sonoma was severed by what she perceived to be a breach of promise, and a sales clerk with bad manners delivering the blow made it all seem very personal. If her sense of fairness hadn’t been violated, she would have happily continued to shop at the store.

If retailers are losing customers over restrictive return policies, why are they putting these policies into practice? The answer is that returns are costly, and stores try to control costs by restricting returns. Returns are also on the rise—up 19% from 2007. For every $1 spent on merchandise today, 9¢ is returned.

What retailers are discovering is that they must walk a fine line. A simple and easy return policy boosts sales, as shoppers are more willing to make purchases with the knowledge that returning them won’t be a hassle. On the other hand, if too many returns are made, it causes havoc to the retailer’s bottom line. There’s a dance going on because authenticity, transparency and “living up to promises” are important values to consumers. Retailers use imagery, emotion, and symbolism to craft an enticing image—which becomes the personality of the store. That image is an unspoken promise of a particular type of shopping experience. It’s the retailer’s job to ensure that every consumer touchpoint lives up to the promise of a store’s image, including returns.

Several online retailers have found that it’s wise to be especially accommodating with returns. Shoe and clothing e-seller Zappos offers free shipping on deliveries and returns, as well as a return policy that’s as hassle-free as they come. They’ve built a wildly popular business, in part, on the philosophy that frequent returners are also frequent buyers.

Most retailers aren’t as accommodating, and feel like they must not only manage the financial impact of rising returns, but cope with mushrooming incidents of fraudulent returns as well. Last year, retailers reportedly lost $14.4 billion (up from $9.4 billion in 2009) to fraudulent returns such as wardrobing, in which people buy products like big screen televisions or party dresses to use for an event, and then return them. One couple in their late 40s proudly told me that they found a way to “rent” boogie boards for free when they visited Hawaii recently. “We bought two at Costco and then returned them before we went home,” the woman said. Another woman explained how she took advantage of Nordstrom’s returns system. She bought three bras from the retailer, but then lost weight after she’d worn them for a while. “So I took them back and exchanged them for my new size.”

We all pay the price for such consumer behavior, as stores take new measures to protect themselves. Some have begun to track shopper returns in order to restrict serial returners — or “returnaholics,” as they’ve been called. Others have shortened the time permitted to make returns or have ramped up requirements for receipts and I.D. Many electronics retailers charge a “restocking fee” for returns. And some stores hang conspicuous tags on clothing or stickers on electronics to prevent wardrobing. These new procedures and policies can feel confusing, even maddening, to shoppers.

While stores are doing what they can to protect themselves, shoppers must do so as well. Making an impulsive purchase with the thought that “I can always return it, no problem,” was probably never a good idea, and what with the rise of tougher return policies, it’s an even worse approach nowadays. Besides being more careful with what you buy in the first place, here are a few simple tips shoppers can take to minimize the agony of store returns:

1. Always check the retailer’s return policy. This is especially important when shopping online. In particular, discount retailers often don’t take returns or will offer a merchandise credit, but not a refund.

2. Keep tabs on receipts. Attach your receipt to your purchase and don’t remove tags until you’re sure you’re going to keep it. Store all your receipts in the same place in case the product is defective. If you lose your receipt, you can sometimes locate a record of your transaction online. Retailers have found that over 14% of returns without receipts are fraudulent and are therefore increasingly requiring receipts for returns.

3. Be prepared before bringing in a return. Preparation lessens the likelihood of conflict and speeds up the return process. Bring your receipt and I.D., and treat the merchandise you’re returning with respect. Says Bridgette, who works at Bloomingdales, “It’s disappointing to send someone off with their purchase nicely pressed and on a hanger, and then to have it returned in rumpled ball.”

4. Hold the emotion. Though you’re sure to occasionally encounter disrespectful salespeople (especially at commission-based stores), it won’t help to get angry or emotional. You also don’t have to be apologetic. Unless you’re a serial returner or have worn or damaged the merchandise, it’s your right to return it.

5. Don’t delay. Because of mounting returns, many retailers have shortened the time period after a purchase that they’re willing to accept a return. Often, the window is just 20 or 30 days.

Kit Yarrow chairs the Psychology Department of Golden Gate University and was named as the university’s 2012 Outstanding Scholar for her research in consumer behavior. She is co-author of Gen BuY and is a frequent speaker on topics related to consumer psychology and Generation Y.

Historical Changes in Retail

Prior to the 1800s retail was predominantly made up of local merchants who provided full service to customers, think of the classic “general store” in any old western movie. This full service often included offering credit, repairs, and offering one-on-one services to consumers to explain the features and benefits of products. Yet, breakthroughs in manufacturing during the industrial revolution lead to a marked increase in affordable quality items. In the early United States textile industry factories began to manufacture their-own ready-made clothes. Affordable blouses, frocks, pants and shirts flooded the market and these ready-made garments sold quickly. The quandary facing mill and factory owners was how best to market these items.

Two retail options existed at that time. The first, involved selling items directly to consumers through company-owned stores. The second option involved employing a commissioned agent in which a company agent would be responsible for delivering manufactured goods to shopkeepers who, in turn, would sell them. The question facing manufacturers and merchants was which option best suited their needs? Customers let it be known that they wanted ready access to a wide assortment of reasonable priced items, and that they were willing to pay a pretty penny for this service. Shoppers’ demands posed an interesting challenge to manufacturers and shopkeepers alike which lead to a new form of retailing: the department store.

Business historians often credit a Parisian retailer named Aristede Bouciaut (1810-1877) for developing the first department store. Called Le Bon Marche, this establishment featured the latest fashions and accessories within a spectacular setting. Early 19th century U.S. retailers from Boston to Richmond and from New York to Chicago quickly adopted Le Bon Marche layout and services and the modern department store was born. Large downtown department stores in major metropolitan city centers dominated retailing well into the post-war era.

In the 1950s, over 4,000 department stores operated nationwide with many new stores opening in suburban areas. Yet, by the mid-1960s, over half of the post-war department stores had closed their doors. This was especially noticeable in medium-sized U.S. cities many of which only had one or two downtown stores. The next three decades prompted further department store closings.

During the 1970’s many department stores closed and were replaced by discount department stores, shopping centers and large malls which soon accounted for 35% of the entire U.S. retail market. Discount department stores in particular, represented the fastest growing part of this phenomenon with annual profits exceeded $20,000,000,000. Customer loyalty soon became a relic of the past. Savvy new shoppers were more than willing to sacrifice the amenities of downtown department store for cheaper prices. Self-service stores with long check-out lines, indistinguishable departments and aisle upon aisle of items of picked-over garments became the norm, not the exception to the rule.

Fast forward to the 1990’s where the utilization of the Internet drastically impacted the retail industry and continues to drive product and marketing innovation to this day. The Internet has transformed how retailers and consumers view the intersections of product, place, price and time. Shoppers now have nearly unlimited access to an unprecedented assortment of products and their purchases are not restricted to a physical “bricks-and-mortar” place or store hours. With a few clicks shoppers can compare prices of goods faster and more efficiently than before. Furthermore, retailers recognized that e-commerce allows for the optimization of inventories while selling a wide range of profit margin goods.

Online shopping allows consumers to directly buy goods or services from a seller over the Internet using a web browser. Consumers find a product of interest by visiting the website of the retailer directly or by searching among alternative vendors using a shopping search engine, which displays the same product’s availability and pricing at different e-retailers. As of 2016, customers can shop online using a range of different computers and devices, including desktop computers, laptops, tablet computers and smartphones.

An online shop evokes the physical analogy of buying products or services at a regular “bricks-and-mortar” retailer or shopping center the process is called business-to-consumer (B2C) online shopping. When an online store is set up to enable businesses to buy from another businesses, the process is called business-to-business (B2B) online shopping. A typical online store enables the customer to browse the firm’s range of products and services, view photos or images of the products, along with information about the product specifications, features and prices.

The popularity and pervasiveness of online shopping shows no signs of slowing down which is putting traditional retailers in a unique position. How can brick-and-mortar stores integrate e-commerce strategically and successfully? In what ways will online retailers emulate brick-and-mortar stores as seen in the trend of popular online stores opening pop up shops for customers to shop in person. By having a better understanding of past industry trends and challenges, modern retailers can learn from their successful predecessors while also blazing a new trail forward.

Highly Recommended Additional Resources

Practice questions

In 1965, Yale University undergraduate Frederick W. Smith wrote a term paper that invented an industry and changed what’s possible. In the paper, he laid out the logistical challenges facing pioneering firms in the information technology industry. Most airfreight shippers relied on passenger route systems, but those didn’t make economic sense for urgent shipments, Smith wrote.

He proposed a system specifically designed to accommodate time-sensitive shipments such as medicine, computer parts, and electronics. Smith’s professor apparently didn’t see the revolutionary implications of his thesis, and the paper received just an average grade.

In August 1971, following a stint in the military, Smith bought controlling interest in Arkansas Aviation Sales, located in Little Rock, Arkansas. While operating his new firm, he saw firsthand how difficult it was to get packages and other airfreight delivered within one to two days. With his term paper in mind, Smith set out to find a better way. Thus the idea for Federal Express was born: A company that has revolutionized global business practices and that now defines speed and reliability.

Smith named the company Federal Express because he believed the patriotic meaning associated with the word “federal” suggested an interest in nationwide economic activity. He also hoped the name would resonate with the Federal Reserve Bank, a potential customer. Although the bank denied his proposal, Smith kept the name because he thought it was memorable and would help attract public attention.

Company headquarters later moved to Memphis, Tennessee. Memphis was chosen because of its central location within the U.S. and because Memphis International Airport was rarely closed due to bad weather. The airport was also willing to make the necessary improvements for the operation and additional hangar space was readily available.

Federal Express officially began operations on April 17, 1973, with 389 team members. That night, 14 small aircraft took off from Memphis and delivered 186 packages to 25 U.S. cities from Rochester, New York, to Miami, Florida. Though the company did not show a profit until July 1975, it soon became the premier carrier of high-priority goods in the marketplace and set the standard for the express shipping industry it established.

In the mid-1970s, Federal Express was a leader in lobbying for air cargo deregulation, which was legislated in 1977. These changes were important, because they allowed the company to use larger aircraft (Boeing 727s and McDonnell-Douglas DC-10s) and spurred its rapid growth. Today FedEx Express has the world’s largest all-cargo air fleet, including Boeing 777s, 767s, 757s, and MD-11s and Airbus A-300s and A-310s.

By the 1980s, Federal Express was well established. Its growth rate was compounding at about 40 percent annually, and competitors were trying to catch up. In fiscal year 1983, it reported $1 billion in revenues, making American business history as the first company to reach that financial hallmark inside 10 years of startup without mergers or acquisitions.