The Origins and Development of Trading Companies in the East

FROM THE LECTURE SERIES: Turning Points in Modern History

By Vejas Liulevicius, Ph.D., University of Tennessee, Knoxville

In the 16th century, Europeans had a special interest in Asia, and specifically ‘the Indies’. The main reason for this interest was the magical powders and herbs or spices that were good sources of wealth. These were the exotic luxury goods that came from the mysterious lands of the East. The Europeans had rightly discovered that trading these precious spices was the gateway to great wealth and power.  

A painting depicting an official of the East India Company, c. 1760
A portrait of an East India Company official. (Image: Dip Chand (artist)/Public domain)

In late 15th century, the Portuguese were the first to reach the ‘Spice Islands’ of the Indies by circumnavigating the Cape of Good Hope. In the first decade of the 16th century, they established their colony in the western part of India called Goa.

They continued to move further in the East to explore and colonize more lands. They solidified their monopoly in the East by advancements into the lands which are today’s Indonesia. Some of these places were the only producers of spices like cloves, nutmeg, and mace in the whole world. This made the Portuguese even more powerful and they expanded their trading activities with China and Japan. This helped Portugal build an empire outside Europe, in the far lands of Asia and Africa. But this power and success could not remain in their hands forever as other nations entered the scene, claiming their shares of the pie.

Learn more about the adventures of Zheng He.

Other European Countries Head for the Indies

The English and the Dutch had a historical feud with the Spanish. In 1588, Elizabethan England won a war against Spain. The Dutch also had an ongoing struggle with the Spanish to claim independence from the Spanish Crown. These feuds were followed by trade wars. In search of a share from this potential source of great wealth, the Dutch and the English set out for the East. England and the Netherlands were protestant countries and were definitely not satisfied with the Pope’s verdict under the Treaty of Tordesillas. According to this treaty, the lands off the west coast of Africa discovered by Columbus were divided between Spain and Portugal.

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Now, the Dutch and the English had a good opportunity to act on their grudges against the Portuguese and take the war outside Europe. They ventured toward exploring the East and conducted their own trades. These trades were highly profitable and encouraged even more traders to flood the East. Now, with the English, the Dutch, and the Spanish at the scene, this was not a simple competition. It was a trade war that would be raging for two centuries.

Portrait of a senior merchant of the East India Company
A senior merchant of the East India Company, presumably Jacob Mathieusen and his wife. (Image: Everett Art/Shutterstock)

The First Multinational Companies in the World

These trips to the East were so costly that one company could not afford to go alone. They found a creative solution to this problem that formed the basis of the first multinational corporations in history.

A number of companies were granted monopolies by the monarchs to finance the ventures. They put money in shared funds and formed a trading alliance to afford such a huge venture. There were a lot of these companies from different countries trading in the East Indies and other parts of the world like the Americas. The companies that traded in the East Indies were from different countries including Denmark, Sweden, France, Spain, and Scotland.

Business Model of the First Corporations

A new model of trade and corporation was formed out of these ventures. Since they pooled their funds to finance the costly ventures, their profits and probable losses would be divided among the shareholders. As far as profits were concerned, this partnership was perfectly fair. The problem was that if the venture failed, each individual partner would be accountable for the loss. So, the merchant would probably lose all his fortune, leading to his bankruptcy.

This is when the model of limited liability was formulated. According to this model, when a merchant was held liable for the loss, he’d only lose his invested sum of money. This way, his personal fortune was secured and he was not bankrupted. This model of trading proved to be highly beneficial for the overall business. The shared stock grew in size over time and the companies were able to fund all the voyages not just one. 

How Was the English East India Company Born?

On December 31, 1600, Queen Elizabeth granted the royal charter to establish the English East India Company. The company included 218 merchants who formed the company as a limited liability corporation. They were autonomous in taking trades, security, and safety measures to protect their monopoly. Over a short period of time, the company spread its presence on the Indian coast and Indonesia.

A flag of the English East India Company
A flag of the English East India Company in 1600. (Image: Wdflake/Public domain)

Learn more about the Opium War in China.

Common Questions about the Origins and Development of Trading Companies in the East

Q: Who came to India first?

The Portuguese were the first to enter the East Indies. They rounded the Cape of Good Hope to reach the East and established their first trading companies.

Q: What did the Dutch East India Company do?

Like other trading companies in the East, the Dutch East Indian Company sought to profit. This profit was to be created through the trade of spices.

Q: When was the English East India Company established?

The English East India Company was established on New Year’s Eve, 1600. This trading company was chartered by Queen Elizabeth to conduct trade in the East.

Q: Who started the spice trade?

The first trading companies in the East were the Portuguese. They were the first nation to reach the East to gain profit by trading spices.

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