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Restructuring, Corporate

Discussion of corporate restructuring encompasses related terms like deindustrialization and downsizing. It also must be understood in the context of ideas about the workings of a market economy and how change occurs at the level of individual firms and broader sectors of an economy. This entry discusses the meaning of these related terms and illustrates their appearance in the United States political economy since the post-World War II period. It also discusses the role of government trade and tax policies in facilitating corporate practices, distinguishing between the actions of individual firms and their aggregate consequences.

Overview of a Market Economy

A market economy comprises millions of privately held firms engaged in the production of goods and services for some market of consumers who may be individuals or other firms. Firms are established to achieve stated goals that often involve financial gains that support continuing operations. The pursuit of financial goals or profits is achieved by some combination of limiting the costs of production and expanding the sale of products or services. Many firms fail in a market economy, and such failure is viewed as a normal risk taken by those who invest in creating firms. Some versions of economic theory view failure as not only normal but even a healthy feature of a market economy, as failure reallocates resources from less productive firms to more productive firms. Economist Joseph Schumpeter called this healthy failure “creative destruction” because it was a means of eliminating inefficient operations and providing new economic opportunities.

When considering the actions of individual firms, it is important to distinguish between such actions and their aggregate consequences. For example, individual firms in the manufacturing sector may seek to maintain or strengthen their corporate profits, and they may engage in activities that contribute to their firm, like shipping production abroad, without intending to harm the overall economy. However, the combined consequences of similar decisions by individual firms may be rational for each of them while in the aggregate they produce or contribute to the overall decline of the manufacturing sector.

Deindustrialization

This term achieved public prominence in the early 1980s with the appearance of a book by Barry Bluestone and Bennett Harrison titled The Deindustrialization of America: Plant Closings, Community Abandonment, and the Dismantling of Basic Industry. They defined the term as the “widespread, systematic disinvestment in the nation's basic productive capacity.” Deindustrialization refers to the condition of an industrial sector, like manufacturing, or a region, like the Midwest or the “rust belt,” that is the aggregate consequence of many individual firms making decisions to systematically redirect their resources in ways that will produce greater financial returns. This may involve producing new products for new markets, mergers with other firms, or investment in other countries. The actions of an individual firm may result in less investment in its core manufacturing activities while increasing investment in new activities. The result of this individual action for the firm may be a reduction of employees in the core activities and an expansion of employment in other activities in other locations in the United States or abroad. Individual firms do not view their redirection of resources as deindustrialization but instead as wise business decisions that will enhance the growth, profits, or expansion of the firm.

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