The concept of firm is explained in this chapter, which starts by making a sharp distinction between the concepts of ‘firm’ and ‘corporation’. The two words are often used as synonyms, but they correspond to radically different notions. A firm is an organization performing an economic activity. A corporation is a type of legal person – most firms of some significance being organized using business corporations.

Making the confusion between ‘firm’ and ‘corporation’ in ordinary, everyday language is not a major issue. But when one addresses issues of governance, it becomes highly problematic. In the analysis of the World Power System, the confusion prevents any proper reasoning.

The Need to Differentiate Firms from Corporations

Multinational firms have played, and most likely will continue to play, a fundamental role in the evolution of the World Power System. The very existence of large, formally private organizations having concentrated property rights means that the State does not monopolize collective power in society, be it at the national or international level. Property rights being rights of decision-making as a matter of principle, their concentration under firm management has brought vast amounts of decision-making power into these organizations. What these organizations are, however, is vastly misunderstood. This prevents understanding the operation of the World Power System: as explained by John Gerard Ruggie, a current and systematic political analysis of the multinational enterprise in the context of global governance is missing.

A first issue to understand precisely the position of firms in the World Power System is that there is a widespread confusion in the literature on economic organizations between the concepts of ‘corporation’ and ‘firm’. The two words are often used interchangeably, ‘company’ or ‘enterprise’ being also sometimes used as synonyms. Before her untimely death, Lynn Stout made me the great honour of agreeing that ‘the careless but unfortunately common habit of treating them as synonyms confuses and misleads’. And the fact is that the consequences of this linguistic and conceptual confusion are extraordinary.