Corporate Form and the State: Business Policy and Change from the Multidivisional to the Multilayered Subsidiary Form*

The largest industrial corporations are changing to a multilayered subsidiary form. Whereas corporations have used subsidiaries to organize their assets since the tum of the century, the number of wholly owned subsidiaries in the 100 largest industrial corporations doubled between 1981 and 1993. The question addressed here is: Why are corporations changing their form now? I suggest that the question is historically contingent and that the answer is, in part, explained by changes in state business policy. A capital dependence framework is elaborated to examine the relationship between state business policy and corporations in the 1970s and 1980s. Business policy changes–resulting in the Tax Reform Act of 1986 and the Revenue Act of 1987–provided corporations with tax-free procedures for parent companies to simultaneously restructure their divisions as subsidiaries and restructure their debt. There are additional incentives for corporations to restructure their divisions as subsidiaries: (1) creating a liability firewall between the parent company and its subsidiary corporations, limiting the financial risk of parent companies, and (2) creating an internal capital market, providing an alternative form of financing thereby reducing corporations’dependence on external capital markets.