Using simple neural networks to analyse firm activity

Characteristically, in economics, the analysis of firm activity is based on a production function that defines a deterministic relationship between factor inputs and firm output. The analysis of the firm as an organisation takes a somewhat different approach. For instance, behavioural economics (for example Simon, 1955; March and Simon, 1958; Cyert and March, 1963), transaction cost theory (Williamson, 1975, 1985) and capabilities approaches (for example Foss and Loasby, 1998; Foss, 2005) emphasise that economic agents have inevitably incomplete information and knowledge and are at most boundedly or limitedly rational. The implication here is that while general principles governing intra-firm interaction can be specified, detailed organisational processes inside the firm are, for practical academic purposes, effectively unobservable. Hence, the usual analytical tools designed to analyse firm behaviour, based on production functions and optimising principles with full information, are in practice an oversimplification of firm activity (Loasby, 1999)

Transaction Costs and Profitability in UK Manufacturing

This paper explores the impact of transaction costs on performance at firm and industry levels using a sample of 7350 UK manufacturing firms. This is achieved by estimating a profit function with estimated transaction costs as a right hand side variable. The discussion has two specific objectives. (1) To show how firm and average industry transaction costs can be estimated using a stochastic frontier method. (2) To examine a central claim of transaction cost theory that links these costs to performance. In addition the different impacts of static and dynamic transaction costs are emphasised, with the different impacts being respectively negative and positive on profitability. Broadly speaking it is shown that such costs do impact on performance in a way consistent with both static and dynamic costs, in different industries, and that the impacts hold after a series of robustness checks. In addition it is shown that the impacts can depend on monopoly power, firm scale, and firm growth

Neural networks and the evolution of firms and industries: An application to UK SIC34 and SIC72

This paper considers whether neural networks might be used to analyse firm activity and the evolution of industries. The key findings of the simulation results used are summarised as follows. While efficiency seeking behaviour has growth advantages, compared to unchanged firms, these are small compared to the growth advantages that are displayed with firms that are able to exploit input use variability. In addition the two sectors analysed here (UK SIC34 and SIC72) show different profit implications of these growth advantages. In SIC34 an increase in firm growth caused by strategic flexibility coincides with an increase in profitability, whereas in SIC72 the increase in firm growth coincides with a profitability reduction. This difference is explained in terms of the differing market structures in the two sectors along with the differing effects of market shocks. Finally the market structure effects of differing firm types have been analysed. It is shown that factor flexibility generates relative growth advantages that benefit smaller firms. But strategic flexibility generates relative growth effects that benefit larger firms

Giant Firms in the Information Economy

The primary objective of this paper is to present a discussion of the potential significance of giant companies in the emerging new information economy. In the 1970s and discussion of the significance of giant firms would be somewhat uncontroversial. Within economics, the work of, for example, Prais (1976) established empirically the central position of giant firms in market economies. From a more interdisciplinary perspective, theorists (particularly Marxist inspired writers) emphasised the development of a monopoly based capitalism (for example, Baran and Sweezy, 1968; Cowling, 1982). But more recently these established or stylised facts have been questioned. As discussed below, an explicitly small firms literature has developed. This literature is frequently linked to claims that the changing dynamics of modern market economies have undermined the position and significance of giant firms. Other writers, for instance the sociologist Castells (1996) links the very same dynamics to a continued role for giant firms in a globalised world

Efficiency and profitability: a panel data analysis of UK manufacturing firms, 1993-2007

This paper examines the impact of efficiency on profitability using a panel of 11728 UK manufacturing firms for the period 1993-2007. A key contribution is estimation of the relationship between firm efficiency and profitability in a new way. Part of this novelty involves direct estimation of firm efficiency using a stochastic frontier method rather than inferences being made about the impact of efficiency based on anticipated firm and market behaviour. Two key aspects of the discussion are (1) the shape of the relationship between efficiency and profitability and (2) the way in which this changes in the short and long runs. A simple theoretical model is developed that predicts a 4th order polynomial for efficiency on the right hand side of a profit equation in levels. This model also predicts short-run and long-run impacts that can involve a switching in the sign of the impact of efficiency. Estimation of this model suggests a threshold effect of efficiency on profitability. Below the threshold efficiency has effectively no effect on profitability, but above the threshold the impact is positive in the short-run but negative in the long-run. This switching is consistent with theoretical expectations

Firm development as an integrated process: with evidence from the General Motors-Fisher Body case

This paper argues that an adequate approach to the firm should be able to accommodate the complexities of actual firm development. The latter is conceptualized in terms of three general stages: prime movers or drivers of change, change processes, and change attractors. Furthermore, any "real-world" firm is both a technical and an institutional unit. To emphasize the importance of "real firm" analysis, the discussion presented here revolves around an understanding of the much considered case of General Motors and Fisher Body integration has developed over time. Generalization from this case suggests that an integrated view of the firm is necessary that combines the three stages and the two bases (technical and institutional). Six general perspectives on the firm are identified as having technical or institutional bases that are relevant in each of the three stages. This integrated approach to the firm is explored in terms of the general topic of firm development. It is concluded that, without an integrated approach to firm development, a potentially biased or incomplete analysis can result

The Indian Economy Since Liberalisation: the Structure and Composition of Exports and Industrial Transformation (1980 – 2000)

This paper assesses empirically structural change in the Indian manufacturing based export sector, based on an analysis of 143 industries / product groupings (mainly manufacturing industries). Trade indices such as Balassa´s revealed comparative advantage (RCA) index, and other variants commonly employed in the literature are used in our analysis. Regression analysis on the RSCA indices is used to further analyse structural change. Thereafter, the stability of the RCA indices is examined, as well as the process of their intertemporal evolution. Three technology categories (high technology, medium technology and low technology) are examined individually and SITC product codes are used as proxies for export industries, in order to look at industry movements within each of these groups. This analysis enables us to assess the export performance of Indian industries in the selected product-industry groupings in detail and evaluate the prospects for growth of particular Indian industrial groupings

Attitudes and motivations of Economics students: Some recent evidence

There is disagreement amongst economists regarding whether economics students are more self-interested than other students in economic and non-economic contexts. Econometric analysis of the choice to share in a Prisoner´s Dilemma game suggests that it may not be economics students per se that have a lower probability of choosing share rather than compete, but instead that individuals with attitudes, motivations and values similar to those assumed by standard economic theory have a lower probability of choosing share. The experimental evidence here of 1,701 students suggests that it is the motivations and attitudes of subjects that are important for determining economic choices rather than simply whether the individual studies economics. The results confirm that a higher proportion of economics students have motivations in a game theory context that are similar to those assumed by standard economic theory, yet that their related general attitudes and values are not significantly different. Overall the results suggest that the assumptions of standard economic theory are appropriate for a subset of individuals, and for many individuals who do not study economics

Are people ethical? An experimental approach

Do ethical motivations and attitudes affect behaviour? We examine this issue in six Prisoner´s Dilemma and Prisoner´s Dilemma related games using an online experiment where individuals were asked to make choices and subsequently to express the motivations for their choices and their general attitudes. The experimental evidence of 1,701 students suggests that the motivations and attitudes of respondents regarding altruism, inequality aversion, reciprocity and aversion to lying are important for determining economic choices as well as self-interest. Econometric analysis of the choice to share indicates that ethical and self-interested motives are more important for determining choices than personal characteristics

Incorporating Ethics into Economics: Problems and Possibilities

In traditional economics the decision-making process for individuals has effectively no role for ethics as individuals are self-interested. The key concepts in economics which determine the role of ethics in the decision-making process are utility, rationality and methodological individualism and hence how these can be and are formulated and combined determines different roles for ethics in economics. Amitai Etzioni, Amartya Sen and John Broome use different definitions of these concepts and hence find different problems and possibilities for a greater role for ethics in economics. This paper integrates the different approaches of these authors and suggests a general mono-utility framework for incorporating ethics into economics whereby the concept of utility requires adaptation