The Logic of Appropriability: From Schumpeter to Arrow to Teece

This note expounds the abstract fundamentals of the appropriability problem, re-assessing insights from three classic contributions – those of Schumpeter, Arrow and Teece. Whereas the first two contributions were explicitly concerned with the implications of appropriability for society at large, Teece’s main concern was with practical questions of business strategy and economic organization. This note argues that, his practical concerns notwithstanding, Teece contributed, en passant but fundamentally, to the clarification of basic questions that previous authors had addressed less comprehensively and less satisfactorily. Specifically, his analysis of the innovator’s access to complementary assets, undertaken from a contracting perspective, can be seen as filling a significant gap in the previous theoretical discussion of appropriability.Appropriability, Innovation, Complementary assets, Patents, Intellectual property.

Toward a Neo-Schumpeterian Theory of the Firm

This paper offers a sketch of what an economic theory of the firm would look like if it were founded on the thought of Joseph Schumpeter, particularly on Chapters 1-2 of his Theory of Economic Development. Schumpeterian analysis requires an intuitively appealing and realistic conceptualization of the distinction between routine and innovative behavior, and in particular, a conceptualization relevant to complex organizations and complex tasks. It is argued that the production theory found in mainstream economics does not meet this requirement, particularly because its characterization of productive knowledge involves an overly sharp distinction between “technically possible” and “technically impossible” – a distinction which has no counterpart in the realities of organizational knowledge. The main elements of a Schumpeterian view are described and contrasted with those in the mainstream view.Theory of the firm, Schumpeter, Innovation, Knowledge

The Economics of Strategic Opportunity

As emphasized by Barney (1986), any explanation of superior profitability must account for why the resources supporting such profitability could have been acquired for a price below their rent generating capacity. Building upon the literature in economics on coordination failures and incomplete markets, we suggest a framework for analyzing such strategic factor market inefficiencies. Our point of departure is that a strategic opportunity exists whenever prices fail to reflect the value of a resource's best use. This paper examines the challenges of imputing a resource's value in the absence of explicit price guidance and suggests the likely characteristics of strategic opportunities. Our framework also suggests that the discovery of strategic opportunity is often a matter of serendipity and access to relevant idiosyncratic resources. This latter observation provides prescriptive advice, although the analysis also explains why more detailed guidance has to be firm specific.

The logic of appropriability: From Schumpeter to Arrow to Teece

This note expounds the abstract fundamentals of the appropriability problem, re-assessing insights from three classic contributions those of Schumpeter, Arrow and Teece. Whereas the first two contributions were explicitly concerned with the implications of appropriability for society at large, Teece's main concern was with practical questions of business strategy and economic organization. This note argues that, his practical concerns notwithstanding, Teece contributed, en passant but fundamentally, to the clarification of basic questions that previous authors had addressed less comprehensively and less satisfactorily. Specifically, his analysis of the innovator's access to complementary assets, undertaken from a contracting perspective, can be seen as filling a significant gap in the previous theoretical discussion of appropriability

Vertical Integration and Dis-integration of Computer Firms: A History Friendly Model of the Co-evolution of the Computer and Semiconductor Industries

In this paper we present a history-friendly model of the changing vertical scope of computer firms during the evolution of the computer and semiconductor industries. The model is "history friendly", in that it attempts at replicating some basic, stylized qualitative features of the evolution of vertical integration on the basis of the causal mechanisms and processes which we believe can explain the history. The specific question addressed in the model is set in the context of dynamic and uncertain technological and market environments, characterized by periods of technological revolutions punctuating periods of relative technological stability and smooth technical progress. The model illustrates how the patterns of vertical integration and specialization in the computer industry change as a function of the evolving levels and distribution of firms' capabilities over time and how they depend on the co-evolution of the upstream and downstream sectors. Specific conditions in each of these markets - the size of the external market, the magnitude of the technological discontinuities, the lock-in effects in demand - exert critical effects and feedbacks on market structure and on the vertical scope of firms as time goes by

Toward a neo-Schumpeterian theory of the firm

This paper offers a sketch of what an economic theory of the firm would look like if it were founded on the thought of Joseph Schumpeter, particularly on Chapters 1-2 of his Theory of Economic Development. Schumpeterian analysis requires an intuitively appealing and realistic conceptualization of the distinction between routine and innovative behavior, and in particular, a conceptualization relevant to complex organizations and complex tasks. It is argued that the production theory found in mainstream economics does not meet this requirement, particularly because its characterization of productive knowledge involves an overly sharp distinction between technically possible and technically impossible a distinction which has no counterpart in the realities of organizational knowledge. The main elements of a Schumpeterian view are described and contrasted with those in the mainstream view

Understanding Dynamic Capabilities

Defining ordinary or “zero- level” capabilities as those that permit a firm to “make a living” in the short term, one can define dynamic capabilities as those that operate to extend, modify or create ordinary capabilities. Logically, one can then proceed to elaborate a hierarchy of higher-order capabilities (Collis 1994). However, it is argued here that the strategic substance of capabilities involves patterning of activity, and that costly investments are typically required to create and sustain such patterning – for example, in product development. Firms can accomplish change without reliance on dynamic capability, by means here termed “ad hoc problem solving.” Whether higher order capabilities are created or not depends on the costs and benefits of the investments relative to ad hoc problem solving, and so does the “level of the game” at which strategic competition effectively occurs