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

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

The Value of Moderate Obsession: Insights from a New Model of Organizational Search

This study presents a new model of search on a “rugged landscape,” which employs modeling techniques from fractal geometry rather than the now-familiar NK modeling technique. In our simulations,firms search locally in a two-dimensional fitness landscape, choosing moves in a way that responds both to local payoff considerations and to a more global sense of opportunity represented by a firm-specific “preferred direction.” The latter concept provides a very simple device for introducing cognitive or motivational considerations into the formal account of search behavior, alongside payoff considerations. After describing the objectives and the structure of the model, we report a first experiment which explores how the ruggedness of the landscape affects the interplay of local payoff and cognitive considerations (preferred direction) in search. We show that an intermediate search strategy, combining the guidance of local search with a moderate level of non-local “obsession,” is distinctly advantageous in searching a rugged landscape. We also explore the effects of other considerations, including the objective validity of the preferred direction and the degree of dispersion of firm strategies. We conclude by noting available features of the model that are not exercised in this experiment. Given the inherent flexibility of the model, the range of questions that might potentially be explored is extremely large.Rugged Landscapes; Local Search; Cognition; Obsession; Fractal Geometry

Toward an Evolutionary Theory of Production

Production theory in the neoclassical tradition is strong on Abstract generality. Its high level of Abstraction tends to impede understanding of technological change, partly because its perspective on production differs so much from those of engineers, managers and technologists. A more grounded approach is needed for evolutionary economics, since evolutionary thinking sees questions of production as tightly and reciprocally connected with questions of coordination, incentives, and organizational knowledge, and is concerned above all with change. In this essay, the shortcomings of mainstream theory are identified and explained in a review of its historical development. The remainder of the paper sets forth a map for a production theory that reflects the key attributes of the productive knowledge. A discussion of spatial replication of productive activity provides a sharp contrast between the evolutionary and mainstream perspectives. The paper concludes with a discussion that places production theory within the broader framework of evolutionary economics and identifies some of the many research tasks on the agenda.-

Small and medium-size enterprises in economic development : possiblities for research and policy

The World Bank's most important long-term advantage in promoting development, says the author, may lie in opportunities to address related obstacles simultaneously. It could mount concurrent efforts to address the problems of small and medium-size enterprises in a particular sector, region, or economy, for example. It could address the conditions of founding new firms, providing finance or technical assistance, developing mutual support institutions, resolving disputes, and perhaps reducing counterproductive government interventions. Were the Bank to follow such a coordinated approach, programs could be designed to generate data to illuminate the impacts and interactions of various elements of policy. These data could be exploited, then, in research designs, or even the design of management information systems, shaped by program evaluation. The author proposes four general issues for research (plus a series of topics for each issue). (1) Can Bank initiatives involving small and medium-size enterprises in developing countries facilitate the entry of these enterprises into similar learning relationships with other firms - foreign firms, larger firms in their own countries, or each other? (2) The economic significance of high"turbulence"(entry and exit rates) in small-firm populations is poorly understood. The fact of high turbulence is well-documented in industrial countries; it is not for developing countries, but available data suggest a broadly similar pattern. Are high failure rates for small businesses symptomatic of an important shortcoming in the system of economic organization itself? Or should the unit of analysis be the enterprise, the entrepreneur, or the entrepreneur's family? (3) Is the apparent trend favoring a larger economic role for smaller production units autonomous rather than induced by other changes? Does it depend on general operating factors such as the declining costs of communication and computation? (4) The rate of learning by a small firm may depend on the nature of its transacting partner. Certain multinational enterprises make good teachers, for example, but certain local labor markets or markets for consumer goods and services may not be well-positioned for relevant learning. They may learn well how to adjust to local circumstances but not to the international diffusion of technology and ways of organizing (the main source of hope for developing countries). Perhaps Bank policy should be more concerned with transaction patterns.General Technology,Environmental Economics&Policies,Decentralization,ICT Policy and Strategies,Small and Medium Size Enterprises,Environmental Economics&Policies,General Technology,Small and Medium Size Enterprises,ICT Policy and Strategies,Small Scale Enterprise

A Baseline Model of Industry Evolution

The paper analyses some general dynamic properties of industries characterized by heterogeneous firms and continuing stochastic entry. After a brief critical assessment of some significant drawbacks of recent contributions to modeling of stochastic industrial dynamics, we propose a novel analytical apparatus able to derive some generic properties of the underlying competition process combining persistent technological heterogeneity, differential growth of individual firms and turnover. The basic model, we suggest, is indeed applicable with proper modifications to a large class of evolutionary processes, well beyond industrial dynamics.Evolution, Competition, Stochastic entry, Industrial dynamics, Evolutionary games

Applying Organizational Routines in understanding organizational change

Organizational routines are considered basic components of organizational behavior and repositories of Organizational capabilities (Nelson and Winter, 1982). They do, therefore, hold one of the keys to understanding organizational change. We identify problems encountered in such research and present proposal for how to deal with them, in order to advance our knowledge of routines and our understanding or organizational change. Developing these themes, we also introduce the articles in the special section 'Towards an Operationalization of the Routines concept'.