Journal of Management and Governance 5: 331–351, 2001. © 2001 Kluwer Academic Publishers. Printed in the Netherlands.

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The Nature of the Firm – Static versus Developmental Interpretations
KLAUS RATHE and ULRICH WITT
Max Planck Institute for Research into Economic Systems, Evolutionary Economics Unit, Kahlaische Str. 10, D-07745 Jena, Germany (E-mail: rathe@mpiew-jena.mpg.de; witt@mpiew-jena.mpg.de) Abstract. Different from the prevailing static perspective in the theory of the firm, a developmental approach focuses on processes of change in firm organizations (rather than on states and their properties). Although business history provides ample evidence for systematic organizational change, few contributions in the literature take a developmental viewpoint and offer explanations for the endogenous processes of change. To contrast static and developmental interpretations, the paper identifies three paradigmatic questions for each of them. Their comparison sheds some new light on the theory of the firm and draws attention to the neglected entrepreneurial role in organizational change.

1. Introduction The attempt of the new institutionalist research program to explain the “nature” of the firm has strongly influenced modern economic thinking about business organizations. Because the neoclassical theory of the price mechanism was virtually silent about why there are firms at all (Demsetz, 1991), a huge literature emerged that, following Coase’s lead, tried to explain why there are two alternative ways of coordinating the division of labor: markets and firms. The reasons offered for why economic agents rely on markets in some circumstances and in others use the organizational form of the firm revolve around the differences between firms and markets, with respect to (transaction) costs and the controlling of contractual hazard (see Holmström and Tirole, 1989; Foss, 2000 for surveys). In pursuit of the new institutionalist program, economic theorizing was attracted to