Journal of Management and Governance 5: 331–351, 2001. © 2001 Kluwer Academic Publishers. Printed in the Netherlands.
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: email@example.com;firstname.lastname@example.org) 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 explanationsfor 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 reasonsoffered 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 tothe problems of governance – problems that had interested organization and management science for decades – and started a systematic inquiry into the incentive problems in contractual relations. Yet differences in incentive and transaction costs are not the only reasons why there are different forms of economic organization. For a full understanding of the “nature” of the ﬁrm, other differencesbetween markets and ﬁrms are also important. For example, the way in which knowledge can be transmitted, utilized, and, most notably, accumulated is very different in markets and ﬁrms. Similarly, cognitive, motivational, and emotional attitudes develop in different ways in the
KLAUS RATHE AND ULRICH WITT
continuing interactions between the members of a ﬁrm on the one hand, and betweenthe participants in market transactions on the other hand. The differences may be very important for an agent – the entrepreneur – who has to invest time, effort, and private wealth into building up a business on the basis of one or the other organizational forms. In general, the development of ﬁrms as organizations – their growth and aging process over time – is very different from, though notindependent of, the evolution of the markets in which the ﬁrms operate. Organizational forms are not given, unchanging entities. Firms undergo signiﬁcant organizational changes during their life span (Chandler, 1990, 1992). A newly-established, small entrepreneurial business clearly differs from a large, well-established corporation although the roots of the latter can usually be traced back to theformer type. However, development, or any other time-dependent aspects of real ﬁrms do not play much of a role in the new, institutionalist research program. Although the scope of economic theorizing has been extended to non-market institutions, the static method and the optimization-cum-equilibrium-based interpretation of neoclassical economics have been preserved (with a notable, early...
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