Organizations and Markets

| Nicolai Foss |

Managerial and Decision Economics has become a favorite journal of mine. It has a strong econ orientation, to be sure, but the journal stresses econ that is relevant, readable, and right. In other words, there is lots of applied microeconomics, transaction cost economics, etc. Moreover, over the last few years MDE – presumably as a result of Margie Peteraf’s tenure as co-editor — has become very much of an econ-based strategic management journal, not like the Journal of Economics and Management Strategy, to be sure, but more economics-oriented than the Strategic Management Journal.

The most recent issue(s — issue 2 and 3 are bundled into one special issue) features a string of excellent papers under the heading “Frontiers of Strategic Management Research,” edited by Peteraf and Catherine Maritan. Several of the papers should be of interest to the O&M readership. For example, Kyle Mayer (with Janet Bercovitz) continues to work with his information technology service contracts dataset, this time looking at the influence of inertia on what contract clauses that are included in these kind of contracts. Maritan and Robert Florence engage in a nice modelling exercise, modelling strategic factor markets in a way that seems quite different from earlier attempts (e.g., by Rich Makadok). Michael Jacobides builds an interesting argument, linking foreign direct investment to the investing firm’s embeddedness in value chains in the home country and value chain conditions in the host country. And, of course, there is the usual handful of alliance articles. A great special issue. Highly recommended.

| Nicolai Foss |

Former O&M guest blogger Dick Langlois is IMHO one of the most original thinkers in the field of economic organization. He is also one of the best writers in management and in economics. So I try to keep track of his writings and usually succeed. However, this paper, “The Austrian Theory of the Firm: Retrospect and Prospect,” written for a conference at the George Mason Law School last May, had escaped my attention until today.

Dick develops a number of related arguments. One is that Hayek (of the 1945 essay, “The Use of Knowledge in Society”) developed richer insights in economic organization than Coase.  Moreover, by pointing out the importance of dispersed knowledge, the coordination problem this raises, and the importance of ”change” for “economic problems,” Hayek anticipated the capabilities theory of the firm. In a parallel argument, Dick links his own work on the capabilities theory of the firm to Austrian capital theory (see also here and here). He ends by speculating on the future of Austrian arguments in the theory of the firm, noting various manifestations, particularly in strategic management, of these arguments (he notes that “Some work in this literature is close in spirit to my own, in some cases extremely close (Jacobides and Winter 2005)” — one agrees).  Definitely worth a read!

| Nicolai Foss |

I have noticed that an increasing number of colleagues build up and afterwards desperately try to manage increasingly large portfolios of paper projects. It is very common to have paper portfolios that encompass more than 20 ongoing projects. At any rate, that’s about the size of my own current portfolio.

I have also noticed that a lot of these paper ideas don’t seem to ever come to be written, or, at best exist in a fragmentary form.  I can relate many anecdotes (some from personal experience!) relating to substantial regret over set-up costs (aka pissing your would-be co-author off). It is possible that this may increasingly become a management problem, certainly on the level of the individual scholar, but perhaps also on the level of university managers (mainly dept. heads).

The question is: Is this (personally and socially) wasteful?  The basic problem is that in order to end up with a suitable amount of published papers a certain amount of exploration is necessary.  Co-authoring papers is a Hayekian discovery process. It is pretty hard, perhaps particularly for younger, unexperienced colleagues, to make reasoned decisions on how many papers one should initiate and with whom (given the costs of experimentation, i.e., set-up costs, the risk of ruining your reputation, etc.).  Reputation mechanisms work imperfectly. Big, but lazy, guys may exploit this, hoping for the rookie to do the job. Problems of procastination and melioration may complicate the decision problem. Etc. 

From another point of view,  however, not much has really changed. Whereas scholars in the past may have spent much time discussing research issues over the lunch table, etc., the publication pressure that most of us are subject to nowadays means that many discussions that would previously have simply ended over the lunch table are now turned into paper ideas.  If that is the case, the process appears much less wasteful — and, importantly, in need of less intenvention by well-intentioned, but (naturally!) misguided university bureaucrats.

| Steve Phelan |

In a recent paper in the Journal of Business Venturing, Sharon Alvarez attempts to construct a theory of entrepreneurship and the firm. The central question is why new resource combinations are sometimes carried out by entrepreneurs starting new ventures rather than within established firms. (more…)

| Nicolai Foss |

To paraphrase Fritz Machlup, the rational-choice model has been a sort of “universal bogey” for many scholars in sociology, psychology, and management. The nature of the alternative(s) has, however, seldom been clarified. Thus, most models of bounded rationality are really variations on the basis RC model. 

However, a much-cited attempt to characterize an actual alternative is James March’s notion of the “logic of appropriateness,” which may be characterized thus: 

The logic of appropriateness is a perspective that sees human action as driven by rules of appropriate or exemplary behavior, organized into institutions. Rules are followed because they are seen as natural, rightful, expected, and legitimate. Actors seek to fulfill the obligations encapsulated in a role, an identity, a membership in a political community or group, and the ethos, practices and expectations of its institutions. Embedded in a social collectivity, they do what they see as appropriate for themselves in a specific type of situation” (quoted from this paper).

In in a logic of appropriateness, the agent/actor does not begin by identifying alternatives, preferences, etc. as in the rational choice model, but rather asks, “What kind of situation is this? Who or what am I? What is the appropriate thing to do given who I am?”  (more…)

| David Hoopes |

For better or worse the hard-hearted authors at O&M have hurt the feelings of our colleagues in other fields. In the spirit of being more specific about why the bloggers here are so harsh I’d like to take a look at an award-winning paper from the Academy of Management Review (Ferraro, F., Pfeffer, J., and Sutton, R.I., “Economics Language and Assumptions: How Theory Can Become Self-Fulfilling”). In this paper we are told how the language of economics (the assumptions that people are selfish cheats) encourages people to be selfish cheats. Aside: in my opinion sociologists have a much darker image of humankind than economists (if we must make careless generalizations).

As I note in an earlier post, the idea of self-interest is often grossly misrepresented. Perhaps economists can thank themselves for this. I don’t know. However, it is important to examine this component of price theory by looking at its roots. In developing public policy toward government intervention in the allocation of goods (mercantilists vs. free traders in Smith’s day) allowing people to make their own decisions is more efficient than having a handful of people making the decisions for everyone. And even if individuals focus on their own needs the result for society is better than having a few people guessing at what everyone else wants and imposing their guesses.

The starting point of the AMR critique is the ever-present complaint about the economics world telling us all that we need to be selfish and greedy (make decisions based on our own self-interest). From here, our friends in the org. theory camp state, “If people are relentless in the pursuit of their own self-interest and equally relentless in the their lack of concern for others’ interests. . . .” What? Where did that second part come in? A very important bridge theory has been added. If people pursue their own self-interest then they also cannot care about anyone else. Management scholars wonder why their (our) work is not used in public policy debates. Small wonder. (more…)

| David Hoopes |

A recent post by Nicolai ponders Demsetz’s approach to transaction costs. My understanding (interpretation) of Demsetz’s “The Theory of the Firm Revisited” is quite different from Nicolai’s. Here’s how I remember that paper.

One of Demsetz’s complaints about transaction costs economics is that a number of very different events are bundled together under the term “transaction.” Williamson’s take on transaction costs focuses largely on comparative governance costs. How does making sure a supplier doesn’t cheat you compare to making sure your employees don’t cheat you? Coase’s version of transaction costs is very different. Coase tends to talk about a variety of other frictions that can occur independently of governance costs. These are what Demsetz calls management costs. Demsetz thinks (quite correctly) that referring to these two types of costs using the same term is confusing. In his Nobel speech Coase notes how his beliefs were more consistent with Demsetz’s than with those emphasizing governance.

Steve Postrel and I (in disucssing capabilities in SMJ 1999) separate cooperation costs from coordination costs. I think of this as fitting the Williamson versus Demsetz and Coase types of transaction costs (or management costs as Harold says). Costs dedicated to aligning incentives are different from costs of making sure everyone has the same plan. Steve and I go on to differentiate the costs of sharing specialized knowledge from the costs of coordinating. (Notice how I moved from Coase and Demsetz to myself?!).

Back to Harold. Demsetz believes that you needn’t have oppourtunism to have organizations. Postrel (2003) in an earlier version compared knowledge and governance as theories of the firm. Where Demsetz believes firms economize on managerial costs (or Coasian transaction costs) Postrel believes that without opportunism the firm is unnecessary.

I’m more with Harold (at least in my own mind I’m not sure Harold really wants me tagging along).

| David Hoopes |

Since the O&Mers have been so quiet about the N prize I guess I’ll ramble a bit. In a comment on one of Peter’s posts I mentioned Demsetz and Alchian. For some reason I had it in my head that A.A. had already won. That’s what I get for staying at UCLA for so long (Alchian had just quit teaching when I got there).

I don’t know why I thought Alchian had won it. “Production, Information costs and Economic Organization” (with Harold Demsetz), American Economic Review 62 (1972): 777-95 is a pretty amazing paper. And “Vertical Integration, Appropriable Rents, and the Competitive Contracting Process” (with Robert Crawford and Bejamin Klein), Journal of Law and Economics (1978) has been very influential. Though I think people think of Ben Klein for that paper. As noted above, Alchian is very well known for (and thought of because of ) “Uncertainty, Evolution and Economic Theory,” Journal of Political Economy 58 (1950): 211-21.

Having said all that, I think srp is correct in that Alchian’s best chance is going in with Nelson and Winter for evolutionary economics or Demsetz and Williamson or Oliver Hart for theory of the firm. It’s hard to imagine that evolutionary economics is that appreciated. I think Sid Winter is grossly underrated. His body of work in economics and strategy is pretty amazing.

As readers of my posts might guess, I am a pretty big fan of Demsetz. I don’t know that Harold is as productive or quantitative as most award givers might like. Stilger and Coase were pretty big fans. But, Hart and Williamson seem more likely award winners.

Over at orgtheory.net they’ve been discussing sociologists and management people who (in some alternate universe) might win. There are not too many Herb Simons out there.

| David Hoopes |

Many people make incorrect assumptions about capitalism. Some would have us believe that capitalism is based on greed, selfishness, and promotes behavior that is completely self-centered. This is a common interpretation of Smith’s advice to allow people to make decisions based on self-interest. Examples are easy to find in the many organization theory-based papers complaining about economics and economists.

Two very good papers can aid in a deeper understanding of the invisible hand. First is James Q. Wilson’s “Adam Smith on Business Ethics.” A central point Wilson makes is that Adam Smith assumed people will behave with a moral sense. Wilson, “A moral man is one whose sense of duty is shaped by conscience; that is, by that impartial spectator within our breast who evaluates our own actions as others would evaluate it.” By suggesting people be allowed to make decisions based on their own self interest Smith was not advocating selfishness and greed. What then was he advocating?

This leads to the second paper, Harold Demstez’s “The Theory of the Firm Revisited.” In the third paragraph Demsetz notes that the debate between mercantilists and free traders was over the role of the government in the economic affairs of the state. “Is central economic planning necessary to avoid chaotic economic conditions?” The great achievement of the perfect competition model, what Demsetz argues should be called perfect decentralization, is its abstraction from centralized control of the economy.

Thus, the central element to capitalism is that decision making is pushed down as far as possible. (more…)

| Nicolai Foss |

Peter and I often get requests that we blog something of a more introductory nature on organizational economics, the theory of the firm, etc. Until now, we haven’t really had the opportunity.

However, we just completed a draft of a chapter on “Organizational Governance” for the Handbook of Rational Choice Social Research, a major project initiated by sociology professors Rafael Wittek, Tom Snijders and Victor Nee for the Russell Sage Foundations (thus dispelling strange claims by Brayden and others that this is the anti-sociology blog). As the title suggests, the contributors, representing economics (/game theory), anthropology, and sociology are united by their commitment to the rational choice approach. The project involves such luminaries as Avner Greif, Jean Ensminger, Sigwart Lindenberg, and others. You can find the chapter under “Papers.” (more…)

| Nicolai Foss |

Christian Bjørnskov and I have just had our paper with the above title accepted for publication in Public Choice. I was very favorably impressed with the review process, which was comparable to the process at the top academy journals in terms of speed and thoroughness. Mail me at njf.smg@cbs.dk if you want a copy of the paper. Here is the abstract:

While much attention has been devoted to analyzing how the institutional framework and entrepreneurship impact growth, how economic policy and institutional design affect entrepreneurship appears to be much less analyzed. We try to explain cross-country differences in the level of entrepreneurship by differences in economic policy and institutional design. Specifically, we use the Economic Freedom Index from the Fraser Institute to ask which elements of economic policy making and the institutional framework are conducive to the supply of entrepreneurship, measured by data on entrepreneurship from the Global Entrepreneurship Monitor. We find that the size of government is negatively correlated with entrepreneurial activity and sound money is positively correlated with entrepreneurial activity. Other measures of economic freedom are not significantly correlated with entrepreneurship

| Nicolai Foss |

Here is a controversial, but perhaps fun, exercise for the O&M readership: nominate a paper that you think is grossly overrated. In operational terms you may think of “overrated” in terms of the ratio of Google Scholar hits to actual content/substance. Remember that you, in contrast to the resident O&M bloggers, have the option and benefit of remaining anonymous. Uninspired? You may draw inspiration from our Pomo Periscope series. (And you are welcome to nominate Ferraro, Pfeffer, and Sutton, Academy of Management Review, 2005. ;-))

| Nicolai Foss |

My two favorite sociologists are Peter Abell and Sigwart Lindenberg. Both stress rationality (and rationalism), micro-foundations for social science research, and are (not surprisingly) sympathetic to, even admiring of, economics. However, neither is an uncritical admirer of economics.

In “Why the Microfoundations of the Social Sciences Should be Based on Goals Rather than Preferences” (you can find it on this page), Lindenberg argues that economists tend to conflate preferences and goals, or at least leaves open or trivializes the relationship between the two.  (more…)

| Nicolai Foss |

OK, I persist in using O&M for the purpose of shameless self-promotion: I have written “Theory of Science Perspectives on Strategic Management Research: Debates and a Novel View” (I know — not an elegant title) for The Elgar Handbook of Research on Competitive Strategy, edited by Giovanni Battista Dagnino.  I will be happy to send you a copy if you drop me a mail at njf.smg@cbs.dk. (more…)

| Nicolai Foss |

Pioneers of Industrial Organization: How the Economics of Competition and Monopoly Took Shape is the title of a new volume edited by Henk de Jong to be published next month by Edward Elgar. My CBS colleague Peter Møllgaard and I have contributed a chapter on early (meaning pre-1980) IO research in the Scandinavian countries. (more…)

| Nicolai Foss |

Here at O&M we have often criticized and poked fun at ideas on social construction and their derived notions in management, such as Weickian “enactment.” Still, it is a fundamental tenet of classical liberalism that ideas matter and matter crucially (although some classical liberals, notably George Stigler, have argued that ideas matter much less than economists would like to think). One crucial area where ideas would seem to have mattered a great deal is privatization (a term that seems to have been invented by Peter Drucker).

In a paper, “Palace Wars and Privatization: Did Chicago Beat Cambridge in Influencing Economic Policies,” just published in the European Management Review, J. Muir McPherson adds to his earlier work with Bruce Kogut (this paper; for a related idea diffusion paper, see this), and examines the influence of “the epistemic community of American-trained economists” (based on the number of non-US, US and Chicago PhD degrees in a given country) on privatization policies. The dataset encompasses self-collected data on 13,422 economists. The statistical methodology is a hazard model. The results indicate a clear impact of the frequency of US-trained economists on the probability of privatization, but it is also noteworthy that among theUS economists, “As Chicago ideas won out . . . the difference between Chicago economics PhDs and graduates from other schools could no longer be detected from the general influence of US-trained economists on the decision to privatize.”

| Nicolai Foss |

Research on corporate governance and the importance to value creation of CEOs is becoming increasingly morbid. Check out the abstract of a recent paper by CBS colleague Morten Bennedsen (as the paper doesn’t seem to be online, you will have to write Morten for a copy; mb.eco@cbs.dk):

Estimating the value of top managerial talent is a central topic of research that has attracted widespread attention from academics and practitioners. Yet, studying the impact of managers on firm performance is difficult because of endogeneity and omitted variables concerns. In this paper, we test for the impact of managers on firm performance in two ways. First, we examine whether top executive deaths have an impact on firm performance, focusing on the manager and firm characteristics that are associated to large manager-death effects. Second, we test for the interaction between the personal and professional activities of managers by examining the effect of deaths of immediate family members (spouses, parents, children, etc) on firm performance. Our main findings are three. First, CEO deaths are strongly correlated with declines in firms operating profitability, asset growth and sales growth. Second, the death of board members does not seem to affect firm prospects, indicating that not all senior managers are equally important for firms’ outcomes. Third, CEOs’ immediate family deaths are significantly negatively correlated to firm performance. This last result suggests a strong link between the personal and business roles that top management plays, a connection that is present even in large firms. Overall, our findings demonstrate CEOs are extremely important for firms’ prospects.

| Nicolai Foss |

Along with Euro colleagues such as Prof. Anna Grandori (Bocconi University) and my colleagues at the Center for Strategic Management and Globalization here at the Copenhagen Business School I have championed the notion of “knowledge governance” as a distinct perspective on knowledge management that explicitly relies on “rational” organization theory (including organizational economics), is methodologically individualist, etc.  (more…)

| Nicolai Foss |

Here is a blog offer: Teppo Felin and I have written “Organizational Routines: Historical Drift, A Course Correction, and Future Directions,” and if you mail me at njf.smg@cbs.dk, I will be happy to send you a copy.  Here is the abstract:

Organizational routines and capabilities have become key constructs not only in evolutionary economics, but more recently also in business administration, specifically strategic management. In this essai we discuss the historical origins of the notion of routines, and highlight some of the theoretical and definitional drift associated with the notion of routines over time.  In parallel we also explicate some of the underlying theoretical problems of routines (and related concepts); problems such as the lack of clarity on the origins of routines, and the more general need for micro-foundations. We argue that individual-level considerations deserve more attention in extant work — we in effect call for a course–correction in work on organizational routines — and we argue that evolutionary economics and strategic management should aim to build micro-foundations related to understanding the origins of routines.

| Nicolai Foss |

As readers of O&M will know, Peter and I are highly sympathetic to subjectivist economics, mainly Austrian economics, and both take an interest in entrepreneurship and the theory of the firm. Yasemin Kor is an expert on the RBV and top management, and former O&M guest blogger Joe Mahoney is, of course, an expert on the RBV and the theory of the firm. This makes, we think, for an excellent author team. Thus, we have collaborated in writing a paper, “Entrepreneurship, Subjectivism, and the Resource-based View: Towards a New Synthesis.” Here is the abstract:

This paper maintains that the consistent application of subjectivism helps to reconcile contemporary entrepreneurship theory with strategic management research in general, and the resource-based view in particular. The paper synthesizes theoretical insights from Austrian economics and Penrose’s (1959) resources approach, arguing that entrepreneurship is inherently subjective and firm specific. This new synthesis describes how entrepreneurship is manifested in teams, and is driven by both heterogeneity of managerial mental models and shared team experiences.

Enjoy!

| Nicolai Foss |

Evolutionary economics has emerged as the perhaps most successful modern heterodox approach. One possible reason for this relative success is that modern EE, in contrast to Austrian economics, old institutional economics, and (partly) post Keynesian economics, embraces formal model building and econometrics. Like the so-called orthodox economics that modern EE is a self-styled alternative to, EE is by no means monolithic. Although evolutionary economists go (roughly) to the same conferences and publish in pretty much the same journals, several factions are discernible within the overall EE community — such as

1. the”Italo-Wharton-Columbia” faction (Dosi, Marengo, Malerba, Orsenigo, Levinthal, Winter, Nelson);
2. the “old institutionalist-realist-evolutionists” (Hodgson, Lawson), mainly located in UK and US, and strong in economic geography; and
3. the German evolutionists, nowadays primarily represented by Ulrich Witt, the Director of the Evolutionary Economics Group at the Max-Planck-Institut für Ökonomik in Jena.

One thing that differentiates the the third group from the two other ones is a stronger commitment to methodological individualism (at least the second group seems to explicitly reject MI). The overriding emphasis on routines and habits that characterizes groups 1) and 2) cannot be found in the works of the German evolutionists. Entrepreneurship is much more strongly emphasized here. There is a suspicion of biological analogies. Economic evolution is conceptualized in terms of the emergence and dissemination of novelty, rather than in terms of the evolutionary triad of variation, heredity and selection. It is an approach that is closer to Austrian economics; hence, here at O&M, we are sympathetic to German evolutionism. For a nice sampling, check out the Papers on Economics and Evolution series that is published by the MPI in Jena.

| Nicolai Foss |

Most of us classical liberals tend to think of politics as largely ugly. But apparently beauty is more important in politics than competence, intelligence, likability, or trustworthiness (not that it is surprising that these may not be that important ….).  Check this fascinating new paper.

| Nicolai Foss |

Frequent readers of this blog will know that we have often posted on the bashing of economics that is going on in the management field (e.g., here and here). The bashing has been cumulating lately. A recent high point of management econ-bashing is the conferment of the AoM Prize for best paper in Academy of Management Review to Ferraro, Pfeffer, and Sutton’s adaptation of extreme and unqualified sociology of knowledge arguments in their “Economics Language and Assumptions: How Theories Can Become Self-Fulfilling.” (more…)

| Nicolai Foss |

Giampaolo Garzarelli (University of Witwatersrand) and I have just had our paper on Ludwig Lachmann, “Institutions as Knowledge Capital: Ludwig M. Lachmann’s Interpretive Institutionalism,” accepted by the Cambridge Journal of Economics.  Mail me at njf.smg@cbs.dk if you want a copy. Here is the abstract:

This paper revisits the socioeconomic theory of the Austrian School economist Ludwig M. Lachmann. By showing that the common claim that Lachmann’s idiosyncratic (read: eclectic and multidisciplinary) approach to economics entails nihilism is unfounded, it reaches the following conclusions. (1) Lachmann held a sophisticated institutional position to economics that anticipated developments in contemporary new institutional economics. (2) Lachmann’s sociological and economic reading of institutions offers insights for the problem of coordination. (3) Lachmann indirectly extends contemporary new institutional theory without simultaneously denying the policy approach of comparative institutional analysis.

| Nicolai Foss |

I have always been surprised and somewhat disturbed by the tendency in Herbert A Simon’s work to elevate hierarchy and organization over markets. Of course, Simon was a liberal democrat – but he was also a great scientist.  

The most visible expression of this tendency is probably Simon’s heavily cited 1991 paper in the Journal of Economic Perspectives, “Organizations and Markets.” Another manifestation of the tendency is Simon’s even more (in fact, much more) famous 1962 paper, “The Architecture of Complexity,” in which hierarchical structure is seen as the master-principle for understanding “the architecture of complexity.”

In an interesting paper, “Hierarchy and History in Simon’s ‘Architecture of Complexity’,” UCLA professor Philip Agre argues that Simon’s paper arose as a critique of general systems theory and its attempt to elevate self-organization over any hierarchical principles. He furthermore sees Simon’s argument as very strongly reflecting the general tenor of the times, what may be called McNamaraism (tellingly, Chandler’s Strategy and Structure was also published in 1962); thus, “… the patterns that Simon discerned became visible within the larger context of the time.”

| Nicolai Foss |

With Christian Bjørnskov I have written “Economic Freedom and Entrepreneurial Activity: Some Cross-Country Evidence.  Here is the abstract:

While much attention has been devoted to analyzing how the institutional framework and entrepreneurship impact growth, how economic policy and institutional design affect entrepreneurship appears to be much less analyzed. We try to explain cross-country differences in the level of entrepreneurship by differences in economic policy and institutional design. Specifically, we use the measures of economic freedom to ask which elements of economic policy making and the institutional framework that are responsible for the supply of entrepreneurship (our data on entrepreneurship are derived from the Global Entrepreneurship Monitor). The combination of these two datasets is unique in the literature. We find that the size of government is negatively correlated with entrepreneurial activity but that sound money is positively correlated with entrepreneurial activity. Other measures of economic freedom are not significantly correlated with entrepreneurship.

Drop me a mail if you want a copy.

| Richard Langlois |

At the risk of injecting some substance into my posts, let me raise an issue in the economics of organization that I have been thinking about recently.

There has been much discussion in the literature about the differences between the transaction-cost and capabilities views of organization, something that Nicolai and I, among many others, have written about. But another division might be between asset theories and activity theories. Asset theories are of course the province of the mainstream economics of organization. In this literature, one typically defines vertical integration as joint ownership of productive assets, and integration typically arises because of hazards from cooperating without joint ownership. Activity theories come from the literatures on product design and modularity. Here the issue is how tasks (or activities) ought to be designed given the structure of the production process. In this literature, the logic of integrality versus modularity provides clues to which activities out to be “outsourced.” Perhaps the best example of this kind of thinking is by Baldwin and Clark. I have also tried to think about the issues in a paper that will be coming out in Organization Studies. In many ways, this approach harkens back to Adam Smith. (more…)

| Nicolai Foss |

I am reading David Warsh’s Knowledge and the Wealth of Nations: A Story of Economic Discovery.  Although the book contains little that will be new to those with some knowledge of the history of economics and recent growth theory, it is worth reading because it is beautifully written, contains some juicy gossip, and has a clear storyline.  In other words, excellent Summer reading.

A notable feature of the book is portraying the development of new growth theory as a remarkable instance of scientific discovery.  Eight years ago, I published a paper in the Journal of Economic Methodology, “The New Growth Theory: Some Intellectual Growth Accounting” (here is an earlier paper version) that took issue with this claim.  My argument was that the NGT was successful for purely heuristic reasons. The argument may have been over the top, or the NGT may have changed since 1998.  Anyway, here is the abstract:

This paper discusses the reasons for the success of the New Growth Theory. Given that the NGT does not appear to say much new about empirical reality, that its essential ideas have been known for a long time, and that it does not really make contact with a large literature on institutions and economic change, its strong success may arguably be seen as surprising.  Or, at least, its success may appear peculiar to Lakatosian methodologists, and others who emphasize notions such as “novel facts”.  The reason for the success of the NGT is argued to lie in its constituting a case of strong heuristic progress: it brought growth through knowledge accumulation within the confines of neoclassical economics, and thus demonstrated the continued viability of this research tradition.

| Nicolai Foss | 

One of the puzzles of business administration/management is that the fields of entrepreneurship and strategic management have existed, and continue to exist, in such relative separation.  Intuitively, one would think of entrepreneurship — the identification and seizure of new opportunities for profit — as constituting the core of the strategic management field. This, however, is not the case. However, there are various indications that strategic management scholars are about to develop interest in entrepreneurship (e.g., work by Kim and Mahoney, Alvarez and Barney). 

One specific indication is an excellent and highly recommended recent paper by JC Spender, “The RBV, Methodological Individualism, and Managerial Cognition: Practising Entrepreneurship.” Here is the Abstract:

If we consider Schumpeter’s methodological individualism and entrepreneurship, the ‘managerial cognition’ arguments can contribute new insights to the RBV discourse.  I open by examining the links between resource inputs and firm outputs , and argue the types of rents implied by the RBV cannot arise or be sustained if these links are logical and explainable. The only rents then available are Marshallian quasi-rents arising from information asymmetry or the Ricardian rents from initial allocation, i.e., those of Porter’s analysis. Today’s RBV lacks the components necessary to create and manage the value at the core of Barney’s VRIO model.  Causal ambiguity or uncertain inimitability might imply sustainable rents but clearly do not explain how the arise, any more than asserting the firm has dynamic capabilities does.  To illustrate how value might be created and brought into the analysis, I look at Penrose’s model of managerial learning, primarily as an accessible instance of the epistemological approach proposed by Austrian economists such as Hayek, Kirzner, and Schumpeter.  This concept of value creation parallels the sense-making concepts of the managerial cognition literature. I conclude that an alliance of BPS and MOC approaches can complement and so complete the RBV, synthesizing notions of value creation, heterogeneous and immobile resources, and endogenous growth into a dynamic theory of the firm.  It balances rational choice and Schumpeterian entrepreneurship. To wrap this argument up, I discuss the theoretical and practical implications of the amended RBV.

| Nicolai Foss |

Now in its 13 year of publication, Industry and Innovation is a journal dedicated to "scholarship on the dynamics of industries and innovation". (It was originally launched as the Journal of Industry Studies).

Its closest competitors are arguably journals such as Industrial and Corporate Change and Research Policy. In terms of intellectual affiliation, I&I serves the communities that are organized in the Schumpeter Society, attend the DRUID conferences, and the like. In other words, I&I is taken up with research in evolutionary economics, dynamic capabilities stuff, parts of economic geography, technology studies and so on. Its editorial board includes Anita McGahan, Richard Nelson, and yours truly. The editor is my CBS colleague, Mark Lorenzen (check his photo!).

Usually, there may not be much of interest for the readers of O&M in I&I. However, the latest issue – guest edited by my former PhD student, Volker Mahnke (CBS, Informatics Dept.) and Serden Ozcan (CBS, Dept of Industrial Economics and Strategy)– features a set of papers that are clearly relevant to those with an interest in organization and organizational strategy.

(more…)