Hagel on Institutional Innovation

11 October 2007 at 1:05 am Peter G. Klein 3 comments

| Peter Klein |

Here is John Hagel with a nice post on institutional innovation. Product, process, and management innovation are important, he notes, but institutional innovation — that which “redefines roles and relationships across independent entities to accelerate and amplify learning and reduce risks” — is the key to long-term value creation. Hagel names diversity, relationships, modularity, federated decision-making, reputation mechanisms, feedback loops, and incentive structures as the design principles underlying institutional innovation.

Hagel is clearly right to emphasize institutional innovation as a key driver of long-term firm, industry, and overall economic performance. He names the creation of the joint-stock company as a primary example. We could perhaps add the M-form structure, the franchise arrangement, relational contracting, the loosely organized network, and the venture-funded startup to this list.

And yet, there is a lot we don’t know about institutional innovation. What are its sources? Is institutional innovation exogenous — a deus ex machina, like Schumpeter’s entrepreneur — or is it the result of some kind of institutional R&D? How large are its effects, relative to other types of innovation, and how long do they take to appear? How does institutional innovation diffuse? Quickly and continuously, or slowly and unpredictably? Are institutional innovations clustered spatially, temporally, by industry, or are they evenly distributed across these dimensions?

Further research along these lines should prove valuable, both for academics and practitioners. Thanks to John for his provocative post.

Entry filed under: - Klein -, Evolutionary Economics, Institutions, New Institutional Economics, Theory of the Firm.

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3 Comments Add your own

1. Meh | 11 October 2007 at 3:29 pm

There is of course some volume of literature about diffusion of institutional forms…
2. spostrel | 11 October 2007 at 7:35 pm

One of the minor themes that comes up when I teach strategy is that new technologies, demand shifts, etc. often don’t fit well with existing institutions, but that there is a lag in changing these for various reasons. Whoever can first figure out how to shift to more efficient forms can gain advantage, although once you break the ice imitation comes rapidly.

The most obvious things that come up are “business model” institutions–who gets paid for what on what basis. Often there is a traditional basis for transactions that is no longer incentive compatible with maximizing joint surplus when technology or demand conditions shift. Yet people resist change, often because they fear that they cannot separate the distributional impact from the efficiency impact.

A good example is TV producers fighting (and winning for a long time) against relaxing the FCC’s financial/syndication rules that limited networks’ ability to own TV shows. The incentives of the traditional system were truly screwy, with the networks’ cancellation decisions hugely affecting the wealth of the producers (by determining whether they accumulated enough episodes to sell reruns in the syndication market), but the networks not seeing a dime of the syndication money. Hardly a recipe for efficient cancellation decisions, but the producers and studios were militant about retaining this structure (even getting former actor Ronald Reagan to overrule his own policy people to preserve the regs).
3. michael webster | 18 October 2007 at 4:03 pm

It appears to me that the overwhelming amount of research is on the share issuing firm; very little academic research is about the franchise system.