Posts filed under ‘Theory of the Firm’
New Paper by Tan and Mahoney: Integrating TCE, RBV, and Agency Theory
| Peter Klein |
Are transaction cost economics, the resource-based view of the firm, and agency theory substitutes or complements? Most applied studies in organizational economics use one or another framework to explain the phenomenon in question; relatively few studies incorporate multiple frameworks, and even fewer attempt to distinguish among them empirically.
A new paper by Danchi Tan and Joe Mahoney, “Why a Multinational Firm Chooses Expatriates: Integrating Resource-Based, Agency and Transaction Costs Perspectives” (Journal of Management Studies, May 2006), takes the middle approach, developing a new framework that incorporates key elements of TCE, RBV, and AT to explain multinational firms’ decisions to staff their foreign subsidiaries with expatriates or host country nationals. (more…)
My First Bleg: Transaction Similarity
| Peter Klein |
A “bleg,” for those who don’t know, is a blog post asking readers for help. (We’ve already written plogs, posted bloggerel, and suffered from blogathy and even blogstipation. No problems yet with blogorrhea.)
Anyway, here’s the bleg. Can readers provide some good references from the capabilities or RBV literatures on Coase’s concept of “transaction similarity,” the idea that firms are more likely to integrate transactions similar to transactions that have been integrated in the past, controlling for current levels of asset specificity, uncertainty, frequency, and so on?
Latent Variables and Structural Equations Modeling
| Peter Klein |
Among my PhD students I note an increasing interest in structural equations modeling (SEM), particularly for working with latent variables. One student’s dissertation uses SEM to study the effect of the institutional environment on entrepreneurship, treating entrepreneurship as a latent variable and using measures of new business starts, patent filings, and the like as the corresponding manifest variables. Another student is using SEM to examine free-riding among members of a large cooperative, with various observable behaviors serving as indicators for the latent variable free-riding.
More generally, SEM is becoming a standard tool in management, where abstract concepts like trust, knowledge, capabilities can (potentially) be modeled as latent variables in a system of equations. Indeed, when I visited Nicolai in his office in Copenhagen a couple of weeks ago, the first thing I noticed on his desk was a LISREL manual, prominently displayed on the corner. (He assures me it is not for show.) (more…)
Foss and Foss RAE Paper Published Online
| Nicolai Foss |
My paper with Kirsten Foss, “The Limits to Designed Order: Authority Under ‘Distributed Knowledge’ Conditions,” Review of Austrian Economics 19: 261-274 (2006) has just been published online on the Springer site. Here is the Abstract:
We examine the argument, put forward by modern management writers and, in a somewhat different guise by Austrian economists, that authority is not a viable mechanism of coordination in the presence of “distributed knowledge” (which corresponds to Hayek’s treatment of the use of dispersed knowledge in society). We define authority and distributed knowledge and argue that authority is compatible with distributed knowledge. Moreover, it is not clear on theoretical grounds how distributed knowledge impacts on economic organization. An implication is that the Austrian argument that designed orders are strongly constrained by the Hayekian dispersed knowledge (Hayek, Kirzner, Sautet) is less decisive than it has usually been taken to be. The positive flipside of this argument is that Austrians confront an exciting research agenda in theorizing how distributed knowledge impacts economic organization.
Crowdsourcing and Switching Costs
| Peter Klein |
I blogged a while back about crowdsourcing, in which individuals, typically amateurs, complete to supply inputs to large producers or distributors via the web. Crowdsourcing is often likened to distributed computing, an age-old (in computer terms, anyway) method of sharing computationally intensive tasks over many CPUs.
The best-known example of distributed computing is SETI@home, in which individuals donate their spare processing power to the search for extraterrestrial life. There’s a problem, however, as Lee Gomes tells us in today’s Wall Street Journal ($): high switching costs. SETI@home users get points for donating computer time and, like frequent flyers who stick to one airline to rack up miles, many refuse to switch to other, equally worthy distributed computing projects (the search for an Alzheimer’s cure, a difficult problem in theoretical physics, etc.). As a result, says Gomes, SETI@home “is to distributed computing what AARP is to social-security reform.”
Moral of the story: If crowdsourcing projects attract mainly hobbyists, participating for fun or to impress their (virtual) friends, expect lock-in and substantial first-mover advantages. If participants do it for the money, however, the crowdsourcing landscape may be much more competitive.
Elgar Companion to Transaction Cost Economics
| Peter Klein |
I’m pleased to announce that I am editing, along with my colleague Michael E. Sykuta, a new entry in the Elgar Companion series: The Elgar Companion to Transaction Cost Economics. The volume will contain several dozen encyclopedia-style entries on the TCE’s foundations and basic principles, precursors and influences, modeling approaches, empirical research, applications, and critiques. Look for publication in late 2007 or early 2008.
More on Family Firms
| Peter Klein |
Recent posts here at O&M and at orgtheory.net have discussed the nature and consequences of family ownership. Today’s Wall Street Journal ($) profiles Fiat’s John Elkann, great-great-grandson of founder Giovanni Agnelli and next in line for the top spot, and discusses the challenges of family capitalism more generally. Excerpts:
[A]s Mr. Elkann is poised to move into the driver’s seat at the 107-year-old icon, the European model of family capitalism espoused by his clan is struggling to endure. Financial markets have become impatient with family-dominated companies, which sometimes put dynastic interests first and occasionally have murky corporate-governance practices. There is also increased skepticism that companies controlled by Europe’s grand families can produce top-flight managers. . . .
Some argue that the model has served Europe poorly. “The sooner we get rid of family capitalism the better off we all are,” says Umberto Mosetti, a corporate-governance expert at the University of Siena and president of shareholder adviser Deminor.
When markets were regional, says Mr. Mosetti, families could finance their businesses through cash flow and loans from friendly local banks. As markets went global, large companies needed to go to capital markets to fuel expansion. Family-controlled firms were often ill-prepared. Something similar happened at Fiat. When competitors from Asia entered the European market, Fiat was caught flat-footed and lost market share; it has been trying to recover ever since.
Are Routines Necessary for an Evolutionary Theory of the Firm?
| Nicolai Foss |
The seminal and in many ways founding contribution to the evolutionary theory of the firm, and its numerous relatives in management, such as the knowledge-based , the competence , the capabilities, etc. views, is without much doubt Sidney Winter and Richard Nelson's An Evolutionary Theory of Economic Change from 1982.
The book is very heavily cited in management (e.g., it is among the top 10 cites in Strategic Management Journal), but has made less of an impact in economics (it was originally intended as an economics contribution rather than a contribution to management). The reason can be found in chapters 4 and 5 that develop notions of routines and organizational capabilities, and try to do so from the notion of individual skill. Since Nelson and Winter (1982) organizational routines have become a primitive in the definition of "higher-level" constructs, such as capabilities or "dynamic" capabilities.
In a number of recent papers (beginning with this paper, but mainly with Teppo Felin), I have identified and discussed various problems with the notion of routines. Very briefly, there are still no clean definitions of routines (which evidently makes it somewhat problematic to define capabilities etc. in terms of routines), the routines construct often implies a denial of methodological individualism, the empirical basis for asserting that routines are so strongly prevalent in real world firms that it is meaningful to think of firms in terms of routines is questionable, routines draw attention away from conscious, rational choice, etc. etc.
New Issue of Industry and Innovation
| 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.
Rings and Promises
| Peter Klein |
Brayden King caught my eye today with a post titled "Is Power Sexy?" He's referring to a 2005 American Journal of Sociology paper with the same title. Of course, contemporary academic prose can make even sex and power seem dull — Using a set of network data from a large number of naturally occurring groups, this study seeks to determine whether powerful people are more likely to be seen as sexy by others than are persons without power [, and] disentangles two aspects of power that are often confused, namely power as a dyadic relationship and power as an individual characteristic or position (which the author calls "status") — but I believe Brayden when he says it's a fun paper to read and blog about.
This made me think, what are some papers in organizational economics that are fun to read? One is Margaret Brinig's "Rings and Promises" (1990), which applies Williamson's hostage model to diamond engagement rings. (more…)
Materials for PhD Course on the Theory of the Firm
| Peter Klein |
Our PhD course on the Theory of the Firm concluded yesterday with a research workshop on Joe Mahoney’s stakeholder approach. All the course materials, including readings and lecture slides, are now available at the course website. These materials might be useful for someone seeking an overview of the key issues and problems in transaction cost economics, the property-rights approach, and the resource-based and capabilities views, as well as Austrian, evolutionary, and entrepreneurial perspectives on the firm.
The student participants were impressive, and the three instructors made a fabulous team. (To hire us for your upcoming gig, please contact our agent at BR-549.)
Time Inconsistency and a Stakeholder Theory of the Firm
| Joe Mahoney |
Recently I have become more persuaded that the incomplete contracting literature potentially offers a theoretical foundation for a stakeholder theory of the firm.
In this light, two industrial organization economists — Dan Kovenock and Stephen Martin — have “inspired” me to learn more about the concept of time inconsistency problems. In a world of incomplete contracting, we often face the potential for time inconsistency problems (Grossman and Hart, 1986) and opportunistic rent extraction. A policy that is optimal ex ante but sub-optimal ex post can be described as “time inconsistent.”
Announcing Guest Blogger Joe Mahoney
| Nicolai Foss |
Peter and I are extremely pleased and proud to announce our new guest blogger, Joseph Mahoney. Joe is a Professor of Strategy at the Dept. of Business Administration, College of Business, University of Illinois at Urbana-Champaign. His first blog entry will appear later today.
Many readers of this blog will know Joe’s work. For those who don’t, suffice it to say that Joe is one of the most prolific and influential scholars in strategic management. While perhaps most often associated with the resource-based view, Joe has also done important work on transaction cost economics (indeed, his knowledge of TCE is encyclopedic) and on entrepreneurship, drawing on Austrian economics. His paper with Ron Sanchez on modularity (SMJ, 1996) and another with J.R. Pandian (SMJ, 1992) are among the most cited and influential SMJ papers. He has recently published a nice volume on Economic Foundations of Strategy with Sage.
Welcome, Joe!
Hart on Ex-Post Governance
| Peter Klein |
Nicolai, Joe Mahoney, and I had the pleasure of lunching yesterday with Oliver Hart, who was in Copenhagen to attend our PhD course and learn something about the theory of the firm. (Ha ha, just checking to see if you're paying attention; actually he was in town for a workshop.)
Hart is writing a new paper (with John Moore), currently titled "Partial Contracts," responding to the charge that incomplete-contracting models of the firm ignore the temporal, sequential processes of coordination that characterize the firm. Robert Gibbons, characterizing the asset-specificity approaches of Williamson (1971, 1979, 1985) and Klein, Crawford, and Alchian (1978) as rent-seeking theories of the firm, calls the Grossman-Hart-Moore property-rights approach
the inverse of the rent-seeking theory. Specifically, where the rent-seeking theory envisions socially destructive haggling ex post, the property-rights theory assumes efficient bargaining, and where the rent-seeking theory is consistent with contractible specific investments ex ante, the property-rights theory requires non-contractible specific investments. These distinctions should already make it clear that the property-rights theory in no sense formalizes the rent-seeking theory (i.e., Grossman-Hart did not formalize Williamson….).
Williamson puts it thusly: "GHM vaporize ex post maladaptation by their assumptions of common knowledge and costless ex post bargaining." (more…)
PhD Course on the Theory of the Firm
| Peter Klein |
This week I join Nicolai and Joe Mahoney for a four-day PhD Course, "Theories of the Firm and Their Application in Business Administration," at the Copenhagen Business School. The course outline, reading list, and notes for some lectures are available here. (More notes will be added as we go.) No webcast or live-blogging, but if anything exciting happens during the week, O&M readers will be the first to know.
Another New Buzzword: Adjacencies
| Peter Klein |
From today's WSJ feature on Time-Warner we learn that "synergies" are out. Now it's all about "adjacencies."
In deal after deal, [Time-Warner] executives promised to create a well-oiled, "vertically integrated" profit machine. Books and magazines and music would feed television and movie and Internet empires, each strengthening the others. But this vision never panned out. . . . Now divisions are encouraged to cooperate only if they can't get a better deal on the open market. The company's units are expected to be "best in class" — corporate-speak for being an industry leader — and those that fall short are threatened with being sold.
A return to the 1960s and "management by the numbers"? (We do know, for instance, that the conglomerates weren't so bad after all — see this, this, and this.)
Who will write the first RBV paper on adjacencies?
Austrian Economics and the Theory of the Firm
| Nicolai Foss |
My co-blogger has developed a very nice online bibliography on the extremely important research that takes place in the intersection between Austrian economics and the theory of the firm. It numbers almost 50 papers. A booming research area! The list may be incomplete, so be sure to mail Peter if your AE/ToF paper is not listed.
Natural and Artificial States, and Firms
| Peter Klein |
Among the last published papers of the libertarian polymath Murray N. Rothbard — one of my intellectual heroes — is his 1994 article “Nations by Consent: Decomposing the Nation-State.” Here Rothbard distinguishes sharply between the state, as a political entity, and the nation, a “complex and varying constellation of different forms of communities, languages, ethnic groups, or religions.” He goes on to develop a theory of appropriate national boundaries, based on the principle of volunary association and the empirical claim that people tend to associate with particular familial, linguistic, cultural, and religious groups. “One goal for libertarians should be to transform existing nation-states into national entities whose boundaries could be called just, in the same sense that private property boundaries are just; that is, to decompose existing coercive nation-states into genuine nations, or nations by consent.”
A March 2006 working paper by Alberto Alesina, William Easterly, and Janina Matuszeski, “Artificial States,” proposes several measures of the degree to which state boundaries are “natural” — corresponding roughly to Rothbard’s nations — or “artificial.” One measure identifies state borders that split ethnic groups into separate states, while another uses fractal geometry to characterize borders as straight or squiggly, assuming that straight borders are more likely to be articifially drawn and not corresponding to natural geographic or ethnic boundaries. The authors show that their measures are closely correlated with the usual measures of national economic performance (the more natural, the better).
What does all this have to do with organizations? The capabilities literature distinguishes between firm boundaries that are “natural,” or organic, and those that are artificially constructed. (more…)
Multi-Culturality and Economic Organization
| Nicolai Foss |
Transaction cost scholars have increasingly become interested in the way economic organization is shaped by the “institutional environment,” for example, how the legal regime impacts internal organization or the boundaries of the firm (e.g., this paper). A paper that seems to have stimulated much of this is Oliver Williamson’s 1991 paper on “Comparative Economic Organization.”
To my knowledge relatively little interest has been devoted to the how the softer rules of the game, notably those that may be placed under a “culture” heading may impact economic organization, although quite some research in international business has dealt with this (e.g., this paper).
As far as I know no research has dealt with the implications of “multi-culturality” within a given territory for economic organization. (more…)
Capabilities as Compensation
| Peter Klein |
Lots of blogospheric buzz today about this paper on local production externalities and researcher compensation (Mankiw, Caplan). The paper examines output and pay for economics and finance professors and concludes that the productivity effect of being at an “elite” university — i.e., having daily personal contact with top-notch colleagues and students — has fallen sharply over the last three decades. (Advances in information technology are seen as the likely cause.) Moreover, as compensation theory would predict, these spillover effects and faculty salaries appear to be substitutes; as the intangible benefits of co-location decrease, universities must increase wages to retain top staff.
The empirical approach used in the paper has obvious applications to the knowledge-management and capabilities literatures more generally. To the extent that the firm’s capabilities are consumed by employees — XYZ Company is an exciting, dynamic, enjoyable place to work — the firm should be able to pay lower wages, other things equal. Using panel data and fixed effects it should be possible, econometrically, to estimate firm-specific capabilities that are reflected in below-market wages. I’m not aware of any capabilities or knowledge-management papers that utilize this approach, however. Am I wrong?
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