Evolution of the Theory of the Firm

Edited by David J. Teece, Professor of Global Business, Haas School of Business, University of California, Berkeley, and Chairman, Berkeley Research Group, US and Neil M. Kay, Professor, Edinburgh Business School, Heriot-Watt University and Emeritus Professor, Economics Department, Strathclyde University, UK

• Contents:AcknowledgementsIntroductionDavid J. Teece and Neil M. KayPART IOVERVIEWS 1. Nicolai J. Foss, Henrik Lando and Steen Thomsen (2000), ‘The Theory of the Firm’, in Boudewijn Bouckaert and Gerrit De Geest (eds), Encyclopedia of Law and Economics, Volume III: The Regulation of Contracts, Article No. 5610, Cheltenham, UK and Northampton, MA, USA: Edward Elgar Publishing, 631–582. Fritz Machlup (1967), ‘Theories of the Firm: Marginalist, Behavioral, Managerial’, American Economic Review, LVII (1), March, 1–333. Oliver Hart (1989), ‘An Economist’s Perspective on the Theory of the Firm’, Columbia Law Review: Contractual Freedom in Corporate Law, 89 (7), November, 1757–744. Harold Demsetz (1988), ‘The Theory of the Firm Revisited’, Journal of Law, Economics, and Organization, 4 (1), Spring, 141–615. Brian J. Loasby (1971), ‘Hypothesis and Paradigm in the Theory of the Firm’, Economic Journal, 81 (324), December, 863–85PART IIRISK AND UNCERTAINTY 6. Frank H. Knight ([1921] 1964), ‘The Meaning of Risk and Uncertainty’, in Risk, Uncertainty and Profit, Part Three, Chapter VII, New York, NY, USA: Augustus M. Kelley, 197–2327. John Maynard Keynes (1936), ‘The State of Long-Term Expectation’, in The General Theory of Employment, Interest and Money, Book IV, Chapter 12, New York, NY, USA: Harcourt, Brace and World, 147–648. Armen A. Alchian (1950), ‘Uncertainty, Evolution, and Economic Theory’, Journal of Political Economy, 58 (3), June, 211–219. Richard N. Langlois and Metin M. Cosgel (1993), ‘Frank Knight on Risk, Uncertainty, and the Firm: A New Interpretation’, Economic Inquiry, XXXI (3), July, 456–6510. Kenneth J. Arrow (1982), ‘Risk Perception in Psychology and Economics’, Economic Inquiry, XX (1), January, 1–911. David Teece, Margaret Peteraf and Sohvi Leih (2016), ‘Dynamic Capabilities and Organizational Agility: Risk, Uncertainty, and Strategy in the Innovation Economy’, California Management Review, 58 (4), Summer, 13–35PART IIIINFORMATION AND KNOWLEDGE 12. Michael Polanyi ([1966] 2009), ‘Tacit Knowing’, in The Tacit Dimension, with a new foreword by Amartya Sen, Chapter 1, Chicago, IL, USA and London, UK: University of Chicago Press, 3–2513. Kenneth J. Arrow (1962), ‘Economic Welfare and the Allocation of Resources for Invention’, in Universities-National Bureau Committee for Economic Research and Committee on Economic Growth of the Social Science Research Council (eds), The Rate and Direction of Inventive Activity: Economic and Social Factors, Part VI, Princeton, NJ, USA: Princeton University Press and New York, NY, USA: National Bureau of Economic Research, 609–2614. F. A. Hayek (1945), ‘The Use of Knowledge in Society’, American Economic Review, XXXV (4), September, 519–3015. Ikujiro Nonaka, Ryoko Toyama and Akiya Nagata (2000), ‘A Firm as a Knowledge-creating Entity: A New Perspective on the Theory of the Firm’, Industrial and Corporate Change, 9 (1), March, 1–2016. David J. Teece (1981), ‘The Multinational Enterprise: Market Failure and Market Power Considerations’, Sloan Management Review, 22 (3), Spring, 3–1717. Bruce Kogut and Udo Zander (1993), ‘Knowledge of the Firm and the Evolutionary Theory of the Multinational Corporation’, Journal of International Business Studies, 24 (4), December, 625–45PART IVBOUNDED RATIONALITY AND DECISION-MAKING 18. Herbert A. Simon (1972), ‘Theories of Bounded Rationality’, in C. B. McGuire and Roy Radner (eds), Decision and Organization: A Volume in Honor of Jacob Marschak, Chapter 8, Amsterdam, the Netherlands: North-Holland Publishing Company, 161–7619. Richard M. Cyert and James G. March ([1963] 1992), ‘A Summary of Basic Concepts in the Behavioral Theory of the Firm’, in A Behavioral Theory of the Firm, 2nd edn, Chapter 7, Cambridge, MA, USA and Oxford, UK: Blackwell Publishers, 161–7620. Brian J. Loasby (1967), ‘Long-Range Formal Planning in Perspective’, Journal of Management Studies, 4 (3), October, 300–30821. Linda Argote and Henrich R. Greve (2007), ‘A Behavioral Theory of the Firm – 40 Years and Counting: Introduction and Impact’, Organization Science, 18 (3), May–June, 337–4922. Oliver Hart (1990), ‘Is “Bounded Rationality” an Important Element of a Theory of Institutions?’, Journal of Institutional and Theoretical Economics, 146 (4), December, 696–70223. Amos Tversky and Daniel Kahneman (1981), ‘The Framing of Decisions and the Psychology of Choice’, Science, 211 (4481), 30th January, 453–58PART V MOTIVES AND INCENTIVES 24. Dale T. Miller (1999), ‘The Norm of Self-Interest’, American Psychologist, 54 (12), December, 1053–6025. Michael C. Jensen (1994), ‘Self-Interest, Altruism, Incentives, and Agency Theory’, Journal of Applied Corporate Finance, 7 (2), Summer, 40–4526. Oliver E. Williamson (1993), ‘Opportunism and its Critics’, Managerial and Decision Economics, 14 (2), March–April, 97–10727. Charles W. L. Hill (1990), ‘Cooperation, Opportunism, and the Invisible Hand: Implications for Transaction Cost Theory’, Academy of Management Review, 15 (3), July, 500–1328. Michael L. Barnett and Robert M. Salomon (2012), ‘Does it Pay to be Really Good? Addressing the Shape of the Relationship between Social and Financial Performance’, Strategic Management Journal, 33 (11), November, 1304–2029. Alexander Pepper and Julie Gore (2015), ‘Behavioral Agency Theory: New Foundations for Theorizing About Executive Compensation’, Journal of Management, 41 (4), May, 1045–68PART VIRESOURCES AND CAPABILITIES 30. Edith T. Penrose (1960), ‘The Growth of the Firm – A Case Study: The Hercules Powder Company’, Business History Review, 34 (1), Spring, 1–2331. Kathleen R. Conner (1991), ‘A Historical Comparison of Resource-Based Theory and Five Schools of Thought Within Industrial Organization Economics: Do We Have a New Theory of the Firm?’, Journal of Management, 17 (1), March, 121–5432. Jeroen Kraaijenbrink, J.-C. Spender and Aard J. Groen (2010), ‘The Resource-Based View: A Review and Assessment of Its Critiques’, Journal of Management, 36 (1), January, 349–72 33. David J. Teece, Gary Pisano and Amy Shuen (1997), ‘Dynamic Capabilities and Strategic Management’, Strategic Management Journal, 18 (7), August, 509–33 34. David J. Teece (2014), ‘The Foundations of Enterprise Performance: Dynamic and Ordinary Capabilities in an (Economic) Theory of Firms’, Academy of Management Perspectives: Symposium, 28 (4), November, 328–5235. David J. Teece (2019), ‘A Capability Theory of the Firm: An Economics and (Strategic) Management Perspective’, New Zealand Economic Papers, 53 (1), 1–43PART VII TRANSACTIONS 36. John R. Commons (1932), ‘The Problem of Correlating Law Economics and Ethics’, Wisconsin Law Review, 8, 3–2637. Ian R. Macneil (1978), ‘Contracts: Adjustment of Long-Term Economic Relations under Classical, Neoclassical, and Relational Contract Law’, Northwestern University Law Review, 72 (6), 854–90538. Oliver E. Williamson (1981), ‘The Economics of Organization: The Transaction Cost Approach’, American Journal of Sociology, 87 (3), November, 548–7739. Sumantra Ghoshal and Peter Moran (1996), ‘Bad for Practice: A Critique of the Transaction Cost Theory’, Academy of Management Review, 21 (1), January, 13–4740. Neil M. Kay (2015), ‘Coase and the Contribution of “The Nature of the Firm”’, Managerial and Decision Economics, Special Issue: Coase and the Theory of the Firm, 36 (1), January, 44–5441. David J. Teece (1980), ‘Economies of Scope and the Scope of the Enterprise’, Journal of Economic Behavior and Organization, 1 (3), September, 223–4742. David J. Teece (1982), ‘Towards an Economic Theory of the Multiproduct Firm’, Journal of Economic Behavior and Organization, 3 (1), March, 39–6343. Kirk Monteverde and David J. Teece (1982), ‘Supplier Switching Costs and Vertical Integration in the Automobile Industry’, Bell Journal of Economics, 13 (1), Spring, 206–1344. David J. Teece (1986), ‘Transactions Cost Economics and the Multinational Enterprise: An Assessment’, Journal of Economic Behavior and Organization, 7 (1), March, 21–45IndexVolume IIContentsAcknowledgementsIntroductionAn introduction to both volumes by the editors appears in Volume IPART INORMS, RULES AND ROUTINES 1. Douglass C. North (1986), ‘The New Institutional Economics’, Journal of Institutional and Theoretical Economics: 3rd Symposium on The New Institutional Economics, 142 (1), March, 230–372. Oliver Hart (2001), ‘Norms and the Theory of the Firm’, University of Pennsylvania Law Review, Symposium: Norms and Corporate Law, 149 (6), June, 1701–153. Markus C. Becker (2005), ‘The Concept of Routines: Some Clarifications’, Cambridge Journal of Economics, 29 (2), March, 249–624. Richard R. Nelson and Sidney G. Winter (1982), ‘Organizational Capabilities and Behavior’, in An Evolutionary Theory of Economic Change, Part II, Chapter 5, Cambridge, MA, USA and London, UK: Belknap Press of Harvard University Press, 96–136, referencesPART IITHE ENTREPRENEUR 5. Joseph A. Schumpeter ([1934] 1983), ‘Entrepreneurial Profit’, in The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle, trans. by Redvers Opie, with a new introduction by John E. Elliott, Chapter IV, New Brunswick, NJ, USA and London UK: Transaction Publishers, 128–566. Joseph A. Schumpeter ([1942] 1962), ‘Crumbling Walls’, in Capitalism, Socialism and Democracy, Part II, Chapter XII, New York, NY, and Evanston, IL, USA: Harper and Row Publishers, 131–427. Edith Tilton Penrose (1959), ‘The Productive Opportunity of the Firm and the “Entrepreneur”’, in The Theory of the Growth of the Firm, Chapter III, New York, NY, USA: John Wiley and Sons, 31–428. Richard N. Langlois (2007), ‘The Entrepreneurial Theory of the Firm and the Theory of the Entrepreneurial Firm’, Journal of Management Studies, Special Issue: The Entrepreneurial Theory of the Firm, 44 (7), November, 1107–249. Mark Casson (2005), ‘Entrepreneurship and the Theory of the Firm’, Journal of Economic Behavior and Organization, 58 (2), October, 327–4810. B. J. Loasby (1982), ‘The Entrepreneur in Economic Theory’, Scottish Journal of Political Economy, 29 (3), November, 235–4511. Sharon A. Alvarez and Jay B. Barney (2007), ‘The Entrepreneurial Theory of the Firm’, Journal of Management Studies, Special Issue: The Entrepreneurial Theory of the Firm, 44 (7), November, 1057–6312. David J. Teece (2016), ‘Dynamic Capabilities and Entrepreneurial Management in Large Organizations: Toward a Theory of the (Entrepreneurial) Firm’, European Economic Review, 86, July, 202–16PART IIIGOVERNANCE 13. Alfred Marshall ([1890] 1920), ‘Industrial Organization, Continued. Business Management’, in Principles of Economics: An Introductory Volume, 8th edn, Book IV, Chapter XII, London, UK: Macmillan and Co., 291–31314. Adolf A. Berle, Jr. and Gardiner C. Means ([1932] 1933), ‘The Divergence of Interest between Ownership and Control’, in The Modern Corporation and Private Property, Book I, Chapter VI, New York, NY, USA: The Macmillan Company, 119–2515. Harold Demsetz (1983), ‘The Structure of Ownership and the Theory of the Firm’, Journal of Law and Economics: Corporations and Private Property: A Conference Sponsored by the Hoover Institution, XXVI (2), June, 375–9016. Oliver E. Williamson (2002), ‘The Theory of the Firm as Governance Structure: From Choice to Contract’, Journal of Economic Perspectives, 16 (3), Summer, 171–9517. Thomas Donaldson and Lee E. Preston (1995), ‘The Stakeholder Theory of the Corporation: Concepts, Evidence, and Implications’, Academy of Management Review, 20 (1), January, 65–9118. Albert O. Hirschman (1980), ‘Exit, Voice, and Loyalty: Further Reflections and a Survey of Recent Contributions’, Milbank Memorial Fund Quarterly: Health and Society, 58 (3), Summer, 430–5319. David J. Teece (2012), ‘Management and Governance of the Business Enterprise: Agency, Contracting, and Capabilities Perspectives’, in Dennis C. Mueller (ed.), The Oxford Handbook of Capitalism, Part III, Chapter 8, New York, NY, USA: Oxford University Press, 220–49PART IVHIERARCHIES 20. Alfred D. Chandler, Jr. ([1962] 1990), ‘Conclusion – Chapters in the History of the Great Industrial Enterprise’, in Strategy and Structure: Chapters in the History of the American Industrial Enterprise, Cambridge, MA, USA and London, UK: MIT Press, 383–96, notes21. Alfred D. Chandler, Jr. (1991), ‘The Functions of the HQ Unit in the Multibusiness Firm’, Strategic Management Journal, Special Issue: Fundamental Research Issues in Strategy and Economics, 12 (S2), Winter, 31–5022. Oliver E. Williamson (1975), ‘The Multidivisional Structure’, in Markets and Hierarchies: Analysis and Antitrust Implications, Chapter 8, New York, NY, USA: The Free Press, 132–54, referencesPART VCO–OPERATION, TEAMS AND NETWORKS 23. Armen A. Alchian and Harold Demsetz (1972), ‘Production, Information Costs, and Economic Organization’, American Economic Review, 62 (5), December, 777–9524. William G. Ouchi (1980), ‘Markets, Bureaucracies, and Clans’, Administrative Science Quarterly, 25 (1), March, 129–4125. Candace Jones, William S. Hesterly and Stephen P. Borgatti (1997), ‘A General Theory of Network Governance: Exchange Conditions and Social Mechanisms’, Academy of Management Review, 22 (4), October, 911–4526. J. Carlos Jarillo (1988), ‘On Strategic Networks’, Strategic Management Journal, 9 (1), January–February, 31–4127. Walter W. Powell (1987), ‘Hybrid Organizational Arrangements: New Form or Transitional Development?’, California Management Review, 30 (1), Fall, 67–8728. Sumantra Ghoshal and Christopher A. Bartlett (1990), ‘The Multinational Corporation as an Interorganizational Network’, Academy of Management Review, 15 (4), October, 603–25PART VIINNOVATION AND APPROPRIABILITY 29. Thorstein Veblen (1898), ‘Why is Economics not an Evolutionary Science?’, Quarterly Journal of Economics, 12 (4), July, 373–97 30. Joseph A. Schumpeter ([1942] 1962), ‘The Process of Creative Destruction’, in Capitalism, Socialism and Democracy, Part II, Chapter VII, New York, NY, and Evanston, IL, USA: Harper and Row Publishers, 81–8631. W. Brian Arthur (1989), ‘Competing Technologies, Increasing Returns, and Lock-In by Historical Events’, Economic Journal, 99 (394), March, 116–3132. Giovanni Dosi (2013), ‘Innovation, Evolution, and Economics: Where We Are and Where We Should Go’, in Jan Fagerberg, Ben R. Martin and Esben Sloth Andersen (eds), Innovation Studies: Evolution and Future Challenges, Part I, Chapter 5, New York, NY, USA: Oxford University Press, 111–3333. David J. Teece (1986), ‘Profiting from Technological Innovation: Implications for Integration, Collaboration, Licensing and Public Policy’, Research Policy, 15 (6), December, 285–30534. David J. Teece (2006), ‘Reflections on “Profiting from Innovation”’, Research Policy, 35 (8), October, 1131–4635. David J. Teece (2010), ‘Technological Innovation and the Theory of the Firm: The Role of Enterprise-Level Knowledge, Complementaries, and (Dynamic) Capabilities’, in Bronwyn H. Hall and Nathan Rosenberg (eds), Handbook of the Economics of Innovation, Volume I, Part III, Chapter 16, Amsterdam, the Netherlands: North-Holland Publishing Company, 679–73036. Sidney G. Winter (2006), ‘The Logic of Appropriability: From Schumpeter to Arrow to Teece’, Research Policy, 35 (8), October, 1100–106PART VII FUTURE DIRECTIONS 37. Paul Milgrom and John Roberts (1988), ‘Economic Theories of the Firm: Past, Present, and Future’, Canadian Journal of Economics, XXI (3), August, 444–5838. Christos N. Pitelis and David J. Teece (2009), ‘The (New) Nature and Essence of the Firm’, European Management Review, 6 (1), Spring, 5–1539. Pierre Garrouste and Stéphane Saussier (2005), ‘Looking for a Theory of the Firm: Future Challenges’, Journal of Economic Behavior and Organization, 58 (2), October, 178–99Index

‘From Coase to Williamson to Hart and Holmström, the theory of the firm has not only evolved but also been duly celebrated. But these ideas have important applications besides firms (e.g., Ostrom on polycentric governance, to name just one) and the formalization of these ideas during this evolution has, as always, been a double-edged sword - sharpening logic and testing, while narrowing causal mechanisms and behavioral assumptions. Teece and Kay do a wonderful job curating the wide range of ideas, approaches, and applications that may fall by the wayside if future researchers learn only from those most celebrated thus far. One might guess that the future evolution of the theory of the firm is more likely to have roots in these volumes than in the canon to date.’