Internationalization, Technological Change and the Theory of the Firm

Nicola De Liso, Riccardo Leoncini

• Publisher: Routledge
• Year: 2010
• Print ISBN: 9781138014039
• eBook ISBN: 9781136934117
• Topic: Business
• Subtopic: Business General
• Index: Business

This book focuses on three main areas, each of which is central to economic theorising: firms' organisation and behaviour, technological change and the process of globalisation. Each subject can be analysed by using different methods, which range from purely theoretical abstractions to case studies and from econometrics to simulations. What this collection provides is a broad view of the three topics by concentrating on different aspects of each of them, and utilising different methods of investigation.

Internationalization, Technological Change and the Theory of the Firm looks in detail at various questions surrounding firms' organisation, including why we can observe ordered paths of production, whether proximity between firms matters, and whether patenting is always worthwhile. In addition, several essays explore technology and innovation, including the persistence-cum-development of old technologies. Furthermore, this book focuses on those processes which concern small- and medium-sized firms, considering the usefulness of stage theory, the possibilities of production off-shoring and the skill composition of manufacturing firms.

Overall, the book is characterised by original ideas, renewed applications of mathematical and statistical methods and the use of new databases. This valuable collection will be of interest to postgraduates and researchers focusing on innovation, theories of the firm and globalisation; and should also be useful to a professional readership as it presents up-to-date research with the aim of improving our understanding of the phenomena of technological change, firms' strategies, and globalisation.

1
Introduction

Firms, technology and globalisation

Nicola De Liso and Riccardo Leoncini

1 Introduction

Firms, technology and globalisation are three central aspects of both economics and the economy. The different way in which the three dimensions are examined by economists on the one hand and other observers, such as entrepreneurs or engineers, on the other hand, is often astonishing. However, whatever strand (Classical, Neoclassical, Institutionalist, Evolutionary, …) and definition (à la Mill, à la Marshall, à la Robbins, …) of economics we prefer, this science should always have some connection with economic reality, as, after all, economics can be seen as a theory of the economy.

We are of course aware of the fact that a trade-off may exist between generalisations and the details which may be subsumed; however, what is a theory worth based on ideas such as the average firm, which conceals a basic feature of capitalism, that is firms seeking profits which, because of this search for profit, try to differentiate themselves from their rivals? In this regard we have to be careful with the use of words, since the use of seeking is not casual, and is consciously used instead of maximising.

Many questions can be raised on the three topics of which the title of this introduction is made up: mainstream economic analysis of technological change has been unsatisfactory for a long time, and endogenous growth theory has mitigated the problems rather than solved them; a proper theory of the firm does not exist; theories which try to explain globalisation have yet to come as too many questions have to be tackled, from finance to international trade, from international mobility of production factors to global production sharing, and more.

Despite the criticisms which have just been considered, economics has gone a long way on the road of science: theories and analyses have been developed and quite a few important principles have been identified.

The weight of economics can hardly be overestimated given the emphasis that is placed on it, and despite the criticisms which have arisen as a result of the recent crisis not being forecast by “experts”, all governments and their leaders rely on economic advisors whose tools affect overall societies, while relationships between countries are largely affected by economic considerations. The kind of economic ideas that characterise policies implemented by policy makers have an impact at the micro, meso and macro level.

In this introduction we briefly outline the way in which firms, technology and globalisation have been considered by economists. Thus, in Section 2 we reconsider some aspects of the debate on the way in which economists have considered firms; in Section 3 we review the way in which economists have tackled technology and its change, while in the fourth section we look at globalisation. The fifth section contains the conclusions and illustrates the structure of the volume.

2 The firm

2.1 Theories of the firm

In a private enterprise industrial economy the business firm is the basic unit for the organization of production. The greater part of economic activity is channelled through firms. The patterns of economic life, including the patterns of consumption as well as of production, are largely shaped by the multitude of individual decisions made by the businessmen who guide the actions of the business units we call firms.

(Penrose 1959: 9)

The importance of firms can hardly be questioned: they are central to both the economy and economic theory. In this section we concentrate on the way in which economics has considered firms.

When one looks at the firm through the lens of economic theory the impression one gets is that what we are actually using is not a lens, but a kaleidoscope, so that the image is made up of continuously changing patterns. Things are difficult because of the many aspects which characterise firms (ownership, internal organisation, amount of output to be produced, cost structure, employment relationships, obsolescence and investment decisions, where the boundary of the firm lies, knowledge and others) and because any theory has its needs in terms of consistency.

Ronald Coase was aware of the fact that

the use of the word “firm” in economics may be different from the use of the term by the “plain man” … [so that] it is all the more necessary not only that a clear definition of the word “firm” should be given but that its difference from a firm in the “real world”, if it exists, should be made clear.

(Coase 1937: 386)

When one tries to provide taxonomies, be it by schools of thought, by themes or any other criterion, one ends up with a picture that is never complete and rarely satisfactory. It is not difficult to find attempts aimed at systematising the contributions to the theory of the firm: examples are Foss (2000a), Gibbons (2004) and Ricketts (2008); older reviews, of course, can easily be found (e.g. Boulding 1942). The problem is what one means by a firm, and the consequent dimensions which have to be considered.

For instance, Foss refers to the theory of the firm as that body of economics that addresses the existence, the boundaries and the internal organisation of the firm (Foss 2000a); Holmström and Tirole besides considering these three aspects explicitly tackle the firm’s capital structure and the role of management (Holmström and Tirole 1989); Cyert and Hedrick examined the existing works from the standpoint of the generation of new knowledge arising from theoretical models, considering four variants of the neoclassical model and non-maximising models (Cyert and Hedrick 1972).

None of the authors ever claim exhaustiveness while controversies – in terms of classification, theoretical content and relevance – always arise. Given the many dimensions of which a firm is made up, the role of the observer is fundamental as he or she can concentrate on one or more different ones, e.g. make-or-buy, division of labour, learning within production and so on.

Results of the analysis can also be affected by sectoral considerations: too often theories have as their background firms producing manufacturing goods. However, the service sector is heavily predominant – tertiary employment in advanced economies takes more than 70 per cent of total employment – and firms belonging to it may sometimes need different tools of analysis. Let us just hint at two specific problems: first, marginal cost is often too close to zero to be a principle according to which pricing can be put in place; second, given that in capitalist economies innovation is a driving force, innovation in services may require service-specific tools of analysis (Miles 2005).

Juridical aspects combine with economic ones: different analyses and results may be obtained when we consider owner-run small-sized firms on the one hand, and joint-stock companies on the other hand – within the latter the divide between ownership and control creates problems in terms of incentives.¹

In this section we do not want to review once more the characteristics of the various approaches – one can refer to the works indicated up to now – but simply to point out two critical points that, we believe, deserve more attention than has been previously given to them. The first consists of the need to reconsider the contribution of classical economists to the theory of the firm; the second point has to do with the non-market relationships that often develop between firms.

2.2 Theory and historical perspective: a reassessment of the classics

Many authors emphasise the fact that the theory of the firm has developed without considering real firms. Cyert and Hedrick (1972) wrote that none of the problems of real firms could find a home within the dominant neoclassical model, and that the controversy over the theory of the firm had arisen over a non-existent entity – the maximising firm which gets information from the market. Despite the fact that this criticism has been partly superseded by the most recent theoretical developments – bounded rationality, principal-agent, incomplete contracting, etc. – there remains some truth in it.

A fundamental problem, in fact, lies in the willingness to have a nineteenth-century physics-like theory made up of principles which can be applied everywhere at any time – and the principle of maximisation or the representation of production in terms of a production function lead in this direction. Firms, however, do not lend themselves to be studied in this way. Furthermore, we have to note that it has become a commonplace to say that “history matters”, but one finds little evidence of the fact that this importance has been actually taken into account in economic studies.

Neither criticism, though, applies to classical economists. Before considering some of their contributions let us point out that when one reviews the contributions to the theory of the firm it is quite difficult to find analyses concerned with classical economics, and it is not unusual to find comments such as “classical economists did not elaborate such a theory”.²

The first principle relevant for the theory of the firm that we have to consider consists of Adam Smith’s division of labour. He refers to at least two types of division of labour, which have been defined as vertical (or manufacturing division of labour, or intraoccupational differentiation) on the one hand, and horizontal (or social division of labour or occupational differentiation³) on the other hand.

As an example of vertical division of labour we can refer to Smith’s original example of pin manufacture. He noted that even such a “trifling manufacture” could be divided into eighteen distinct operations, and that by organising the work process in such a way that one worker performed only one operation overall productivity and production would increase dramatically. He noted that:

This great increase of the quantity of work, which, in consequence of the d...

Table of contents

• Routledge studies in global competition
• Contents
• Illustrations
• Contributors
• 1 Introduction
• Part I Technological change, firms’ organisation and incentives
• Part II Fragmentation and internationalisation of firms and of local systems of production
• Index