The Innovative Firm: Theory and Empirical Evidence dec.ec.unipg.it/~ The Innovative Firm: Theory and

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  • The Innovative Firm: Theory and Empirical Evidence

    Lecture 5

    Fabrizio Pompei

    Department of Economics University of Perugia

    Economics of Innovation (2016/2017) (II Semester, 2017)

    Pompei Innovative Firm Academic Year 2016/2017 1 / 26

  • Contents of the Lecture*

    1 Basic Concepts on Innovative Firm

    2 Theories of the Innovative Firm

    3 Innovative Firm along an Historical Perspective

    4 Innovative Firms: a Comparative-Historical Perspective

    5 Questions for lecture 5

    *The Oxford Handbook of Innovation, Fagerberg, Mowery and Nelson R. (2013), chapter 2,

    Pompei Innovative Firm Academic Year 2016/2017 2 / 26

  • Basic Concepts on Innovative Firm

    What is an Innovative Firm

    On the wake of other important theories of the firm (for example, the Coase-Williamson theory of the firm) , also the Theory of Innovative Firm studies the firm as a complex organisation/institution

    For example the transaction-costs theory of Coase-Williamson focuses on the problem of make or buy and analyses how firms can solve this problem and the trade-off between the transaction costs (costs a firm has to bear if it decides to buy the intermediate product on the market) and coordination costs (costs a firm has to bear if it decides to internalise the production of the specific component)

    Likewise, the Theory of the Innovative Firm concentrates on how the firm solves the problem to combine in original way specific sources and competences to produce new products and production process

    Especially, what makes a firm innovative and how have the characteristics of innovative firms changed over time are important questions

    To answer to these questions we often have to analyse the social conditions of the innovative enterprise in the comparative-historical experiences of the advanced economies

    Pompei Innovative Firm Academic Year 2016/2017 3 / 26

  • Basic Concepts on Innovative Firm

    Social Conditions of the Innovative Enterprise

    As we will see, very often firms need specific social conditions to innovate, because innovation needs learning and learning process is collective and involves, depending on the socio-historical context, various members of the organisation within and outside the firm

    Innovation requires learning about how to transform technologies and access markets in ways that generate higher quality and/or/lower cost products

    The innovation process is uncertain because what needs to be learned about transforming technologies and accessing markets can only become known through the process itself

    The innovation process is cumulative when learning cannot be done all at once: what is learned today provides a foundation for what can be learned tomorrow

    The innovation process is collective when learning cannot be done alone, because it requires the collaboration of different people with different capabilities

    When learning is collective it is necessary to integrate the work of people into an organisation, that is the innovative firm

    Pompei Innovative Firm Academic Year 2016/2017 4 / 26

  • Theories of the Innovative Firm

    Innovating Firm versus Optimising Firm: Marshall and Schumpeter

    Over the past century the theoretical efforts of economists have focused mainly on the optimising firms rather than the innovating firm The optimising firm takes as given technological capabilities and market prices (for inputs as well for outputs) and seeks to maximise profits on the basis of the technological and markets constraints The innovating firm seeks to transform the technological and market conditions that the optimising firms takes as ’given’, in order to differentiates itself from its competitors in the market Both Alfred Marshall (in his book Principle of Economics, 1920) and Joseph Schumpeter (in his books The theory of economic development, 1911 and Capitalism, Socialism and Democracy, 1942) viewed the innovating firm as the result of the entrepreneurial work of an extraordinary individual Edith Penrose (The theory of the growth of the firm, 1959) conceptualised the modern corporate enterprise as an organisation that administers a collection of human and physical resources According to Penrose, people contribute labour services to the firm, not merely as individuals, but as members of teams who engage in learning about how to make best use of the firm’s productive resources

    Pompei Innovative Firm Academic Year 2016/2017 5 / 26

  • Theories of the Innovative Firm

    Penrose’s theory of the firm and the Resource Based View (RBV)

    Penrose’s Theory explains us why firms are different even in the same industry:

    At any point in time, learning mentioned above, endows the firm with experience that give it productive opportunities unavailable to other firms that have not accumulated the same experience, even in the same industry

    Moreover, the accumulation of innovative experience enables the firm to overcome the ’managerial limit’ that in the theory of the optimising firm causes the onset of increasing costs and constraints the growth of the firm

    From the 1980s many scholars cited the Penrose’s 1959 book as an intellectual foundation for a resource based view (RBV) of the firm

    RBV focuses on the characteristics of valuable resources that one firm posses and that competitor firms find it difficult to imitate

    Limitations of RBV: it provided no perspective on why and how some firms rather than others accumulate valuable and inimitable resources

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  • Theories of the Innovative Firm

    Teece’s theory of the innovative firm and dynamic capabilities

    The concept of dynamic capability helps us to understand why some firms are able to build specific characteristics that shape their sustainable competitive advantage over time

    David Teece wrote several influential articles in the 1990s and the 2000s in which he tried to explain the theory of innovative firms from the point of view of the strategic management literature and the concepts of resources, competences and dynamic capabilities

    Resources are firm-specific assets that are difficult or impossible to imitate

    They are stocks, not flows, very often they are intangible assets, idiosyncratic in nature

    An important hint to distinguish resources from ordinary inputs that every firms posses is to think at resources as assets that do not have a well developed market in which they could be traded and therefore could pass from a firm to another

    Examples of resources are process know-how, customer relationships and the knowledge possessed by groups of especially skilled employees, very often this knowledge is embedded in a specific organisation and tend to be destroyed if one or more members of the organisation leave the firm

    Pompei Innovative Firm Academic Year 2016/2017 7 / 26

  • Theories of the Innovative Firm

    Teece’s theory of the innovative firm and dynamic capabilities (II)

    Competences are particular kind of organisational resource. They result from activities that are performed repetitively, or quasi-repetitively.

    Organisational competences are usually underpinned by organisational routines

    A firm uses its specific resources to perform some tasks and so doing it shows its competences

    Competences can be quantified because they can be measured against particular task requirements

    How decisions are made, how customer needs are assessed, how quality is maintained, are all tasks that produce different value among firms

    A firm that performs its tasks very well, in order to survive the market, to gain profit and to maintain a competitive advantage over time, surely posseses competences that a researcher should identify

    However, there will be a moment in which a need for renewal of specific resources/competences emerges, both in fast-moving environments (High-Tech sectors) and in low-tech industries

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  • Theories of the Innovative Firm

    Teece’s theory of the innovative firm and dynamic capabilities (III): an example on resources and competences

    Let’s take a company that developed specific assets and competences in logistics because the logistic manager for this department has applied a flexible working time, so workers (truck drivers) are able to easily adapt to all customer needs in delivering goods at whatever time The flexibility in working time is also supported by specific software that has been implemented in each truck in order to facilitate the task of each truck driver Trucks are ordinary inputs bought on the market, but trucks provided with software that support logistics is a specific assets of that company More precisely, the aggregation of logistic manager, team of truck drivers that specifically use trucks provided with software, and truck themselves, are the specific resources/assets of this company The mode with which the company performs the logistics is a specific competence producing value (for example, it allows to reduce costs and company’s profits increase) Resource and competences are idiosyncratic and result from complementarity and specific conditions that emerge in this company

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  • Theories of the Innovative Firm

    Teece’s theory of the innovative firm and dynamic capabilities (IV)

    Dynamic capabilities are the firm’s ability to integrate, build and rec