Competence-based theories of the firm
The figure of the entrepreneur, and with him the variety and evolution of firms, returned with institutionalist views of the firm, called “competence-based”, “resources-based”, “capabilities” or “evolutionary” theories.
They built on the tradition interested in dynamics and the role of the entrepreneur that included writers such as Smith, Marx, Marshall, Schumpeter, Knight, Austin Robinson (1931) and Penrose, adding the Austrian idea of tacit knowledge. These views were developed, among others, by George Richardson (1972), David Teece (1982), Richard Nelson and Sydney Winter (1982), Geoffrey Hodgson (1988) and Richard Langlois (1992).Considering truly the limits of rationality, they view decisions as based on learning and habits, and the firm as a stock of knowledge or a set of competences, which are incorporated in non-transferable and tacit routines, routines that are therefore specific to the firm (and not to the transaction). These competences - organizational, managerial, technological or reputational - are dynamic and cumulative, and are therefore path dependent and differ among firms, accounting for their diversity in terms of internal organization or strategies. The differences with contractual theories are numerous: these theories study problems of coordination other than incentive conflicts, reintroduce technology and innovation, and explain variety among firms, their historical evolution and strategy; they study the process of production and take into account the specificity of the employment contract; they give a role to the entrepreneur, with competences that are specific and cannot be contracted (Hodgson 1998).
Influenced by Schumpeter, Marshall, Darwin, the behavioural and managerial schools, and Alchian (1950), the work of Nelson and Winter (1982) is central for evolutionary economics. It claims that, owing to the problems of rationality, firms operate with organizational routines (in production, price setting, research, and so on), the diversity of which explains the diversity of behaviours and therefore of performances.
Firms inherit routines (genes); they can copy existing routines or develop new ones (mutation, which can also result from exceptional events); and the environment selects successful firms, and thus routines. The pluralism of environments of selection also accounts for the variety of trajectories. In line with Smith’s and Marshall’s positions, the firm is viewed as an instrument of dynamic progress since it generates and protects knowledge (which is not individual but embodied in collective structures). The firm is defined as a repository of routines, which “are the skills of an organization” (Nelson and Winter 1982: 124). Works by Giovanni Dosi and Teece (1992) added that the evolution of the firm is pathdependent and focused on its coherence and “core competence”.These evolutionary theories of the firm stress the firm’s cognitive aspects at the expense of its social or historical dimensions, and disregard conflict, even if routines are themselves at the core of conflicts. Other institutionalist perspectives on the firm, which are also evolutionary, see conflict and power as central, as illustrated by Harvey Leibenstein (1987) or Hodgson (1988), as well as Marxian-radical theories in which the firm develops to exert power on the market (Marglin 1974). Hodgson insists on the durable character of the firm in relation to the market, which protects routines and competences, essential to production, against destruction through competition or simply the changing environment. Continuity of the firm also allows for innovations. It makes the firm a corporate culture, shaping preferences toward trust and cooperation and building a common culture (a common framework for the perception and interpretation of information) and common motives. This facilitates learning and reduces opportunism and cognitive or communicative distortions, and eventually enhances production, but also encourages inertia and conformism. The firm therefore has specific advantages over the market. Hodgson also insists that the firm has a legal existence, which makes it essentially different from hybrid forms (Williamson 1985) or networks (Powell 1990). These latter forms are better reinterpreted as a form of exchange beyond market exchange, “relational exchange”, involving cooperation as opposed to competition.
The neoclassical view of the firm as a black box, which emerged in the 1930s after a century of economic analysis and gave a central role to the entrepreneur and the firm as factors of change, was continuously challenged, even if until the 1970s alternative views were too isolated to be heard. Recent theories of the firm have either integrated these insights into a neoclassical framework, viewing the firm as a contractual equilibrium, or have more radically rejected neoclassical tools, thus returning to the role of the entrepreneur and the firm in evolution.
Elodie Bertrand