Neoschumpeterian Extensions Firms And Routines Without Entrepreneurs

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As explained in the previous section, Schumpeter changed his views on the entrepreneurial role. In Schumpeter (1942) he concluded that, in the era of large trusts, it is no longer through the outstanding figure of the promoter-entrepreneur that new market opportunities are established. This task is done instead by the bureaucratic work of the specialized divisions of those trusts. However, he did not explain either how the corporate teams and departments actually operate or how the division of labor internal to the organization is coordinated. Some forty years later the issue was taken up again in the neo-Schumpeterian revival initiated by Nelson and Winter (1982). They worked out a synthesis of Schumpeter's views with more recent theoretical developments. Their synthesis also fills the explanatory gap which Schumpeter had left.

One set of ideas entering that synthesis comes from the behavioral theory of the firm developed by the Carnegie school (Cyert & March, 1963; March & Simon, 1958; Simon, 1949). Following the notion of bounded rationality and its implications for firm behavior, Nelson and Winter suggest that the internal interactions of organizations are based on behavioral routines and rules of thumb. Production planning, calculation, price setting, and even the allocation of R&D funds, all follow rule-bound behavior. The second theory element added to the Schumpeterian framework in Nelson and Winter's synthesis is a loose analogy with the concept of natural selection.6 Nelson and Winter (1982) identify the routines used by organizations for internal coordination with "genotypes" in the neo-Darwinian model of natural selection. Correspondingly, they consider specific decisions that result from the firms' routines as the analogue of "phenotypes." The latter may be more or less favorable for the firm's overall performance and thus result in potential differences in profitability. Assuming that profitability differentials translate into growth differentials, and that routines which successfully enhance growth will not be changed, Nelson and Winter see firm expansion as an increase in the relative frequency of the corresponding "genes." Routines that cause a firm's performance to deteriorate are, by contrast, unlikely to disseminate.7

Because of the complexity of the interactive selection dynamics operating on the routines at the different layers of the firm organization, Nelson and Winter (1982) derive the implications of their neo-Schumpeterian synthesis by extensive simulations. The perhaps most significant finding is that their approach supports what has been called the inverse (rather than the original) Schumpeter hypothesis concerning the relationship between market structure and innovativeness. According to the inverse hypothesis, the degree of concentration within an industry, which indicates a potential for monopolistic practices, is a consequence of, rather than a prerequisite for, a high rate of innovativeness in the industry. Nelson and Winter thus provide a different rationale for Schumpeter's notion of a "perennial gale of creative destruction" and the relationships between market structure and innovativeness. However, to obtain their results Nelson and Winter specify the intra-organizational working of the large trusts in a way that does not even mention entrepreneurship.

The question that can be raised here is whether a full understanding of how coordination is achieved on the organizational level can indeed be achieved if the role of the entrepreneur is completely ignored. Can a theory of routines and selective routine replication succeed which denies entrepreneurship any significance? To investigate this question let us subsume "what is regular and predictable about business behavior... under the heading 'routine'" (Nelson & Winter, 1982, p. 15). This means aiming at a comprehensive interpretation of what is going on inside firms exclusively in terms of the routines which the firms employ. However, organizational routines refer to the form of interactions inside the organization, including the form of communicating information. As such they may constrain the amount, and perhaps even the quality, of information thus processed, but they do not determine the meaning or cognitive content of the information. If, as will be claimed here, the cognitive level is important for understanding what happens inside firm organizations, then an analysis based exclusively on organizational routines is not sufficient.

In their actions the members of a firm organization follow their subjective intentions, conceptions, and conjectures. No less than organizational routines to which the firm members adhere, their cognitive notions may be a source of regular and predictable features in business behavior and, as such, a significant and specific feature of the organization. It is at this cognitive level that entrepreneurship becomes a crucial input to coordination in the organization. As will be explained in more detail below, the entrepreneurial input is to conceive, implement, and enforce a business conception which provides the cognitive orientation through which the firm members can coordinate. Business conceptions are needed to create and shape a firm. As such, they may inspire the design of organizational routines, but they are not themselves organizational routines. In fact, it is only on the cognitive level that conflicts can be diagnosed between a business conception and the behavioral inertia resulting from the pursuit of some organizational routines, or among behavioral inertia. An entrepreneurial task that may be crucial for the success and survival of the firm - and that is often surprisingly difficult to achieve (Loasby, 1991, Chap. 3) - may then be to do battle with this inertia and overcome it.

In addition to the problems on the cognitive level, there are also motivational or incentive problems. These also relate to entrepreneurship, and they also tend to be neglected with an exclusive focus on organizational routines. What an entrepreneur conceives of as desirable, and what is actually realized in the operation of the firm organization, may be very different. Routines in Nelson and Winter's sense imply recurring, multilaterally expected patterns of interactions between the firm members. Such routines may involve or induce incentive conflicts. They may, for example, be vulnerable to free riding or to hold up. The more frequently hold up and free riding crops up, the more likely entrepreneurial action will be taken to control and fight them. Some of the measures chosen may consist of new organizational routines intended to keep hold up and free riding in check. The crucial point is, however, that the corresponding organizational change is an intentionally produced response to the incentive problems diagnosed. As explained elsewhere (Witt, 2000), such problems depend on the size and age of an organization. Their systematically changing impact may give rise to an endogenously caused development of firm organizations which cannot be explained by relying exclusively on a selection mechanism.

In fact, if the entrepreneurial role is fully acknowledged, the heuristic value of the selection metaphor itself becomes questionable. A major difficulty is the fact that, for selection among organizational routines to produce systematic change -as Nelson and Winter, of course, imply - there must be sufficient inertia both in the organizations' environment (the markets) and in their routines which selection forces are supposed to operate on. In a turbulent, changing market environment and/or with rapidly mutating routines, selection would have no time to become a shaping agent. While the pace of change in the market environment is not necessarily subject to entrepreneurial discretion, the inertia in the organizational routines clearly is. When they rely on organizational routines, entrepreneurs have strong incentives to identify low performance routines and to replace or improve them before being forced out of the market (i.e. falling victim to selection). Entrepreneurial problem solving of this type amounts to a kind of intentionally produced mutation and an "internal" rather than an "external" selection process. Since "internal" selection is likely to depend on hypothesis formation and learning from insight (relating, to be sure, to the cognitive level), the very notion of selection is of little help in understanding entrepreneurship. Cognitive processes are likely to produce adaptations which follow their own regularities. As they emerge from a limited human information processing capacity - which means that people are forced to be selective in what they sense, learn, and perceive -the regularities reflect mental "selection" processes which both in their dynamics and in their outcomes are not necessarily the same as population-bound, genetic selection processes.

Nelson and Winter thus do extend Schumpeter's views on the role of trusts in economic development. They fill the theoretical gap left by Schumpeter (1942) with regard to the question of how those large corporate organizations operate internally. However, perhaps inspired by the late Schumpeter's verdict on the declining role of entrepreneurship, they do so in a way that completely ignores the role of entrepreneurs. Moreover, their heuristic frame, which is based on organizational routines and the selection metaphor, makes it difficult to get to the level where subjective cognition and its motivational implications matter. Yet it is precisely this level which is central to the Austrian approach to economics and which should therefore be given careful attention in the analysis.

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