firm

The firm is an >organization which is a unit of >production. The distinction between the firm and networks relies on the possible identification of the respective derivative >actor which constitutes the firm, such that the firm becomes a unit of decision making and >action.

This abstract definition allows to pay respect to different theories of the firm which seem to have their own merits, depending on the context in space and time. EE can fruitfully adopt many of the existing approaches and to integrate them in the general framework of network analysis and evolutionary analysis. Generally, EE emphasizes the role of >knowledge for the emergence of the firm. In this regard, causal factors referring to opportunism and bounded rationality of actors (Williamsonian view of the firm) assume their due place, yet are not regarded as the primordial forces, because opportunism is a behavioral phenomenon that is in turn determined by other network characteristics, like >language games defining the mutual moral obligations of actors.

There are other factors directly linked to the problem of coordinating knowledge in >networks, both of a technological kind as of a actor-related kind. For example, different technologies may imply different distributions of tacit and explicit knowledge over the members of a firm. At the same time, there is an impact of individual >capacity and >needs, with the firm serving as a division of labour between more risk-inclined persons (entrepreneurs) and those who prefer stable sources of income. Finally, >power relations play a role, which are in turn determined by network structures external to the firm, like the competitive conditions of labour markets. All these factors have been elucidated by different schools of thought and are useful building blocks of an EE theory of the firm.

EE agrees that >transaction costs determine the differentiation between firm and market, yet rejects any kind of rational choice approach here. Transaction costs are an important determinant of the ex-post competitive success or failure of firms, but even then it is difficult to disentangle transaction costs from production costs. Furthermore, there is always an interaction between different kinds of knowledge in terms of its object (technology, actors, networks) and in terms of its being referential and non-referential, or, being generic or local. In the latter case, local knowledge can be both referential and non-referential, yet even the referential part may not be amenable to easy and fast diffusion because of high costs of communication and time constraints. These observations imply that the relative >competitive advantage of firm versus market changes during the evolution of the economy and its structural composition. This is the main reason of the recurrent waves of industrial reorganization that we observe in reality. Particular patterns of knowledge distribution and network relations may lead to the emergence of special network >configurations, like in industrial districts and >innovation systems.

Finally, societies may differ in the way how knowledge is embedded in >culture, for example, in the cultural regulation of >communication or the cultural preferences for knowledge-sharing or learning procedures. This has also implications for the structure of the firm and the firm/market dichotomy, as, for example, is evident in the different role of small scale versus large scale firms in different societies with different >entrepreneurial traditions.

Basic References
Although Edith Penrose criticised biological analogies to market competition, most Evolutionary Economists agree that she contributed substantially to the evolutionary theory of the firm in terms of knowledge:
Edith Penrose, The Theory of the Growth of the Firm, New York: Wiley, 1959
The problem of knowledge and cultural embeddedness has been analyzed in a systematic way in the many comparative studies of the Japanese and the American firm, of which is a classic:
Masahiko Aoki, Information, Incentives, and Bargaining in the Japanese Economy, Cambridge et al.: Cambridge University Press, 1988.
For a concise characterization of the evolutionary approach to firms, see
Hodgson, Geoffrey M.,Competence and Contract in the Theory of the Firm, in: Journal of Economic Behavior & Organization, Vol. 35, 1998, pp. 179-201.

Semantic Field
network   knowledge
organization
market   firm   transaction costs