Geography Reference
In-Depth Information
derived and generated by either spillovers, human capital or 'learning by
doing' (Romer 1986; Lucas 1988) or alternatively by investment in R&D
(Romer 1990; Grossman and Helpman 1991). The NGT appreciation
of the importance of knowledge and technology in growth processes is
widely considered to be a crucial contribution to modern economic theory,
allowing for better account of the empirical evidence on the subject which
has been accumulating since at least the 1950s (Abramovitz 1956; Solow
1956). Nevertheless, the endogenous and, at least to some extent, appro-
priable characters of technical knowledge emphasized by the New Growth
Theory still leave unresolved the problem that technology and innovation
are far from being simple inputs into the production process. The empha-
sis on undefined 'spillovers' within the New Growth Theory analytical
framework still does not help explain the fundamental questions of how
knowledge and technology affect growth and why growth rates differ
among firms with the same input endowments. Indeed, what emerges from
the discussions of spillovers is that some forms of
external
effects give rise
to
endogenous
growth.
Within mainstream economic and industrial organization theory, the
transactions costs approach has had the merit of expanding out the 'limits
of the market' in constraining firms' growth. According to its proponents,
the market is imperfect because most activities, such as discovering the
relevant prices, negotiating transactions for both inputs and outputs,
investing in monitoring and enforcing contracts, forecasting long-term
exchanges, coping with different regulations and institutional settings,
all involve costs. The firm thus emerges as an organizational form for
coordinating of economic activity by direction rather than by the price
mechanism (Coase 1937). Potential limitations of the market therefore
stem from the behavioural assumptions of transactions costs econom-
ics, such as bounded rationality and opportunistic behaviour. In this
theoretical approach, the organization of economic activity is carried
out within and between
markets
and
hierarchies
. Hierarchies are the
main governance structures which vary with the nature and dimensions
of the transaction, or with other economic environment factors such as
the investment characteristics (
asset specificity
), frequency of transac-
tions, and uncertainty and complexity (Williamson 1975, 1985, 1987). For
example, non-specific, occasional or recurrent transactions, such as the
purchase of standard machinery, are effectively organized by the market.
In contrast, uncertain, idiosyncratic and non-recurrent transactions, such
as the production of a customized intermediate input, are often removed
from the market and integrated into the firm, where they can be more
efficiently undertaken, because the internalization process better militates
against opportunism.
