Geography Reference
In-Depth Information
As is also highlighted in Chapter 2, in the transactions costs framework
both the nature and the growth of the firm differ substantially from the
neoclassical approach. Indeed, transactions costs theory is very appropri-
ate for analysing the existence of MNEs, which by definition are excluded
in the neoclassical notion of a 'representative firm'. The firm's size is
determined by the efficiency of its own operations relative to that of the
market (Coase 1937). In the words of Williamson, 'the modern corpora-
tion is mainly to be understood as the product of a series of organiza-
tional innovations that have had the purpose and effect of economising
on transactions costs' (Williamson 1987, p. 273). Therefore, the tension
between markets and hierarchies may create different types of competen-
cies or different levels of transactions costs for certain activities, requiring
firms to match their competitors' distinct advantages by developing their
own.
Technological competence and organizational innovation are brought
into the transactions costs picture, thereby underpinning the growth and
heterogeneity of firms. On the basis of its behavioural assumptions and
the importance attributed to complexity, uncertainty, and asset specifi-
city, transactions costs economics allows for the inclusion of technological
change as an explanation of firm behaviour. In addition, the dichotomy
between markets and hierarchies theoretically allows for the possibility of
an interaction between external and internal sources of innovation. From
this perspective, transactions costs theory substantially advances our
understanding of innovation processes. This is because the behavioural
and environmental assumptions embodied within the transactions costs
framework introduce an interface between the internal and the exter-
nal dimensions of the firm, and the impact of the sources of innovation
depends on the balance between these two dimensions. Nevertheless, as
in neoclassical economics, explaining a firm's growth is not the main aim
of the transactions costs approach. Rather, its objective is to explain the
existence and nature of the firm as an alternative to the market as a form
of governance.
2
A more complex task, however, is to understand
how
technological change occurs and in particular
where
and
why
it tends to
thrive. In order to do this, the analytical perspective has to shift from the
investigation regarding the existence of the firm to one which focuses on
the firm's dynamics. In other words, we must move the attention from the
firm's features as a representative agent within, or because of, the market,
to the firm's internal attributes and resources and the changes in these as
a response to changing environments. The two other major approaches
which have tried to shed light on some aspects of this complex debate are
the Penrosian resource based view of the firm, and evolutionary econom-
ics of technological change.
