Industrial and Corporate Change - recent issues

Vertical integration and disintegration of computer firms: a history-friendly model of the coevolution of the computer and semiconductor industries

Malerba, F., Nelson, R., Orsenigo, L., Winter, S. — 2008-03-20

In this article, we present a history-friendly model of the changing vertical scope of computer firms during the evolution of the computer and semiconductor industries. The model is "history-friendly," in that it attempts at replicating some basic, stylized qualitative features of the evolution of vertical integration on the basis of the causal mechanisms and processes, which we believe can explain the history. These factors are identified in the coevolution of capabilities, the size of markets, and the structure of industries. In particular, the basic assumption is that the principal force behind the patterns of vertical integration and disintegration of computer firms was the differential development of capabilities for designing and producing semiconductors among firms. On this basis, the changing boundaries of firms are analyzed in the context of dynamic and uncertain technological and market environments, characterized by periods of technological revolutions punctuating periods of relative technological stability and smooth technical progress. The model illustrates how the patterns of vertical integration and specialization in the computer industry change as a function of the evolving levels and distribution of firms’ capabilities over time and how they depend on the coevolution of the upstream and downstream sectors. Specific conditions in each of these markets—the size of the external market, the magnitude of the technological discontinuities, the lock-in effects in demand—exert critical effects and feedbacks on market structure and on the vertical scope of firms as time goes by.

Institutional reform and technological practice: the case of electricity

Kunneke, R. W. — 2008-03-20

This article proposes a framework for categorizing possible interrelations between technological and institutional change and applies this framework to the case of the restructuring of the electricity sector. It is argued that there is a need for coherence between institutions and technological practice, so as to safeguard the satisfactory functioning of electricity infrastructure. The identification of possible incoherences between institutions and technological practice allows for a better understanding of the potential drivers for change and the evolutionary processes of which they may be part. This article attempts to elaborate the nature of this co-evolution in somewhat more detail, using specific levels of analysis that are exemplified in a four-level model. In the case of the restructuring of the electricity sector, the institutional framework has changed from a public utility-oriented, towards a market-oriented system. However, the technological practice remained unchanged: a system-oriented approach that relies on centralized planning, control and operation. This discrepancy between institutions and technological practice leads to significant frictions in the functioning of the electricity sector, but it also offers opportunities for innovation. In order to make liberalization a success, it might be necessary to stimulate certain technical developments (i.e. distributed generation and intelligent networks).

The rise and fall of global network alliances

Ulset, S. — 2008-03-20

The purpose of this article is to develop an evolutionary transaction cost economics approach capable of explaining the rise and fall of global network alliances once created to provide global services to multinational companies. In this global services market, market contracting and integrated corporations eventually replaced global network alliances. Both inefficiently designed or applied governance and efficiently realigned governance may explain why alliances failed and subsequently were replaced by more appropriate market contracting and integrated firms. The global alliance story also illustrates the point that economic actors initially may not have the requisite capacity to look ahead and recognize contractual hazards, but that such capacity and recognition may gradually evolve as a product of negative experience.

How valuable is a piece of the spectrum? Determination of value in external resource acquisition

Ansari, S., Munir, K. — 2008-03-20

Based on an in-depth study of third generation mobile telephony licenses in the UK, we discuss what makes externally acquired resources more or less valuable for their owners. We find that value is influenced by competitive dynamics, the discourse that surrounds a particular resource, and the development of collaborative networks around the resource. We also find that the value of a resource is determined during the process that leads up to its acquisition and continues to vary in the post acquisition dynamics. Our analysis furthers existing understanding of value within the resource-based view, and bears important implications for firm-level capabilities.

Technological capabilities and late shakeouts: industrial dynamics in the advanced gas turbine industry, 1987-2002

Bergek, A., Tell, F., Berggren, C., Watson, J. — 2008-03-20

This article focuses on technological discontinuities and late shakeouts in mature industries. The empirical case is combined cycle gas turbine technology in the power generation industry, where two of four main incumbents (GE, ABB, Siemens, and Westinghouse) exited the industry after several years of competition. We show that the vast differences in firm performance are strongly related to variation in technological capabilities, such as sourcing and integration of knowledge from related industries and after-launch problem solving. The findings from this case may also be of general interest for studies of dynamics in other mature, complex industries.

Understanding an emergent diversity of corporate governance and organizational architecture: an essentiality-based analysis

Aoki, M., Jackson, G. — 2008-01-18

This article proposes a simple framework for understanding an emergent diversity of linkages between corporate governance (CG) and organizational architecture (OA). It distinguishes discreet modes of their linkage by different combinatorial patterns between three basic assets: managers’ human assets (MHA), workers’ human assets (WHA), and non-human assets (NHA). Using the concept of essentiality of human assets proposed by Hart (1995) and distinguished from that of complementarities, we first propose a new characterization of four known modes of CG-OA linkage: three traditional (Anglo-American, German, and Japanese) and one relatively new (Silicon Valley) models. Then we present empirical evidences of emergent diversity of CG-OA linkages in Japan, which is somewhat at odds with the old Japanese model. We interpret its emergent dominant mode as the path-dependent evolution of a new pattern of essentiality between human assets, made viable by lessening of institutional-complementarity-constraints, which surrounded the traditional Japanese model. We argue that this new mode interpreted in terms of essentiality may have broader applicability beyond Japanese context.

ICT, skills, and organizational change: evidence from Italian manufacturing firms

Giuri, P., Torrisi, S., Zinovyeva, N. — 2008-01-18

This article examines the complementarity among information and communication technologies (ICT), skills, and organizational change from a panel of 680 Italian manufacturing firms during 1995–2003. By drawing on different statistical methods, we found evidence of complementarity between skills and organizational change, but did not find evidence of complementarity between ICT and skills. Moreover, our results show that the hypothesis of full complementarity among ICT, human capital, and organizational change does not apply to small and medium firms. Instead, we discovered that organizational change yields negative effects on the complementarity between ICT and human capital.

Modeling the co-evolution of national industries and institutions

Fatas-Villafranca, F., Sanchez-Choliz, J., Jarne, G. — 2008-01-18

Important contributions within the realms of industrial dynamics and evolutionary economic theory have shown the need to explore the sources of industrial leadership in high-tech industries. Several of these studies suggest that the co-evolution between national industries and certain supporting institutions could play a fundamental role as a source of competitive advantage, although an analysis of these processes still poses significant formal and theoretical challenges. In this article, we draw on previous contributions to formal evolutionary theorizing in order to build up a co-evolution model suitable for the dynamic analysis of industrial leadership. This model involves national firms competing on a worldwide level in a science-based industry, and co-evolving with their respective national university systems. Certain national firms may influence university funding by institutional shaping, while national university systems crucially affect the competitive advantage of said firms in the global market. The model highlights important mechanisms through which institutional, technological, and market interrelated factors determine the dynamics of industrial leadership and, eventually, the emergence of industrial leadership shifts. Some of the implications regarding policy and future research on economic development follow.

Financial market reactions following technological discontinuities: a non-event study in two industries

Benner, M. J. — 2008-01-18

A large body of literature has explored the challenges of technological change for established firms. Much of this work has focused on factors internal to firms, such as inertial routines or managers’ cognitive limitations that constrain incumbents’ development of new capabilities and response to new technologies. But institutional pressures arising from financial markets and the securities analysts who mediate such markets likely also play a role in whether and how incumbent firms respond to technological change. We know little about how financial markets and securities analysts react as an incumbent firm is faced with a radical technological discontinuity that threatens to substitute for the existing technology. Understanding such reactions is critical, as they further influence whether and how incumbents respond to technological discontinuities. In this article, I explore securities analysts’ reactions to incumbent firms faced with technological discontinuities in two industries: digital technology in photography, and Voice over Internet protocol (VoIP) technology in wireline telecommunications. I find that these discontinuities go largely unmentioned in analysts’ reports and appear to have little influence on analysts’ recommendations or stock prices even for several years. The findings suggest further that analysts and investors continue to reward incumbents for cash flows arising from focusing on the existing business and technology despite the increasing certainty of technological obsolescence.

Where do transactions come from? Modularity, transactions, and the boundaries of firms

Baldwin, C. Y. — 2008-01-18

This article constructs a theory of the location of transactions and the boundaries of firms in a productive system. It proposes that systems of production can be viewed as networks, in which tasks-cum-agents are the nodes and transfers—of material, energy and information—between tasks and agents are the links. Transactions are defined as mutually agreed-upon transfers with compensation and are located within the task network. Placing a transaction in a particular location in turn requires work to define, count (or measure), and pay for the transacted objects. The costs of this work (labeled mundane transaction costs) are generally low at the thin crossing points of the task network, which correspond to module boundaries. Therefore, transactions are more likely to be located at module boundaries than in their interiors. Several implications arise from this theory. Among these: Modularizations create new module boundaries, hence new transaction locations. Areas in the task network where transfers are dense and complex should be located in transaction-free zones, so that the cost of transacting does not overburden the system. The thin crossing points between transaction-free zones constitute breakpoints, where firms and industries may split apart.

The US stock market and the governance of innovative enterprise

Lazonick, W. — 2007-11-30

During the 1980s and 1990s, the argument that "maximizing shareholder value" results in superior economic performance came to dominate the corporate governance debates. This shareholder-value perspective represents an attempt to construct a theory of corporate governance that is consistent with the neoclassical theory of the market economy. I outline the rationale for the shareholder-value perspective, and show that, rooted in agency theory, it lacks a theory of innovative enterprise. To go beyond agency theory and its shareholder-value perspective, I present a framework for analyzing the functions of the stock market in the business corporation and the influence of these functions on the innovation process. I then apply this framework to the experience of the US ICT industries over the past decade to consider empirically the influences of the five functions of the stock market—summarized as "creation," "control," "combination," "compensation," and "cash"—on innovative enterprise in US high-technology industries. In the conclusion, I draw out the implications of the changing functions of the stock market for the governance of innovative enterprise.

"High performance" work practices, decentralization, and profitability: evidence from panel data

Colombo, M. G., Delmastro, M., Rabbiosi, L. — 2007-11-30

The aim of this article is to test the effects on firm profitability of the adoption of both "high performance" work practices (HPWPs) and changes in organizational design relating to the depth of the corporate hierarchy and the allocation of decision authority. For this purpose, we resort to panel estimates based on a longitudinal data set that includes information relating to 109 Italian manufacturing single-plant firms observed in the 1990s during 7 years. The econometric results show that the adoption of HPWPs leads to better performances, especially when it is associated with the delegation of decision authority downward the corporate hierarchy.

A structural decomposition analysis of technological opportunity, corporate survival, and leadership

Fai, F. — 2007-11-30

This article considers corporate technological leadership and survival in the face of changing technological opportunities over the period 1930–1990 for firms selected from three broad industrial groups. By using US patent data in a novel application of structural decomposition analysis, it considers the extent to which selected firms’ positions of technological leadership benefited from a favorable change in the structure of their technological environment relative to changes caused through firm-level choices.

Technological regimes and sectoral differences in productivity growth

Castellacci, F. — 2007-11-30

The article explores a novel extension of the R&D-productivity literature. It puts forward an empirical model where sectoral productivity growth is related to the characteristics of technological regimes and a set of other industry-specific economic features. The model is estimated on a cross-section of manufacturing industries in nine European countries for the period 1996–2001. The econometric results provide basic support for most of the hypotheses put forward by the model. They show, in particular, that sectoral differences in productivity growth in Europe are related to cross-industry differences in terms of the following main factors: (i) appropriability conditions; (ii) levels of technological opportunities; (iii) education and skill levels; (iv) the degree of openness to foreign competition; and (v) the size of the market.

Business services outsourcing by manufacturing firms

Merino, F., Rodriguez, D. R. — 2007-11-30

Outsourcing of services is one of the most important phenomena that are reshaping firms’ boundaries in the last decades. This article assesses the reasons leading manufacturing firms to contract out some service activities instead of providing them internally. The theoretical framework, inspired in transaction cost economics, emphasizes the effects that firm heterogeneity and service-specific decisions have on the decision to outsource. Our empirical analysis, using Spanish firm data, suggests the relevance of nonlineal effects related to firm size, wage differentials and location, among other factors, with clear differences among groups of services.

How Europe's economies learn: a comparison of work organization and innovation mode for the EU-15

Arundel, A., Lorenz, E., Lundvall, B.-A., Valeyre, A. — 2007-11-30

This article explores the link between the organization of work and innovation by developing national aggregate indicators for the EU member states of organizational forms and innovation modes (how firms innovate). The organizational indicators are constructed from the Third European Survey of Working Conditions results for 8081 salaried employees in 2000. The innovation mode indicators are calculated using the results of the third Community Innovation Survey (CIS-3) for innovation activities between 1998 and 2000. The analysis shows that in nations where work is organized to support high levels of discretion in solving complex problems firms tend to be more active in terms of innovations developed through their in-house creative efforts. In countries where learning and problem solving on the job are more constrained, and little discretion is left to the employee, firms tend to engage in a supplier-dominated innovation strategy. Their technological renewal depends more on the absorption of innovations developed elsewhere. These patterns remain when we divide the economies into manufacturing and services.

The results suggest that in order to understand national systems of innovation, it is necessary to bring the mode of organization of work into the analysis. Early conceptions of national innovation systems were built upon an analysis of interactive learning between producers and users. Now the analysis needs to be founded also on an understanding of how people interact and learn at the workplace in different national economies. The results also suggest that European policy efforts to improve innovation performance as part of the revised Lisbon strategy would benefit from a stronger focus on the diffusion of innovative forms of work organization. A step in this direction would be to develop indicators of work organization that could be directly linked to innovation performance.