The firm as an environmentconstructing entity

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The firm as an environment-constructing entity
Presentation for the Symposium on Evolutionary
Economics 2007 Puschino, Russia 14 September 2007

• Pavel O. Luksha
• http//www. luksha.ru pavel.luksha_at_gmail.com

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Nature of the firm debate

• Firm as a black box (autonomous and monolythic
  agent) in neoclassical theory
• Transaction cost theory interpretations
• fictionalist firm as a nexus of contracts that
  is a legal fiction (Alchian 1984 Jensen,
  Meckling, 1976)
• aggregationist firm as a collection of real
  (non-human) assets that glue the firm (Hart,
  1989, 1995 Grossman, Hart, 1986)

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Firm as a real entity

• Real entity interpretations
• entity emergent qualities of organizational
  level (system gt sum of parts)
• views arising in old institutional school / legal
  studies (Dewey, Freund, Brown etc),
  resource-based view (Penrose, Barney, Grant etc.)
  etc.
• real entity is typically defined by internal
  properties (Gindis, 2006, 2007)
• need to be complemented by external properties
  (defined in relation to environment)

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Firm as a real entity (2)

• Crucial external property the firm as a real
  entity should have causal powers over its
  environment
• We need to present instances and theory of the
  influence of causal power of the firm over its
  environment

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Instances

• Theoretical considerations include a number of
  cases where firms can change behaviour of their
  counterparts
• impact on equilibrium in oligopoly rivalry
• effects of product innovation
• incentives (that provoke individuals/groups to
  act in a specific way)
• signaling (e.g. advertising)
• signal distortions (e.g. lemon market,
  agent-principal problem etc.)

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Instances (2)

• Important phenomenological evidences from
  business practice (ignored by theory), e.g.
• demand side
• preference shift evidences on manipulation of
  consumer preferences (Packard, 1957, Hastings et.
  al. 2003, Galst, White, 1976, Perrien et. al.
  1997, etc.)
• loyalty building (de Chernatony, McDonald, 1992)
• supply side
• creation of customer-unique supplier clusters,
  ecogenesis (Normann, 2001)
• non-market strategies (Baron, 1995) (e.g.lobbying)

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Firm-environment relationship

• Dominant paradigms were influenced by
  evolutionary thinking
• adaptationist
• selectionist
• evolutionary non-reductionist
• Paradigms that removed the issue whatsoever
• fictionalist (firm / environment as a fiction)

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Adaptationist

• Approaches
• neoclassical theory of the firm,
  structure-conduct-performance in industrial
  organization
• dominating approach in organizational studies and
  strategic management
• Firms adjust in response to threats
• the environment has a causal power that induces
  modifications and transformations in firms
  (usually seen as change in arrangement of
  individuals)
• firms have little or no ability to modify their
  environments

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Selectionist

• Approaches
• (neo-Schumpeterian) evolutionary economic
  modeling
• organizational ecology / environmental school of
  strategic management
• Firms are selected by environmental forces
• organizations are rigid, and can be selected out
  if environment changes
• organizational success is ascribed to processes
  of selection, over which organizations have
  little or no control

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Fictionalist

• Bundles together two approaches that are usually
  considered separately
• Organization as a fiction
• transaction cost interpretations (and related)
• Environment as a fiction
• social constructivism sees environments as
  invented (Starbuck, 1976), having no independent
  existence (Smirich, Stubbart, 1985)
• In both approaches, the firm-environment
  distinction / relationship dissolves. It is a way
  to deny rather to understand.

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Evolutionary non-reductionist

• Adaptationists / selectionists emphasize one
  aspect at the expense of other aspects (
  reductionism)
• Non-reductionist approaches
• multi-level evolution (Baum, Singh, 1994)
• organization-environment coevolution (March,
  1994, Baum, Singh, 1994) many theoretical /
  empirical studies in recent years
• Admits the ability to significantly modify
  environment, but does not set out explicit models
  of environment construction

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Niche construction inspirations from
evolutionary biology

• Domination of adaptationist / selectionist view
  in evolutionary biology
• Gene-biased view
• organism is but a mediator that translates
  natural selection pressures to help select
  genotypes (e.g. Dawkins)
• Criticisms that help remove bias
• organisms are active in their environments
  (Lewontin, Lloyd etc.)
• niche construction (Odling-Smee et. al. 2003)
  ability to modify environmental pressures

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Consideration of environment in adaptationist /
selectionist paradigm
Much of the traditional evolutionary studies
treat environment as complex and independent from
impact of population (adaptationist /
selectionist view)
disturban-ces
natural selection
? (E)
E
G
G f (G, E, ? (G))
variation
? (G)
E h (E, ? (E))
genetic inheritance
G gene pool of a given population of
organisms E environment for given population of
organisms
natural selection
E
G
from (Laland et al.,2000), amended by the
present author
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Concept of niche construction
Niche construction the process whereby
organisms, through their metabolism, their
activities, and their choices, modify their own
and each others niches. Niche construction may
result in changes in one or more natural
selection pressures.
natural selection
E
G
? (E)
? (G)
niche construction
G f(G, E, ? (G))
environment inheritance
genetic inheritance
E h(G, E, ? (E))
natural selection
E
G
niche construction
from (Laland et al.,2000), amended by the
present author
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Niche construction transplantation of a concept
Niche construction a change made to the
environment (outside the boundary of the firm)
that seriously impacts upon the decision making
of firms counterparts, implying long-lasting
alterations in their behavioural patterns
R f (R, E, ?(R)) E h (R, E, ?(E))
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Niche construction transplantation of a concept
(2)

• Organizations as significantly rigid structures
  (Hannan, Freeman, 1977, 1984 Staw et. al. 1981),
  preserved by reproduction of routines
• Organizational strategies as manifests of
  organizational capabilities (organization-specific
  resources) (Penrose, 1959, PrahaladHamel, 1990,
  Grant, 1996)
• Organizational environment plasticity as a
  consequence of individual / group learning
  capabilities

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General classification of niche construction
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Classified examples of niche construction in
business
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Psychological mechanisms behind organizational
niche construction

• Niche construction occurs due to learning of
  individuals / groups / organizations that
  constitute organizational environment
• The situation of learning is induced by
  organization
• Learning is multi-level (behavioural patterns,
  rules / habits, behavioural models)
• Learnt behavioural patterns are maintained by
  mechanisms of remembering that help to retain
  individual / collective memory

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Organizational mechanisms of niche construction

• Organizations can operate in a legitimate way
  only within their own borders King Midas
  effect of organization
• Organizations can only transcend their borders by
  communications, using media as extensions of
  themselves
• Niche constructing effects are conveyed through
  communications (that establish demonstrations,
  reinforcements and learning contexts)

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Institutional vehicles of niche construction

• Niche constructing communications of the
  organization are structured (repeatedly
  transmitted) by purposefully established
  institutional vehicles
• The institutional vehicle an inter-organizational
  structure involving the media, the counterparts,
  the supporting agencies bounded by contractual
  arrangement
• Initialization of vehicle operation is within
  organizational routines
• The outcome of vehicle operation new behavioural
  patterns / habits / behavioural models

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Conclusions

• Firm is a real entity views can be supported by
  evidences of environment constructing ability of
  organization
• Firm-environment relation considerations are
  dominated by adaptationist / selectionist
  approaches
• This situation closely mirrors mainstream views
  in evolutionary biology, criticized by a number
  of scholars (Lewontin etc.)

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Conclusions (cont.)

• Insights on active role of organisms (niche
  construction) can be transplanted to understand
  environment constructing role of organizations
  (creation/ modification of long-term behavioural
  patterns)
• Evidences of organizational niche construction
  are multiple (demand side, supply side,
  non-market strategy)

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Firm as an environment-constructing entity

• The notion of the firm as an agent of adaptation
  and a subject of selection is contested. This
  notion is, at least, incomplete.
• The firm is also an entity that actively creates
  its own environment, and adjusts the constraints
  of its own adaptation and selection