SelfSelection of Dominating Firm Strategy: Dinos vs Mammals

1
Self-Selection of Dominating Firm Strategy
Dinos vs Mammals
Presentation for the Workshop of European
Network on the Economics of the Firm Sheffield,
July 16-17, 2004

• Pavel O. Luksha
• Higher School of Economics
• http//www.geocities.com/pluksha bowin_at_mail.ru

2
Agenda

• Role of coevolution process in evolutionary
  dynamics
• Self-selection as a type of coevolution
• Self-selection in economy
• Strategy of the firm as the basis for
  self-selection
• Justifying MAS for studies of economic
  self-selection
• Description of MAS model

3
Selection and Coevolution
Traditional evolutionary selection
Coevolutionary selection
population 1
environment
population 1
population 2
population 2
specific type of evolutionary selection,character
ized by mutual selection of two populations
process of natural selection determinant is the
environmental fitness (specimen and species
selected are best fittingthe given habitat)
linear causality
circular causality feedback loop
4
Main Types of Coevolution
Predatorprey (Ehrlich, Raven, 1964)
Mutualism
population 1
population 1

-


population 2
population 2
cooperation dynamics mutual adaptation of
species to each other importance of cooperative
effects first suggested in (Kropotkin, 1910)
conflict dynamics changes in prey (avoidance)
lead to changes in predator (chase), and to
further changes in prey (avoidance) Proteus
effect, Red Queen game
example herbivorious butterflies vs.
plantsfungi vs plants etc.
examples ants and aphids ants acacia
orchard bees etc.
5
Coevolution and Darwinistic Evolution
Self-reproduction of complex systems
Forces of co-evolution (coherent
neo-Kropotkin evolution)systems supporting
each other, co-operating
Forces of opportunistic evolution(neo-Darwin
istic evolution)systems acting against each
other, competing
Given structural properties,destructiveforces
New structural properties, creativeforces
Emergence of new forms
Selection of fittest
Developing and evolving systems
NOVELTY
OPTIMIZATION
6
Coevolution in Economic Processes

• One of the more important
  post-Aristotelian developments in evolutionary
  theory is the emphasis on endogenous
  environments, on the ways in which the
  convergence between an evolving unit and its
  environment is complicated by the fact that the
  environment is not only changing but changing
  partly as a part of a process of coevolution
  History cannot be seen as simply a product of the
  organism and its own exogenous environment.
  Species coevolve, as do institutions March
  (1994 43).

7
Studies of Coevolution in Economics

• Theoretical elaborations
• Co-evolution of organization and its technical
  environment (Levinthal Myatt, 1994), (Rosenkopf
  Tushman, 1994)
• Co-evolution of social service organization and
  its institutional environment (Baum Singh,
  1994)
• Coevolution of strategy and new organizational
  forms (Lewin Volberda, 1999)
• Co-evolution of resources and scope of firms
  (Cuervo-Cazurra, 2001)
• Co-evolution of individual behaviors and social
  institutions (Bowels et al., 2002), (Rouchier et
  al., 1999)
• Case studies
• UK motorcycle industry (Wezel, 2002)
• Caribbean tourism industry (Cuervo-Cazurra
  Martin de Holan, 2002)
• ASEAN family business groups (Carney
  Gedajlovic, 2001)
• Innovation networks (Gilsing, 2003)
• Supplier networks in electronics (Sturgeon Lee,
  2001)
• etc.

8
Self-Selection A Type of Mutualism

• Self-selection
• originally, a term from from sociology and
  institutional economics (selection of ones
  reference group)
• in terms of evolution, a process of selection, in
  which interaction of a evolving population with
  its environment changes environment in the way
  that it has positive feedback on this population
  and negative feedback on competing entities
• in physics, self-selection is responsible for
  major evolutionary leaps of material evolution
  (known also as the breaches of symmetry) e.g.
  selection of matter vs anti-matter, early biotic
  evolution symmetry of proteins, selection of
  hypercycles etc. (Ebeling et al., 1990)

Self-selection in biology
Complex environment (may include other
populations)
Decreased fitness with the given
environment negative feedback
Provokes changesin the environment to its own
advantage
Increased fitness of the species with the given
environment positive feedback
Population 1
Population 2
competing species
9
Self-Selection in Human History
The process of evolution in socio-economic
systems led to mutual selection of population of
socio-economic individuals (with certain content
of their social memory) and their artificial
environment, that have made them competitive
against natural environment and competing
societies (Luksha, 2001, 2003) It is by
consciously changing its environment to its own
advantage that human has become evolutionary
superior to other species.
Example settlements (protective border and
artificial internal environment) that support
human species and keep away other competing
species
Illustration from Ishimov (2003)
10
Process of Economic Self-Selection

• A particular type of economic self-selection
  considered self-selection of a given type of
  firm / industry in an economy

Global market

Investor population
-

-

-

-
Industry A
Industry B
-

-

Household population
exogenous impacts
11
Economic Self-Selection Detailed
Selection of industry A invest. projects
attractive investmentprojects
- investmentinto industry B
Losing global competition
Winning global competition
investmentinto industry A
- competitivesupply to markets
compen-sation
compe- titivesupply to markets
- compen-sation
Strengthening of industry A
Weakening of industry B
supply of workforce of specificquality (type
A)
compe-tencies
- compe-tencies
- supply of workforceof specific quality (type B)
Selection of workforce of specific quality
education
demand for workforce of specific
quality(type A)
exogenous impacts
12
Strategy Basis for Selection

• What serves as a basis for evolutionary
  selection
• appropriate rule of balancing between cost and
  price e.g. profit-maximizing (Friedman, 1953)
• efficient decisions that have been locked-in and
  routinized within the organization (Nelson,
  Winter, 1982)
• efficiently designed strategies that allow
  internal selection of a path for organization
  survival (Porter, 1980)
• A strategy understood as a combination of
  organizational values, targets and chosen methods
  and practices to support them can thus be
  considered a subject of selection process
• Nelson Winter (1982) envisage the development
  of strategy as the essential organizational
  routine. They stress that managers have limited
  control over activities, and thus can only set up
  a framework of actions, i.e. a strategy

13
Strategies That Establish Self-Selection

• Two major types of strategies that establish firm
  self-selection suggested

14
Basic Strategies Adaptive Environment

• Are they really self-selective?the adaptive
  environment forces firms to chose strategies,
  which in their turn transform the adaptive
  environment

15
Just Few Correlations
Education primary good specialization
Education GDP per capita

• No focus on cross-panel data analysis, but
  certain relationships are evident
• Cross-country differences - e.g. knowledge as
  the lever of riches (Mokyr, 1992)

16
Switches of Self-Selection Dynamics

• Evidence from Mani (2002), based on case studies
  of eight countries
• countries that successfully switched toward
  knowledge-based economy, implemented a complex
  system of policies that included
• reforms of secondary and tertiary education that
  allowed improvements in domestic manpower
  (increased amounts of technically trained staff)
• incentives for investors who invested into
  knowledge-rich sectors
• tax allowances, grants and other incentives for
  firms engaged in knowledge-rich sectors
• Mani stresses the improvements in quality of the
  staff as the backbone of these structural reforms

17
Testing The Self-Selection Dependencies

• Confirm the existence of strategy self-selection
  within the selection of a specific industry
• indirect evidences from cross-panel data
• simulation of artificial economy
• Which of the key market institutes are primarily
  responsible for firm self-selection?
• What are the order parameters that enslave
  the complex dynamics of the system? as in
  (Haken, 1987) (and thus, what could be the scope
  of industrial policies)

18
Applying MAS to Studies of Self-Selection

• Rapidly advancing method of socio-economic
  studies (Edmonds, 2000)
• Extending ALIFE paradigm (Langton, 1989)
  possibilities to study economy as it could be!
  (Epstein Axtell, 1996), (Casti, 1997)
• Ability to capture emergent phenomena at first
  hand (Kurumatani et al., 2002)
• Successfully applied in diverse spheres
• Some studies particularly focusing on
  self-selection, e.g. (Schelling, 1971, 1978),
  (Krugman, 1996)

19
Agent-Based Modeling in Social Sciences

• Economics
• Markets Santa Fe Stock Market (ecologies of
  trade strategies), Arifovic (cobweb), Albin and
  Foley, Epstein and Axtell, Bell (bilateral
  exchange in networks), Youssefmir and Huberman
  (volatility clustering), Vriend, Kirman and
  Weisbuch (local prices and learning), Tesfatsion
  (endogenous networks), Chen and Yeh (role of
  speculators), Bak et al. (correct price
  statistics), Sellgren (insurance markets), Bruun
  (spatially-mediated consumption)
• Firms Bak, Woodford and Schneikman, Miller,
  Padgett, Axtell, Luna, Tabaka
• Macroeconomics Bullard, Duffy, Arifovic, Carroll
  and Allen
• Technology Teitelbaum, Huberman and Lorch
• Norms Arthur, Glaeser, Sacerdote and Schneikman,
  Axtell, Epstein and Young
• Politics
• Axelrod, Cederman (behavior of states, cultural
  processes)
• Kollman, et al. (adaptive parties, Tiebout model)
• Sociology Gilbert and co-workers, Macy, Latane,
  Gaylord
• Computational organization theory e.g., Carley
  and Prietula
• Law Picker
• Anthropology e.g., Gumerman et al., Kohler et
  al.

Source (Axtell, 2000) amended by present
author
20
Model Structure

• Basic structure of model includes following
  elements
• two countries (West and East) with identical
  economic structure (j 1,2)
• two types of goods, coming in lots
• resource (or intermediate good), characterized by
  price
• good (or final good), characterized by price and
  consumer quality
• three types of agents firms, households,
  investors
• six types of markets (1) labor market, (2)
  intermediate and (3) final good markets,
  financial market for (4) firms and (5)
  households, (6) education market

No behavioral rules (strategies) prescribed for
agents they are expected to emerge in the
simulation runs.
21
Model Structure (2)

• Agents Aj autonomous entities with two-level
  neural networks, that reproduce themselves or die
  under certain conditions. Strategy weights of
  neural network

22
Model Structure (3)

• Markets Mj loci of agent interactions under
  certain behavioral rules (rules of exchange)

23
Model Structure (4)
country 2
M6
M1
F1
F2
HH
M2
M3
I
M5
M4
country 1
24
Stages of Modeling
Model Stage 1 j1 AjF1, F2, HH MjM1,
M2, M3 Model Stage 2 j1,2 AjF1, F2,
HH MjM1, M2, M3 Model Stage
3 j1,2 AjF1, F2, HH, I MjM1,
M5 Model Stage 4 j1,2 AjF1, F2, HH,
I MjM1, M6
25
Possible Implications

• Sphere of application for the theories of the
  firm
• process of self-selection implies that the
  existence of countries and markets for which
  either neo-classical or competence-based theory
  of the firm is best applicable
• emphasis on inter-dependency of firm strategy and
  its environment (from spillovers to
  coevolutionary framework)
• Industrial policiesit is implied that there are
  key parameters that may switch evolutionary
  dynamics of a system towards a chosen path