by Richard N. Langlois and Paul L. Robertson

We are pleased and honored to be able to introduce Firms, Markets, and Economic Change to Japanese readers.

It has been almost 10 years since the book appeared in English. In that time, much has happened both in the world of business scholarship and in the world of business itself. Nonetheless, although we would certainly write a different book if we were beginning anew today, we feel that the book we did write has held up well over the last decade. Indeed, along many dimensions, the book, and the work that led up to it, anticipated the direction scholarship would take in the subsequent decade – and, in some small measure, may have even helped nudge the trend of scholarship along.

Much of the importance of the book stems from the fact that we have taken time seriously. The early chapters of the book set out to investigate the effects of technological change and learning (and not merely of technology in some static sense) on the activities undertaken within particular firms. In contrast to neo-classical economic theory, we examine the long-run process of how technological evolution can lead to changes in the boundaries of a firm over the long-run. Thus, developments in our major exemplar, the automotive industry, are traced over a forty year period because new knowledge is not assimilated instantaneously or automatically, and because friction in the activities of firms, sectors and the economy as a whole often influence how the effects of change work themselves out in the end. In contrast to neo-classical economics, in our theory changes do not automatically lead to an equilibrium outcome that can be specified in advance. Instead, depending on the circumstances under which a change arises, many possible results may occur. Firms, Markets and Economic Change therefore fits squarely in the tradition of evolutionary economics, in which history and context count and events unfold in real time. Although a tendency to reduce theory to mathematical expressions is underway in some branches of evolutionary economics, thereby undermining attempts to cope with the messiness of reality, our approach has been influential in promoting the use of narrative in other branches.

Our work has also contributed to the management literature, especially in the capabilities theory of the firm which is sometimes associated with the so-called resource based view of the firm. The importance of this way of looking at the firm was already clear when Firms, Markets, and Economic Change first appeared, and the book was part of an already growing literature. That literature has continued to swell in the years since, and, along with the work of Michael Porter, now represents what is arguably the dominant view of strategy taught in American business schools. We demonstrate the importance of resources, especially intangible ones such as knowledge, in structuring the outcomes that firms can achieve through strategic activity. While in economics departments the mainstream preoccupation with incentives rather than coordination and knowledge still reigns supreme, ours was an early voice arguing for a richer account of the theory of the boundaries of the firm. The theory of dynamic capabilities, as well as the related theory of dynamic transaction costs, provides a way of explaining phenomena – like the rise of the large managerial corporation as chronicled by Alfred Chandler (1977) – that mainstream theories do not handle well.

Another dimension is the theory of modular systems. The work that became chapter 3 of Firms, Markets, and Economic Change was one of the earliest efforts in what has become an extremely important field of research. Although economists had written about the demand-side benefits of modularity and standards – in terms of network effects, path dependency, and lock-in – ours was perhaps the first work to point to the supply-side benefits of modular systems, namely, the ability of such systems to “break the boundaries of the firm” and to take advantage of capabilities in the wider economy and thus gain the benefits of rapid-trial-and-error learning. We also investigate the benefits of modularity from a demand-side perspective by showing how the benefits of modular design may be attractive to consumers. We demonstrate the strategic value of a set of practices rather than concentrating simply on their cost-saving qualities, and in the process we help show why the real world is not dominated by homogenous goods.

In Chapter 7, we look into a topic that has become increasing popular – the importance of networks in promoting technological change. As is typical of our methodology in other parts of the book, we deliberately set out to expose the complexity of reality by showing that networks are far from uniform and that the conditions in which they operate may also vary significantly. This leads us to argue that a single approach to research and development cannot be guaranteed to promote the best outcomes under all circumstances. By comparing relatively centralized “Japanese” practices (as they were represented by American scholars and journalists in the early 1990s) with the more market-based approaches that characterized Silicon Valley and other nodes of change in the U.S., we show that firm organization is only one of several factors that can lead to successful innovation. Events since the book was published have provided support for our view that multiple systems of organizing the boundaries between firms and markets may be successful depending on the economic and social contexts in which particular firms operate.

The years since 1995 have seen increased globalization of production, the rise of the New Economy, and the shakeout of the early twenty-first century. These developments have led many to see a need to reevaluate prevailing views of the large managerial corporation, which was the preeminent form of business institution for much of the twentieth century. Using ideas from Firms, Markets, and Economic Change, including the theory of economic capabilities and the theory of network forms of organization, Langlois (2003) has attempted to understand this phenomenon – which he calls the Vanishing Hand – and to reinterpret Alfred Chandler’s famous account of the rise of the corporation. This has led to a debate in which Robertson (2003) has argued that recent changes in information and communications technologies are unlikely to substantially affect the internal organization and boundaries of many firms. Robertson and Verona (forthcoming) have also extended our original argument to show that, in the complicated world in which we live, the effects of technological change on firm boundaries are not possible to predict on first principles, reaffirming our point that developments do not necessarily converge to a single equilibrium or, indeed, to an equilibrium at all in a complex environment in which change takes place in many forms and in multiple layers.

Even though our approach is still far from the mainstream (in fact, our logic questions the value of mainstream thinking in a diverse and changing world), Firms, Markets and Economic Change has served as a useful beacon for scholars who want to break free from the lack of realism inherent in modern neo-classical economics. Simply by encouraging others to think in unconventional (some would say subversive) ways, we are proud to have helped to loosen the logical logjam that still characterizes conventional academic economic theory. Breaking the logjam entirely through the spread of new ideas is certain to be a lengthy and uneven process – but that is totally consistent with the message of our book.

Alfred Chandler (1977) The Visible Hand. Cambridge: Harvard University Press.

Richard N. Langlois (2003).. “The Vanishing Hand: The Changing Dynamics of Industrial Capitalism,” Industrial and Corporate Change 12,2: 351-385 (April).

Paul L. Robertson (2003) “The Future of Management: Does Business History Have Anything to Tell Us?” Australian Economic History Review 43, 1: 1-21.

Paul L. Robertson and Gianmario Verona, “Post-Chandlerian Firms: Technological Change and Firm Boundaries”, to appear in Maureen McKelvey, Keith Smith, and Magnus Holmén, eds., Flexibility and Stability in Economic Transformation.

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