Topic 9 Flashcards
What is the Schumpeterian model of innovation?
When a product of technique is improved the enw good or method displaces the old one. ‘creative destruction’.
What proporties of firms might help them innovate in the modern IT world?
External sensing: the organization recives and interprests messages about new markets, technologies & threats (googles 20% rule).
Organizational action: it requires a sturcture facilitating immediate decision making and swift action to sieze opportunities.
What is the evidence that small firms innovate more then large? Evidence to the contrary?
- Controversial
- Past two decades 2/3 of new US jobes created in the private sector
- Corporate sector facing challanges from tech & resources lock-ins, institutional & cultural rigidities.
- Radical innovations observed mostly in start ups.
- Firms that carried out pharmaceutical revolution (penicillin & sulfa) were large & established.
- in 1990s worls larged 700 industrial firms filed half world patents.
- Some firms established internal venture units but many shut them down.
What theories explaint the existance of the firm?
- Transaction cost theory by Ronald Coase
- Team production theory
- Thoery of Asset Specificity
Explain Ronald Coase’s transaction cost theory visa vi the existance of the firm.
Costs involved with transactions means that there is a big efficiency in having firms, within which market transactions need not take place. Costs to price transactions include discovering the price, cost of negociating and drafting an enforceable contract.
Explain team production theory.
The firm emerges because extra output is provided by team production (through specialization & team synergy) but the success depends on the ability to manage a team.
The firm is a entity which brings together a team which is more productive working together then at arms length through the market.
What is the metering problem?
Difficult to assess the contribution of each individual to a group output.
Central organization can help with this.
What is the theory of asset-specificity?
- One party mist make an investment to transact with another. This investment is asset specific (not very exchangeable).
- It’s impossible to draw up a complete contract that covers all actions
- Ex: Electricity generator & coal mine, the generator wants to build near the coal mine. Once the generator is built, the coal mine can renegociate contract to their advantage. Generator is facing ‘hold-up’ situation.
- Much easier when one person controls all involved.
What determines how large a firm should be?
Dependent on the cost of using the price mechanism, and the cost of organization of entrepenuers. The make vs buy decision.
What is the make vs buy decision?
A firm may decide to purchase an input, or simply decide to make it itself (vertical integration v outsourcing).
What are the advantages of vertical integration vs outsourcing?
- Lower transaction cost
- Team production & team synergies
- Quality measurement
- Specialized needs
- Regualtions & Taxation
- Increased control of inputs.
- Reduce risk of being ‘held up’
- Outsourcing may affect firms reputation
- Product differenciation may be possible
- If you outsource everything you reduce your core competancies.
What are the advantages of outsourcing over vertical integration?
- Price system is in general more efficient (increases specialization, flexibility, innovation, discipline - lol).
- VI converts explicit costs into implicit costs. Harder to get the cost of subcomponents.
- Centralization reverses specialization gains.
What are Keiretsu?
Set of companies with interlocking business relationships and shareholdings.
Two types - Horizontally integrated, Vertically Integrated.
Keiretsu maintained dominance over the Japanese economy for the greater half of the 20th century, but recently lost their grip.
The trend is a move towards the middle of the continuum, away from either extreme.
