Strategy and Institutional & Organizational Economics
By Jackson A. Nickerson (Washington University in St. Louis) and Brian S. Silverman (University of Toronto)
The field of strategy draws on several cognate disciplines, with the goal of addressing one overarching question: Why are some firms able to obtain sustainable competitive advantage (i.e., consistently higher profits than competitors)? In the 1990s, this motivating question for the field was codified into four fundamental subsidiary questions:
- How do firms behave? Or, do firms really behave like rational actors, and, if not, what models of their behavior should be used by researchers and policy makers?
- Why are firms different? Or, what sustains the heterogeneity in resources and performance among close competitors despite competition and imitative attempts?
- What limits the scope of the firm? Or, what is the function of or value added by the headquarters unit in a diversified firm?
- What determines success and failure in international competition? Or, what are the origins of success and what are their particular manifestations in international settings?
Although more recent scholarship has expanded the range of these queries, these four fundamental questions continue to constitute the chief concerns in strategy research today. Insights from institutional and organizational economics (IOE) have shed substantial light on these inquiries, and the IOE lens holds the promise of further insights and contributions to strategy research.
What limits the scope of the firm? At the core of IOE's contribution to the field of strategy is the economic theory of the firm. Theories of organizational economics, especially transaction cost economics (TCE), address the fundamental strategic question of firm scope. The canonical organizational decision in TCE, the "make or buy" decision, is precisely an examination of the vertical scope of a firm (Williamson 1975, 1985). Early extensions of TCE applied the theory's logic to lateral product diversification, thus addressing limits to the horizontal scope of the firm as well.
Why are firms different? In a neo-classical world of free competition and imitation, it is difficult to explain persistent heterogeneity in performance among competing firms. Strategy scholars have devoted substantial effort to exploring the sources of sustained performance differences, with the bulk of scholars acknowledging the importance of value-generating "resources" or "capabilities" that are not easily tradeable on markets, hence less subject to competition or imitation than traditional assets.
How do firms behave? As a field, strategy has generally been oriented toward explaining real-world phenomena. Perhaps for this reason, it has been more receptive than economics to the idea that firm behavior deviates from the rational actor paradigm. The behavioral assumptions of organizational economics, particularly the bounded rationality and opportunism propounded by transaction cost economics, have been widely adopted in the field.
What determines success and failure in international competition? IOE scholars note that variation in national or regional background institutions causes competition and organization to differ, deviating in myriad ways from neoclassical models. The national institutional environment affects the nature of multinational investment, the location of activities vulnerable to knowledge spillovers, and the broader relevance of geographic strategy.
The field of strategy has been profoundly shaped by institutional and organizational economics. Indeed, an assessment of citation patterns from 1985 to 2008 in strategy illustrates that new institutional scholars such as Oliver Williamson are among the most highly and enduringly cited in the field. When the wider list of contributions is considered, it is easy to conclude that IOE is one of the core pillars of the field of strategic management.