Organizational capital, technological choice, and firm productivity

Most theory treats productivity as exogenously given by technological capabilities. Moreover, technology is very often assumed to be freely tradable. It is therefore puzzling to observe the huge differences in productivity as we find in empirical studies even of firms working in the same market environment. To reconcile the heterogeneity, I deviate from a purely technological view and stress the organizational function of a firm. Firms are vehicles to facilitate the division of labor between people with different skills who join forces to produce a particular good. A firm’s management decides about technology jointly with investment projects and changes in the labor force, thereby determining productivity. If a firm is managed well, productivity increases with a larger labor force, because gains from specialization can be exploited. Moreover, as result of the decisions by the management, firms grow over time, shrink or even exit. The growth process is necessarily stochastic, since the future is uncertain and many effects influence the outcome of management’s decisions. Stochastic firm growth, in turn, yields a stationary firm size distribution which reflects large heterogeneity of the firms.