Technological Innovation and the Theory of the Firm

The firm is the central actor for the effectuation of innovation and technological change. The large industrial laboratories of the previous century have given way to more organizationally and geographically diffuse sources of technology, placing even greater emphasis on the coordination skills of managers. Dynamic capabilities are the skills, procedures, organizational structures, and decision rules that firms utilize to create and capture value. Managers must be able to sense opportunities, craft a business model to capitalize on them, and reconfigure their organizations, and sometimes their industries, as the business environment and technology shift. The key employees in this regard are experts (literati and numerati), whose management requires limited hierarchy, flexible teams, and performance-based incentives. To encompass these realities, the theory of the firm needs to be augmented to account for opportunity as well as opportunism, coordination beyond the boundaries of the firm as well as within it, variations in the level of capability across firms, and the frequent superiority of the firm over markets for the creation, transfer, and protection of intangible assets. Complementarities and cospecialization are advanced as two emerging concepts of particular relevance to a theory of the innovating enterprise earning above-normal returns.