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Dynamic capabilities between firm organization and local development: a critical survey

Riccardo Leoncini’, Sandro Montresor±, Giovanna VertovaÃ

Abstract: This paper aims to explore the nature and the determinants of the dynamic capabilities of the firm: a notion that, while increasingly more fashionable, remains still conceptually diffuse. Through a critical review of the massive and heterogeneous literature that refers, either explicitly or implicitly, to dynamic capabilities in explaining the firm’s dynamics, the paper detects a certain gap between an organizational and an environmental kind of approach to the issue. The nature of the firm and that of the firm environment, especially geographical, are in fact focused on alternatively, thus implying a dynamic capabilities analysis that turns out to be biased. The pros and the cons of a combined approach, which tries to integrate the two, are shown and contrasted to a possibly more satisfactory approach, dealing with the firm as a system operating within an institutional setting of techno-economic relationships.

Keywords: dynamic capabilities; firm organization; firm environment; technological systems. JEL Classification: D23, L22, 033

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University of Bologna and CERIS/DSE-CNR, Milan, e-mail: [email protected]

University of Bologna, e-mail: [email protected]

University of Bergamo and CERIS/DSE-CNR, Milan. Corresponding author: Giovanna Vertova, Department of Economics “Hyman P. Minsky”, University of Bergamo, Via dei Caniana 2, 24127 Bergamo, Italy. Tel: 035.2052566, fax: 035.2052549, e-mail: [email protected]

1. Introduction

Germinated in searching for the origin of competitive advantage (Teece and Pisano 1994), the concept of ‘dynamic capabilities’ has progressively flourished in other areas of investigation of the firm1. For example, it has stimulated alternative explanations of the different fortune established and new entrant firms exhibit in front of the technological discontinuities that shake their industries (Henderson 1993). More in general, dynamic capabilities seem to have become a further candidate — although nor unchallenged neither unquestioned2 — to the micro-foundation of the evolutionary literature on technological change. Indeed, they try to link the advent of new technological paradigms to the evolution of the firm knowledge base (Dosi et al. 2000). The dynamics of the firm capabilities is deeply rooted in the firm knowledge base3. In adapting their existing capabilities over time, in acquiring or in developing new ones, firms actually engage themselves in a process of learning something new. This argument has made the theory of organization the ‘shelf’ where to search the toolbox for investigating the dynamic capabilities issue. Its analysis has actually become an application to the theory of organizational learning. Indeed, the investigation of the process of ‘organizational knowledge creation’ (Nonaka 1994: 15) has cast new light on the different ways and effectiveness with which firms/organizations deal with their changing environment. Organizational learning has offered several important tools that made the dynamic capabilities issue to became less ‘black-boxed’: the role of the managerial cognition and mental representation of the firm’s dynamics is just one of them (Garud and Rappa 1994). This is for sure an extremely important result in addressing the epistemological and

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the ontological foundations of dynamic capabilities. However, as the paper aims to argue at first, organizational learning has also entailed a certain focalisation-bias in the analysis of dynamic capabilities. By centring upon the internal organization of the firm, it has in fact somehow neglected the relational and contextual aspects affecting the creation and development of dynamic capabilities. On the one hand, concepts of interactive and environmental nature are often called forth in the organizational account of learning (e.g. Levitt and March 1988, March 1991) and of dynamic capabilities themselves (e.g. Iansiti and Clark 1994). On the other hand, however, their relevance is generally hidden by relegating them within a generic setting, mostly depicted as an aseptic ‘diamond’ of firms, suppliers and users (Porter 1990), whose relationships are almost exclusively of formal nature. In trying to recover the role of relations and context in shaping firms’ learning processes one might turn to a different strand of literature, focusing on a geographical, rather than an organizational kind of environment. Although without an explicit reference to dynamic capabilities, the literature on the so–called ‘local systems of production’ in fact stresses the relevance, in adjusting and building up firms’ capabilities, of factors such as, for example: the localisation in a Marshallian ‘industrial district’ (Marshall 1890, Becattini 1979, 1987), the embeddedness in an ‘innovative milieu’ (Aydalot 1986, Camagni 1991a), and the firm setting in a ‘regional system of innovation’ (Braczyk et al. 1998, Cooke et al. 1998). However, and this is the second part of the paper’s argument, the focus on local production systems entails a bias somehow symmetric to that implied by organizational learning. Indeed, such an ‘environmental’ account inevitably takes some focus out of the firm as a knowledge creating organization, and even more as an organization managing the

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dynamics of its capabilities. Thus, dynamic capabilities tend to degenerate into geographically delimited, system-specific capabilities: firms have different individual (rather than organizational) abilities to benefit from, rather than to build up. Both ‘organizational’ and contextual/relational (in brief, ‘environmental’) factors play a crucial role in shaping the dynamic capabilities of the firm. What is more important, they are strictly interconnected. Accordingly, laying a bridge between the two correspondent theoretical perspectives becomes an essential task. This appears crucial by thinking that:

‘dynamic capabilities [...] emphasizes two aspects. First, it refers to the shifting character of the environment; second, it emphasizes the key role of strategic management in appropriately adapting, integrating, and reconfiguring internal and external organizational skills, resources, and functional competencies toward changing environment’ (Teece and Pisano 1994: 557; authors’ emphasis).

How to integrate the theoretical analysis of these two ‘aspects’ is, however, an extremely delicate task. Mainly because both the organizational and the environmental approach encompass several perspectives, drawing on conceptual categories which partially overlap and providing predictions not entirely differentiating. Their survey and classification into schematic taxonomies thus becomes essential in order to detect which elements could be retained for a more interacting study about firm’s dynamic capabilities. In this vein, the paper reviews both the organizational and the environmental approaches, but differently. The review of the organizational accounts is conducted by creating an

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original taxonomy. Although counting several and heterogeneous contributions, the relative literature does not distinguish very clearly among them. In order to build up a useful taxonomy of them it should be checked, from scratch, how they answer to some basic questions, relating to the crucial elements of dynamic capabilities. The survey of the environmental approaches, instead, benefits from more effective schematisation attempts of the relevant literature and relies more heavily on some pre-definite, well-known approaches about ‘local production systems’. Yet, even this second survey has some novelty, because it extracts from each of these approaches the crucial elements of a local production system and its ability (or inability) to affect firms’ dynamic capabilities. These two surveys lead to an important conclusion, representing the third part of the paper’s argument: a satisfactory analysis of dynamic capabilities cannot simply rely on some kind of integration of the two approaches. A novel ‘system approach’ to dynamic capabilities appears desirable. Indeed, when firms are considered as open, dynamic systems, co-evolving in broader technological systems, the analysis of their dynamic capabilities can be addressed by retaining, simultaneously, both the organizational and the contextual nature of their learning patterns, the formal and informal characterisation of the relationships they establish, and the territorial specification of their evolution. In other words, looking at firms as evolving organizations within evolving systems, would represent a more effective way to investigate the determinants and the processes of their dynamic capabilities. The structure of the paper basically follows the logical order of the arguments presented above. Section 2 critically reviews those contributions that represent the organizational viewpoint in the analysis of dynamic capabilities. Section 3 provides a critical survey of the environmental one. In both cases, the focalisation-bias (or de-

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focalisation) they entail will be stressed. Section 4 closes the paper by addressing possible ways to eliminate, or at least reduce, this bias. An integrated approach, which proposes to overlap organizational and environmental arguments, is contrasted with the ‘seeds’ of a novel system approach to dynamic capabilities. The superiority of latter in providing a comprehensive analysis of dynamic capabilities is sketched .

2. Dynamic capabilities through the organizational lens

The concept of dynamic capabilities has been put forward to account for the different ways and effectiveness firms face the ‘turbulence’ of their hosting environments. In particular, to explain why firms show different dynamic performances once their sector has been shaken by some kind of pervasive technological change. Its inspiring rational lies in the problems that the neoclassical theory encounters in reducing the issue to a pure question of strategic incentives to invest in innovation. Even once the nature of the technological shake — i.e. incremental rather than radical — has been disentangled, predictions based on strategic arguments are not empirically robust4 (Henderson 1993, Jones 2001). Non strategicmatching empirical results require to investigate the impact of technological change on the firm organization (i.e. communication channels, information filters, routines, procedures and the like) and to consider the different research capabilities of the firms5. The notion of dynamic capabilities tries to respond to such a need, that is ‘[the] need [of] much better models of heterogeneous capability — its evolution and its role in competition — […] to fully understand the competitive implications of technological change’ (Henderson 1993: 268). Indeed, the concept and its rational have attracted

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researchers of the firm from diverse disciplines, both in economics and in other social sciences. This fact has inevitably entailed a certain ‘terminological soup’ around the issue. The contributions that fall under the organizational heading are just apparently uniform. In spite of substantial conceptual and terminological overlapping, relevant differences emerge among them with respect to the inner nature and functioning of dynamic capabilities. In disentangling such differences an original taxonomy of four approaches seems applicable. As it will be shown, the four approaches present some elements of complementarity. Yet they endorse differences that lead to not entirely aligned predictions.

Insert table 1 about here

2.1 The strategic management approach

The first item of such a taxonomy is occupied by the definition provided by the forerunners of the concept (Teece and Pisano 1994, Teece et al. 1997). As it was introduced to build up on it an alternative explanation of competitive advantage, in the following, this position will be referred to as the ‘strategic management approach’ to dynamic capabilities6. According to this approach, dynamic capabilities are conceived as a particular ‘firm’s ability’ to manage its ‘internal and external competencies’ in order to face its ‘changing environment’ more competitively then the rivals (Teece et al. 1997: 516). Apparently, the definition is purely a functional one. Dynamic capabilities are just ‘higher-order’ capabilities, which differ from ‘lower-order’ ones because of their function. Indeed, they would serve dynamic firms to break out the rents and the path dependency

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guaranteed to the rivals by their having rare, valuable and inimitable lower-order capabilities (Collis 1994: 149)7. The inner nature of dynamic capabilities is thus still that of ‘capabilities’, although of a special kind. In this last respect the present approach draws on some previous works in the field of strategic management, in particular on the seminal paper by Leonard-Barton (1992). According to her ‘dynamic paradox’, the ‘core capabilities’ of the firm can turn into ‘core rigidities’ if the firm itself is unable to renew them. It should be stressed that in the present approach strategic capabilities, both static and dynamic, are not always clearly distinguished from ‘individual’ resources, i.e. resources that are separable from the firm context and thus able to carry a market price. Indeed, dynamic capabilities take on the nature of a very special kind of resources — i.e. organizational and non-price-carrying — only when they are related to processes of organizational learning (Dierickx and Cool 1989). Dynamic capabilities are in fact directly connected to the ‘organizational processes’ of the firm. Its ‘dynamic role’ is precisely that of allowing the firm to learn through ‘communication codes and search procedures, which are rooted in specific organizational settings’ (Teece et al. 1997: 518). Although the emphasis is on the firm competitive advantage, the role of the firm organization thus keeps this approach complementary to the other approaches under the same heading. Two peculiarities should however be remarked. First of all, learning is indicated as the only truly ‘dynamic concept’. As such, it is clearly distinguished from the ‘coordination/integration’ of the firm competences — instead treated as a ‘static concept’ — and from their ‘reconfiguration’ — retained as a ‘transformational concept’ (Teece et al. 1997: 518-512). In so doing, the way in which the integration and the coordination of the

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firm capabilities actually help firms learn is not explored. Second, integration and coordination capabilities are mainly conceived as internal, that is relating tasks and activities within the boundaries of the firm. The role of external integration is simply sketched, and always by referring to those formal kinds of relationships (Teece et al. 1997: 519) which feed up processes of ‘inter-organizational learning’. That kind of knowledge (mainly tacit) firms acquire, often unintentionally, through less formal techno-economic relationships with other firms and organizations, instead, is not addressed. This last peculiarity is typical of contributions in the field of strategic management. Although by placing knowledge at the basis of a sound theory of the firm (e.g. Grant 1996), they still consider the ‘environment’ in which the firms operate in a quite aseptic way: that is as a set of competitive relationships among competitors, suppliers and customers.

2.2 The technology approach

A second approach to dynamic capabilities can be identified around those contributions, mainly of empirical nature, which have focused on the different capabilities that different firms have to implement and/or use new technologies. This could be actually considered one the most fruitful field of application of the dynamic capabilities rational. Indeed, its two constitutive elements — ‘the shifting character of the environment’ and ‘the role of strategic management’ in dealing with it (Teece and Pisano 1994: 557) — find an immediate specification in, respectively: (i) the ‘technological discontinuities’ which ‘destroy’ (rather than ‘enhance’) the firm’s existing competence (Tushman and Anderson 1986); (ii) the change in the communication channels, interpretative filters and organizational routines (in

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brief, in the ‘architectural knowledge’) the firm needs to implement in front of these discontinuities (Henderson and Clark 1990). Nonetheless, the focus on technological aspects is so dominant that the concept of dynamic capabilities as such is only rarely used in an explicit way (e.g. Iansiti and Clark 1994). In what can be termed the ‘technology approach’, dynamic capabilities are identified with research and technological capabilities. That is, capabilities which apply to a certain technological element, such as: the ‘knowledge’ the firm masters in setting a new product dominant-design (Henderson and Clark 1990); the ‘skills and know-how’ the firm uses to deal with new products and processes (Tushman and Anderson 1986); the recursive chain of ‘activities’ through which the firm engages in technological problem-solving (Iansiti and Clark 1994)8. While the application to technology makes dynamic capabilities more concrete, in this approach their inner nature is conceptually more diffuse. On the one hand, organizational learning still seems at the core of their explanation (Iansiti and Clark 1994: 17). On the other hand, a certain connection remains with the ‘problem-solving’ strategies of the firm. In particular, about how much to invest in the new technology and about when to adopt it. This strategic influence, which reveals a certain overlapping between the present and the previous approach, crucially affects the way the firm environment is depicted. First of all, the firm is described in ‘technical’ terms, as a community of engineers and strategies designers trying to tackle the firm technological complexity. This implies that, with respect to its external environment, the firm just needs to have a ‘technology integration capacity’ (Iansiti and Clark 1994: 565). Picking-up that external, codifiable knowledge, which is more suitable to be linked with its existing knowledge base, is the most crucial capability9.

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The same capacity does not apply, instead, to other forms of knowledge integration, of more tacit nature, which call for some kind of physical proximity between the firm and its interacting organizations. A second strategic influence on the present technological approach concerns the characterisation of the firm environment. In general, its is depicted as an ‘industry’ populated by ‘established organisations’ (incumbents) and ‘new entrants’, among which the relevant relationships are mainly of competitive nature (Tushman and Anderson 1986: 445-446). Non-competitive relationships among firms, and relationships with other institutions and organizations of different nature, are instead just given a marginal role in shaping organizational learning and the capabilities dynamics. Furthermore, out of the manifold set of relationships that the firm establishes beyond its boundaries, only those with customers are deemed relevant for the capability-building process (Iansiti and Clark 1994). In spite of these influences, the strategic management and the technology approach provide quite different predictions on which would be the ‘superior’ firm in terms of dynamic capabilities. The former points out those firms which manage to reconfigure their resources and capabilities to make them rent yielding in a new competitive equilibrium scenario. The latter, instead, favours those firms that are able to drive the ‘creative destruction’ of such an equilibrium through the successful adoption of a new technology. Although, to the authors’ knowledge, empirical tests have not been provided yet, that the two predictions lead to the identification of the same firms appears at least theoretically implausible.

2.3 The organization approach

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Although organizational learning is common to all the approaches, organization theory enters more pervasively in a third approach which makes the firm’s reaction and proreaction to change mainly dependent on the structure and composition of the relative organization. As in the previous technological one, also in the present ‘organization approach’ the explicit use of the dynamic capabilities concept is infrequent10. However, there is no doubt that its inner logic is at work, although to a different extent depending on the specific contributions. At the outset, important seeds can be found in the literature on the patterns the firm follows in ‘creating’ new knowledge (Nonaka 1994, Nonaka and Takeuchi 1997). These patterns are actually modelled as driven by the capability of the firm to create further knowledge, i.e. to learn. The creation of organizational knowledge, in turn, depends on a ‘spiral’ of events through which knowledge is transformed into further knowledge. Dynamic capabilities thus apply to knowledge itself. What is more, they are crucially affected by its availability. Organizational learning in fact tends to be dominated by local processes of search (March and Simon 1958). Accordingly, when a technological discontinuity shakes the firm environment and urges the firm to learn distantly from what it knows, core competencies become ‘core rigidities’ (Leonard-Barton 1992). In such a framework, therefore, dynamic capabilities are thought to be used in contrasting the organizational inertia and the path dependency associated with the learning process. In these and other similar organizational accounts (e.g. Levitt and March 1988, March, 1991), the attention to interactive kinds of aspects among firm/organization members, as well as to organization-wide conditions and management models is higher than

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in the previous two approaches (Nonaka 1994). Furthermore, such a relational dimension also spans beyond the boundaries of the firm, and makes external interactions extremely relevant in driving organizational learning11. However, these relational considerations are only partially encapsulated. First of all, although both formal and informal external communication channels are considered (Nonaka 1994), the latter are simply treated as an extension of the standard intra-organizational case, rather than a constituent part of it. Accordingly, they are not given any special attention. Furthermore, following a typical strategic management approach, the ‘environment’ within which firms operate is often reduced to an aseptic triad (customers-suppliers-competitors), affecting individual rather than organizational learning. Similar stylisations of the firm environment can also be found in a more recent strand of organization studies linking the dynamic capabilities of the firm to the role of managerial cognition (Garud and Rappa 1994). The capacity of the firm to adapt successfully to radical new technology would depend, rather than on organizational learning or the firm’s capability set, on the mental models and strategic beliefs that boundedly rational managers develop in driving firm decisions. Indeed, the shaping of these cognitive representations by the historical environment — either through the shared ‘dominant logic’ of working together (Prahalad and Bettis 1986) or through the ‘imprint’ of the firm founders (Baron et al. 1999) — makes it difficult for the top managers to adapt their mental models in rapidly changing environments (Barr et al. 1992). Dynamic capabilities should therefore be related to how beliefs evolve within organizations, to the role of hierarchy in cognition and, first and above all, to how capabilities and cognition relate (Tripsas and Gavetti 2000). In this last respect it should be stressed that the empirical tests of this cognitive

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hypothesis seem to provide different predictions from those one could associate to the technology approach. In both case studies (e.g. Tripsas and Gavetti 2000) and systematic analysis (e.g. Kaplan et al. 2003), cognitive arguments seem to explain both the firm inertia and the firm pro-action in front of technological discontinuities also after having controlled for alternative explanations (among which there is the availability of relevant technological capabilities).

2.4 The evolutionary approach

The theoretical background on which dynamic capabilities draw is in general evolutionary. With the partial exception of strategic management, this holds true for all the approaches analysed so far. Indeed, they all link the advent of new technological paradigms to the evolution of the firm knowledge base (Dosi et al. 2000). On the other hand, it is possible to distinguish a group of studies which settle dynamic capabilities more explicitly in the variation-selection-retention model at the core of evolutionary theorising (Cyert and March 1963, Nelson and Winter 1982). In what can be accordingly termed the ‘evolutionary approach’, dynamic capabilities are related to the minimum ontological element of the evolutionary firm, i.e. to its organizational routines. On the one hand, dynamic capabilities directly apply to ‘operational routines’ — rather than to generic competencies or capabilities — allowing the firm to generate and modify them whenever it is necessary (Zollo and Winter 2002, Zott 2002). On the other hand, dynamic capabilities are distinguished from the routines they apply to, on the basis of their intentional and deliberated character. In other words, while operational

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routines are conceived of as automatic or quasi-automatic responses to environmental changes, capabilities and dynamic capabilities are instead related to those ‘constant dispositions and strategic heuristics that shape the approach of a firm to the non-routine problems it faces’ (Nelson and Winter 1982: 15). Also in this approach organizational learning is crucial in determining the dynamic capabilities of the firm. Dynamic capability is in fact conceived as a ‘learned, regular pattern of collective activity’ (Zollo and Winter 1999: 17, authors’ emphasis). Here, however, organizational learning is fitted within an evolutionary model, which enlarges the scope of ‘attributes’ dynamic capabilities depend on. The focus on variation, for example, recovers in the analysis the nature (e.g. exploratory vs. exploitative, cognitive vs. experiential) and the direction (i.e. imitative vs. experimental) of organizational search, whose choice also depends on the costs of deploying the relative resources (Zott 2002). The retention of the routines that the firm has learnt to select, instead, recovers the delicate issue of the timing of their actual implementation (Zott 2002). What is more, the map which connects dynamic capabilities to organizational learning is widened by addressing those routines that standard organization theory relegates to ‘off-line’ activities: knowledge ‘articulation’ and ‘codification’. Conversely, the latter two are here pointed out as important forms of learning, through which the firm actually develop its dynamic capabilities12. On the basis of these considerations, the added value of the evolutionary approach appears extremely valuable. First of all, it adds an important evolutionary qualification to the relevance of organizational learning for dynamic capabilities. While it is involved in the ‘selection’ of a new set of ideas, mainly through articulation and codification processes, the firm gets also engaged in the ‘generative variation’ of further knowledge. Accordingly, the

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‘exploration’ of new knowledge does not necessarily prime its ‘exploitation’, as it is instead suggested by some accounts of the organization approach (e.g. March 1991). Further qualifications are added by simulating the evolutionary model in the attempt at suggesting propositions to be empirically tested. Quite interestingly, the predictions the evolutionary approach would suggest do not purely reduce to that of the previous approaches13. On the other hand, it must be noted that the evolutionary model is set at work in a framework (a typical ‘knowledge-cycle’) which occurs entirely within the boundaries of the firm, and with respect to which the firm environment does not play a direct dynamic role. Environmental factors are just ‘viewed [...] as inputs to the dynamic capability building process, rather than part of the process itself’ (Zollo and Winter 1999: 11). However, once fitted in a broader evolutionary framework, this view appears a contingent simplification rather than a general hypothesis. Given the importance that evolutionary economics has traditionally attributed to the institutions making up the surrounding environment of the firm (Hodgson 1988), their role in shaping the dynamic capabilities of the firm is another evolutionary qualification of the issue. The introduction and the subsequent development of innovation system kinds of concepts (Lundvall 1992, Nelson 1993) — on which this paper will focus in the next sections — actually implement the idea that institutional and policy contexts, with their spatial and territorial characterisations, crucially shape the dynamic capabilities of the firm, thus introducing important policy implications (Metcalfe 1995). This consideration is among the starting points of a the alternative approach to dynamic capabilities which is put forward in this paper. Such an alternative view will incorporate, in addition to those emerged in this section, some other insights which originate from a different way of looking at dynamic capabilities: that is, through an

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‘environmental’ rather than organizational lens. To the view emerging through this latter lens the next section is dedicated.

3. Dynamic capabilities through the ‘environmental’ lens

In order to consider the relational and contextual factors affecting the dynamic capabilities of the firm, it seems natural to draw on the literature on the so called ‘local production systems’. Under this generic heading it is in fact possible to place all those approaches that, in spite of their specific features and ‘unit of analysis’, share an important common view: that firm is not an isolated entity, but is instead ‘somehow’ related to its territory by relations and networks with other firms, institutions and organizations in the same geographical area. Of course, this is not the unique characterisation for the ‘firm environment’. There are several other approaches that have considered the interaction between the firm and the environment, without focusing on the local dimension. The literature on organizational learning considers the interaction with other actors as an important learning mechanism for firms (Levitt and March 1988, March 1991). The more recent literature on complexity, competition and evolution offers compelling argument on the importance of the environmental context (Levinthal 1997, Gavetti and Levinthal 2000). Yet, this literature thinks that either the external environment is just a further complication that needed to be incorporated within the boundaries of the firm, or that the firm’s external relationships are simply strategic to an exogenous bundle of rules of the game. The traditional literature on local production systems is where the external relationships of the firm and the role of its

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socio-economic context are most deeply analysed, in particular in dealing with the firm dynamics. That is the reason why the following survey deals with the ‘traditional’ approaches to local production systems and their ability to influence firm’s dynamic capabilities. Accordingly, the lens provided by the analysis of local production systems is the ‘environmental’ lens to dynamic capabilities considered in this paper. In this section it will be shown that also this latter ‘environmental’ lens suffers, as the organizational one, of an important drawback, somehow symmetric to that one. In fact, in order to concentrate on the outside-the-firm space (i.e. its environment), this lens ends out with diverting the attention away from the inside-the-firm space. Consequently, the result is a certain focalisation-bias on the relational and contextual features affecting the dynamic capabilities of the firm. On the other hand, such a focalisation-bias takes place to a different extent in the different approaches. A schematic taxonomy of the most significant approaches, rather than an exhaustive review of the correspondent contributions, might be useful in illustrating this point (Table 2).

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3.1 The Industrial District approach (ID)

Out of the several approaches to the local systems of production, that of the industrial districts (ID) is for sure the most notable, as notable are its insights for the dynamic capabilities issue. The theoretical ‘pedigree’ of the notion is quite well known, as it goes back to Alfred Marshall’s (1890) observation of the tendency of small specialised firms to

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concentrate in a limited geographical area. This phenomenon was explained by the possibility for the firms to reap external economies of scale. In its original characterisation, therefore, the ID represents a quite standard ‘industrial’ environment for the firm — i.e. a set of inter-industrial relationships — while it is the mechanism through which it affects the growth of firms (and their capability to grow), which receives a novel interpretation. In the earlier Becattini’s revisitation (1979, 1987, 1990) of Marshall’s tradition, the ID approach gained a new impulse. Becattini (1990: 38) speaks about the ID as ‘a socioterritorial entity which is characterised by the active presence of both a community of people and a population of firms in one naturally and historically bounded area’. This definition marks a certain shift from the consideration of purely economic factors to the inclusion of social factors too: the ‘population of firms’ must exist within a ‘community of people’. This shift extends the meaning of the firm environment driving the firm behaviour; however, it also entails a certain retrieval as both firms and people are considered constituent players of the ID. Although the firm does not ‘melt’ in the ID, the collectivity of firms still captures more attention than their individuality, especially as far as learning is concerned. Indeed, by setting the ‘community of people’ at work in creating and maintaining a homogeneous system of values14, and by describing the ‘population of firms’ as specialising in one or few phases of the production processes (typical of the district), the ID gets characterised as a typical ‘flexible production system’ (Piore and Sabel 1984). Within it, the development and transmission of new knowledge relays mainly on the embedded collective knowledge, and also technological change becomes a social process, because the ‘community of people’ embodies the relevant collective knowledge (Bellandi 2001). It seems that there is no

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influence of this collective knowledge within the firm’s boundaries because the unit of analysis becomes the networks of different agents (Chell and Baines 2000, Johannisson and Ramírez-Pasillas 2002, Lechner and Dowling 2003). On the contrary, it looks as if knowledge flows among firms and individuals without interfering with the internal organization of the firm. All the attention is concentrated outside the firm’s boundaries and there is a lack of analysis of the feedback that firms gain by being located within a ID. While the standard ID approach suffers from a certain focalisation-bias — a bias for the system-environment — the assessment somehow changes if the attention is turned to the most recent contributions on the ID approach. Indeed, the change in the international economic conditions occurred in the 1990s has opened a new discussion among those who place the firm at the centre of the analysis and those who instead focus on the system of firms (Whitford 2001). Ferrucci and Varaldo (1993), for example, supported the firmcentred position, arguing that the ‘district-firm’ is different from a ‘normal-firm’, due to its strong root in the local socio-cultural context. Their position, along with those who also suggest to shift the level of the analysis away from the district-system (Taylor 1999), actually inaugurated a new way of looking at the firm dynamics, which somehow overlaps the organizational lens and the environmental one. Although this new combined approach seems quite promising, it also entails some problems that will be addressed below. A further different evaluation applies to those recent contributions, which have started conceiving the district-system in cognitive terms (Belussi and Gottardi 2000). Given that, as a cognitive system, the ID has the primary task to process, diffuse and recompose information in a coherent set of knowledge, this emerging approach has in fact recovered in the analysis of the firm dynamics the importance of its strategic flexibility and strategic

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rationality, especially of those firms operating in integrated business groups. Indeed, the exploration and the refinement of this kind of system approach appear quite helpful in overcoming the focalisation-biases of both organizational and environmental nature that have been previously detected. An argument that will be addressed in the next section of this paper.

3.2 The milieu innovateur approach (MI)

A connection between the firm dynamics (and, implicitly, the related capabilities) and the firm environment can be found in the approach of the so called ‘milieu innovateur’ (MI), developed by the GREMI group with the objective of investigating the relationship between technology and space (Aydalot 1986, Camagni 1991a). As in the organizational technology approach referred to above, innovation is still retained the crucial engine of the firm dynamics. In analysing the relationship between technology and space, the GREMI group focuses the attention on the local environment as a ‘unit’ encompassing both the firm and technology. Since the very beginning, the attention of GREMI was in fact mainly focused outside the firm. The original intention was actually the understanding of the innovative activities of some places by implicitly assuming that favourable conditions are to be found outside the firm’s boundaries. The MI approach is a systemic one and this crucially affects the way firms are engaged in it. The MI is actually considered ‘incubator’ of innovations and innovative firms (Aydalot 1986: 10), in which the firm is indeed a player, but just one of the many involved in the innovative process. In such an approach, the organizational bias of the firm as an

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isolated and space-less economic agent is therefore overcome, as firms are rooted in their territory and constrained by both their local industrial atmosphere and their social, institutional and political conditions. On the other hand, however, the firm appears nearly undistinguishable from such an environment, thus introducing another bias, this time towards the MI. Indeed, only the MI seems able to innovate, while the firm and its organization does not play any crucial role in the innovation process. In other words, the milieu determines the innovative behaviour of firms to the point that it is not the firm who innovates, it is the territory (Gay and Picard 2001). In the MI approach therefore, the dynamic capabilities of the firm or, better to say, their technological capabilities, degenerate into ‘collective capabilities’. It is the MI who defines the new technological paradigms and trajectories, since it is the depositary of local know-how, skills, competence and experience, specific to that particular territory. Indeed, rather than on individual learning, the focus is on the ‘collective learning’ the firms realise by interacting. Interactions, in turn, are given much more emphasis than in the organizational approaches, to the point that they are considered more important than the availability of local factors and resources. Again, a sign of a ‘reverse bias’. Within the MI, non-market interactions, as well as inter-personal relations, create a local synergy that turns out to be a more powerful explanation of innovation and, consequently, of local growth (Maillat 1995). The idea of territory emerging from the MI approach is evidently quite different from that of standard industrial economics — where industries come first and create the territory — or of economic geography — where it is, instead, space that comes first. In the MI approach industry and space are instead ontological equal, as the territory has a twofold

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inter-related nature. On the one side, it is the result of the innovation processes; on the other side, it performs different collective tasks in order to foster innovation15. Following this approach, the MI has come to be considered as a collective operator with the main task of reducing uncertainty (Camagni 1991b). In order to function correctly, it has been claimed, the MI needs to encapsulate a crucial dimension, i.e. a coordination mechanism, which harmonises all its tasks (Crevoisier 2001). However, this concept of the MI as a ‘living thing’ gives rise to some questions, because it seems to introduce a deterministic relationship between the firm and the MI. This approach gives the impression that, as far as a firm is located within a MI, it will become an innovative firm with no effort and with no costs. The firm does not seem to participate to the innovation processes, which is played all outside its boundaries. Hence, no connections seem to exist between the MI and the space inside the firm (i.e. its organization).

3.3 The Regional System of Innovation approach (RSI)

The role of the environment in driving the firm dynamics appears more evident in a very recent ‘local’ kind of approach, the regional systems of innovation (RSI). Stemming from the literature on national system of innovation (Freeman 1987, Lundvall 1992, Nelson 1993, Edquist 1997), the RSI approach questions the key elements a region must posses in order to foster innovation. While a RSI has many features in common with a NSI16, it would be however a mistake to consider a RSI as a ‘proto’ of a NSI, just on a smaller scale. Rather, the RSI represents another point of view of the whole system of innovation (Braczyk et al. 1998, Howells 1999, Doloreux 2002). Indeed, from a top-down perspective, the regional

23

governance structures are quite different from the national ones, and from a bottom-up perspective, the qualitative differences are related to the regional internal sets of interactions between firms and organizations (Howells 1999). A regional system therefore becomes a crucial arena for localised learning and tacit know-how sharing, thanks to its institutional fabrics and informal links. The relevance of the RSI for the dynamic capabilities of the firm is thus notable. Given the importance that also the RSI approach attributes to innovation and learning, it might seem that the same approach does not add to the analysis of the dynamic capabilities issue much more than the MI approach17. However, the RSI concept is built up on five constituent elements which make its interpretative power somehow superior: (i) the region, an administrative and political unit with some cultural and historical homogeneity and with some statutory power; (ii) innovation in the neo-Schumpeterian evolutionary approach; (iii) networks, i.e. relationships based on trust, reputation, custom, reciprocity and reliability; (iv) learning processes especially in the sense of institutional learning; (v) interactions driven by formal and informal links and relationships (Cooke 2001). No matter its exact composition, drawing on this conceptual framework the RSI is able to incorporate firms, along with other actors involved in the innovative process, within specific regional contexts, but still keeping the former conceptually ‘independent’ from the latter. Furthermore, unlike the two approaches previously reviewed, in the RSI the internal organization of the firms is explicitly considered, by positively correlating their systemic innovation potential to such elements as trustful labour relations, shop-floor co-operation and a worker welfare orientation (Cooke 2001). To be sure, the RSI approach quite naturally concentrates around the region, as an administrative and cultural unit of analysis.

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Nevertheless, ‘the “cultur” of the region (…) can be divided into the institutional level, the organizational level for firms and the organizational level for governance’ (Cooke 2001: 960), so that the firm organization emerges as relevant too. These and other elements make the present environmental approach less defocalised on the organizational issues of the firm than the previous two. However, a certain environmental bias still remains. Again, there is a lack of analysis about how the RSI influences the firm, which, inevitably, depends on the internal structure and organization of the firm itself. Moreover, the RSI approach, as well as the MI one, concentrates its attention on learning as a collective and socialised process. Yet, both forget to see how the new knowledge, mainly tacit, has different fallouts for different firms. Each firm would use, apply, implement, develop and change the new knowledge in different ways, according to their internal structure. Taking into account these drawbacks, also the RSI does not seem able to encapsulate all the factors that are at stake in dealing with firms’ dynamic capabilities.

3.4 The New Industrial Space approach (NIS)

The California School of Economic Geography developed the new industrial spaces approach around the middle of the 1980s (Storper and Walker 1983, Scott 1988) in order to explain the development of new locational structures of production brought about by the emerging regime of flexible accumulation. According to this approach, the new industries, emerging after technological breaking points, have structures that are independent from older industries and can enjoy a window of location opportunities. Here, the firm is central

25

and seen as an organization with the aim to internalise transaction costs (Coase 1937). Thus, by expanding the transaction cost approach to the firm, the new industrial spaces are seen as complexes of firms organized into networks where the production is a comprehensible organizational structure rooted in both the firm and the market (Scott 1988). Therefore, production is seen as a more complicated phenomenon involving both a single enterprise and the interactive system or networks of socially divided enterprises. This is the only approach, among all those reviewed in this section, which gives much more importance to the firm. The external environment is considered as a typical Porter’s diamond, based on the relational practices between customers and suppliers. Firms are seen as agents seeking to reduce transaction costs through agglomeration and urbanisation economies. Localised industrial agglomerations occurs where these external economies tend to spur continuously out of their variegated production systems and local labour markets. The external environment is also considered because nothing and nobody assure that markets alone can successfully coordinate transactions in an industrial space (Storper 1999). Industrial agglomerations are more likely to be successful when they manage to build an appropriate framework of institutional and collective order, such as industrial technology, labour training, business service associations, innovation networks, cooperative manufacturing structure, local government and land use control (Scott 1992). This approach suffers from the limitation of its basic concept, the transaction cost view of the firm. The new industrial spaces are seen as systems coordinated by institutional and/or business transactions, yet only formal transactions among firms are taken into consideration. The simple explanation that, when external transactions increase firms tend to geographically concentrate in order to reduce transaction costs, seems quite reductive. All

26

informal transactions, which can be explained by neither the market nor the hierarchy, are neglected. Also the external environment is considered only according to its ability to reduce uncertainty and, consequently, transaction costs. This view seems to focus its attention on cost criteria, which, certainly, cannot capture the complexity of an informal organization such as a local system of production. Therefore, the territory is seen as just functional to the cost-cutting strategy and the institutional as well as the historical context of firms are not questioned. This last consideration, along with those made in the previous sections, suggests that sticking to an environmental lens only, however articulated it might be, does not seem enough, as well as it appears insufficient to draw on the organizational lens only. Of course, this does not amount to doubting of the relevance of the this literature per se, but just of its exclusive use in investigating the dynamic capabilities issue. A more ‘complex’ approach appears necessary, but, as the next section will show, its identification is far from automatic.

4. Some concluding remarks and directions for future research

Sticking to one lens only, either ‘organizational’ (Section 2) or ‘environmental’ (Section 3), inevitably entails a partial view of the dynamic capabilities of the firm. Therefore, one might think that using both lenses simultaneously, somehow overlapping them, enables to capture the same capabilities more accurately. A similar exercise appears implicit in an interesting research program, which has recently tried to extend to spatial systems of firms a relational approach of inter-organizational nature (Lipparini 1995, Lipparini and Lorenzoni 1996). The starting point of this last stream of studies is the role that is played by the firms’

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relational set-ups. According to this ‘relational view’, setting-up firm networks, signing-up partnership agreements with other organizations, managing the ensuing relationships, or simply involving (also informally) customers and suppliers in their business operations, would increase the learning capabilities of the firms involved. The dynamic capability of the firm is in fact retained nothing but a ‘relational capability’. The relevance of a relational argument has emerged both from a theoretical and an empirical point of view. From a theoretical perspective, it has become evident that while externalities and spillover effects make firms, operating in local systems of production, relatively more efficient, their dynamics also depend on the organization of the firm itself (Ferrucci and Varaldo 1993, Lipparini and Lorenzoni 1996). Furthermore, the relevance of these theoretical suggestions is confirmed by some recent empirical studies showing how groups of firms and across-firms shareholding are quite pervasive also within local systems of production (Brioschi et al. 2002, 2004). In front of these encouraging theoretical and empirical results, one might wonder whether the combined perspective, which is referred to here, actually allows to overcome the biased-views documented in the previous sections. Unfortunately, a closer look at those aspects does not seem to confirm this suggestion. On the contrary, the retrieval of organizational aspects in the analysis of local production systems seems to occur at the expenses of those tacit and informal elements which are typical of the environmental lens, and which get therefore somehow hidden, if not even lost. First of all, the focus on formal inter-organizational arrangements inevitably entails a peculiar view of the learning process. A local system of production would evolve mainly by developing a system-wide ‘architectural’ knowledge that, intelligently and purposely, combines the ‘component’ knowledge embodied and developed by the relevant individual

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firms. Evidently, such a view neglects that rarely local systems of production draw on a body of production and innovation knowledge that has an explicit and hierarchical nature. On the contrary, if a certain combination of the ‘individual’ knowledge of the firms is possible, it occurs unintentionally, through repetitive trials and errors (Camagni 1991b). A second distortion refers to the actual specification the knowledge creation process finds, once it is set at work within local systems of production. Indeed, such a view just retains those moments of the ‘spiral knowledge model’ (Nonaka 1994), which operate on a codified and explicit kind of knowledge. On the contrary, it filters out those moments that are more intensive of an implicit kind of knowledge. The consideration of these latter stages of the process seems therefore to call for an additional network of relationships on which the present view does not explicitly focus on. Finally this approach seems to presume that, in order to generate knowledge and thus feeding-up the dynamic capabilities process, the interaction among the firms of a system must be deliberately planned and organized. Less explicit forms of interactions are not deemed very powerful in increasing the knowledge stock of the interacting agents (Lipparini 1998). This way of looking at ‘learning-byinteracting’, however, is not entirely satisfactory. As clearly emphasised by Lundvall (1992), the same kind of learning is in fact affected, not only by an organizational kind of distance, but also, and above all, by the degree of proximity that (firm) producers and (firm) users show in economic and in spatial terms. What is more, the relative importance of these different forms of distance varies depending on the content of the interaction themselves. Moreover, learning-by-interacting is actually less formal and organized than what the combined lens to dynamic capabilities envisages. In the light of the previous set of considerations, the evaluation of the organizational

29

analysis of local production systems, although extremely important, cannot be retained fully satisfactory. On the contrary, it seems that the dynamic capabilities process gets examined in an even more partial way. This is not surprising! As it happens in practice, when one just imposes a lens over another, without bothering with their relative convexity, the resulting image is not necessarily more crystalline. Using a different, more appropriate lens in general yields a more accurate view. A more fruitful research line might be, for example, that of analysing the dynamic capabilities of the firm dealing with it as a ‘complex adaptive system’ (Fuller and Moran 2000, 2001, Montresor and Romagnoli 2004). Following such a perspective, the dynamic capabilities of the firm could be seen as its capabilities to undertake a ‘complex’ process of change in two respects. On the one side, the firm needs to have the homeostatic capacity of fine-tuning its capabilities set and its organizational structure with respect to the outer environment, once the environmental signals do not exceed the threshold levels of the former. On the other side, the firm also needs the (truly dynamic) capacity of shifting its boundaries, in order not to be overwhelmed when the environmental pressure becomes excessive18. Conceptualised in this way, the nature of dynamic capabilities is evidently quite different from that of the approaches reviewed so far. First of all, dynamic capabilities apply to the firm as a system of capabilities, rather than to one or another of its constitutive elements (be they routines, competencies, or technology). Their core element is the firm capacity to undertake a complex adaptive process, rather than its ability to implement an organizational kind of learning. In fact, such a capacity is not purely organizational, and merely consisting of an evolution process of its organization in response to changing

30

patterns of the selection mechanism. On the contrary, once the firm dynamics is conceived as a co-evolutionary process, environmental factors become as relevant as organizational ones in explaining dynamic capabilities, thus actually laying a bridge between the two perspectives that have been reviewed. The approach that has been sketched appears to have some important positive implications, which make it promising and worthwhile pursuing. First of all, firms, which populate a technological system, are typically treated as ‘evolutionary’ in their nature (Nelson and Winter 1982), and this has in turn at least two crucial implications. On the one hand, their learning patterns are informed by the variety generation mechanisms, which are centred on their organizational routines, thus calling for an organizational analysis of their dynamic capabilities. On the other hand, their ‘evolution’ is co-determined (along with the previous mechanism) by the selection process that the market forces operate on them, thus calling for an environmental analysis of their dynamic capabilities. A second important implication has to do with the fact that, following a system perspective, the dynamics of the firm (and of the relative capabilities) cannot be considered in isolation from the set of actors and relationships of which a technological system is made up of. Not only because do firms need an institutional set-up and an economic structure to carry out their business activities, but also, and above all, because they learn (and innovate) by interacting with other firms and actors of the technological system (Lundvall 1992). This means that what is learnt by firms is inevitably shaped by the relations, typically of informal nature, they develop within the institutional set-up underpinning the system itself. An environmental kind of analysis is thus necessary in this last respect. Furthermore, the learning process of the firm is also influenced by those interactions, typically of formal nature, firms deliberately establish with

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others in building up ‘inter-organizational platforms’ for the generation and diffusion of collective learning. Accordingly, an organizational (to be sure, inter-organizational) approach to dynamic capabilities turns out to be useful once again. A third implication concerns the opportunity to deal with dynamic capabilities by retaining elements of territorial nature. Indeed, the relationships that innervate a system occur both through ‘immaterial’ and ‘material’ kinds of networks. While the former are conducive of codified bits of knowledge, whose diffusion does not require (to be effective) spatial proximity between knowledge (innovation) producers and users, such a kind of closeness is instead essential in the spreading of tacit bits of knowledge, whose ‘embodied’ diffusion benefits from the location in a common territory. Accordingly, while the former kind of network can be strategically planned — and thus organizationally investigated — the latter provides ‘local’ systems of innovation (and production) with a special advantage in ‘socialising’ and ‘externalising’ their organizational knowledge (Nonaka 1994) — thus invoking an environmental/spatial kind of analysis.

Acknowledgment: a previous version of this paper has been presented at the PRIN2003 Workshop on “Dynamic capabilities, organizations and human resources: theories and empirical evidences”, Ferrara (Italy), 28th May 2003. The authors are grateful to the participants for their useful comments and suggestions. Usual caveats apply.

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Table 1 — The main approaches to dynamic capabilities Strategic management

Technology

Organization

Evolutionary

What are dynamic capabilities?

Higher-level strategic capabilities (competitive advantage)

Technological capabilities (organizational competences to overcome inertia)

Capabilities to create organizational knowledge (renew managerial cognition)

A learned collective activity (intentional routines)

What do they apply to?

Lower-level strategic capabilities/resources (competitive advantage)

Technology (i.e. technological knowledge, skills, know-how, recursive activities)

Organizational knowledge (managerial cognition)

Operational routines (quasi-automatic routines)

Organizational learning combined with strategic considerations

Organizational learning from an organization theory perspective

Cognitive learning from an evolutionary viewpoint (variationselection-retention)

Organizational learning from a Which is their core strategic point of view (competitive element? advantage)

How is the firm conceived?

How is the firm environment dealt with?

A set of resources and capabilities whose integration/combination is a static factor

A technical system of resources with An organization in which individual respect to which technological and collective knowledge interact integration is dominant

An industry characterized by An aseptic (strategic like) diamond competitive relationships and with a with which the firm is integrated in special focus on external (formal) formal terms (competitors, suppliers technology integration and consumer and consumers) integration

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A set of organizations interacting (mainly) on a formal basis (interorganizational learning)

A set of organizational routines and capabilities

A system of institutions which operate in a socio-political context with a territorial specification

Table 2 — Main features of the different local production system approaches Industrial District

Milieu Innovateur

Regional System of Innovation

New Industrial Spaces

Research agenda

Why do firms tend to concentrate in some geographically bounded areas?

Why do some places innovate more than others?

Why do some regions innovate more than others?

Why do new industrial spaces emerge?

The core feature

“Embeddedness”

Innovation

Institutions

Agglomeration and urbanisation economies

Community of people and population of firms

Firms, institutions, organisations, research and training institutions, etc.

Firms and institutions

Firms with economies of scale and scope

Inter-firm and inter-personal relations

local synergy created by the relationships between all local actors

Relations between firms and institutions

Formal relationships among firms

Social organisation

Active: task to foster innovation Passive: result of the innovative processes

Administrative defined region

Porter’s diamond

Maintenance of a homogeneous system of values

Coordination of all forces of the territory

Supporting innovative activities of firms

Homogeneous evolutionary firms

Homogeneous evolutionary firms

Homogeneous evolutionary firms

The players

Core of the innovation dynamic

Type of territory

Main task

Firms

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Reduction of transaction costs

Transaction-cost approach to the firm

Notes: 1

For a critical position of dynamic capabilities as a source of competitive advantage see Eisenhardt and Martin

2000. 2

Routines being the most acclaimed challenger.

3

Of course, the meaning of the term ‘capabilities’ would deserve, per se, a deeper exploration. However, it is

not the aim of this paper to engage in such an arduous exercise, while it is recognised that a sort of change of status of the concept has happened: from ‘a label on a black box’ to ‘a label on a more transparent box — which can be seen to have other boxes inside it’ (Dosi et al. 2000: 4). 4

Briefly and roughly, ceteris paribus, established incumbent firms would dominate entrepreneurial entrants in

front of incremental innovations, leaving the older technology a viable substitute for the new. In such a case the former would in fact have an incentive to extend their market power to a new generation of technology by pre-empting the latter’s entry (Gilbert and Newberry 1982). But when an innovations is radical, the reverse holds. The incumbents’ incentive to invest in it will be in fact attenuated by their fear of increasing the probability of cannibalising their existing rents (Reinganum 1983). 5

Once again in short, the organizational ‘attributes’ of the incumbents might guarantee them an advantage

over the entrants when an innovation, no matter whether incremental or radical, is ‘competence enhancing’. However, the same attributes turn into source of inertia and inefficiency for them when an innovation, even technologically incremental, is ‘competence destroying’, making the research productivity of the entrants superior (Henderson 1993). 6

Unlike the classical Porter analysis (1980), relating the competitive advantage of the firm to its position in a

certain sector, such a strategic management approach refers to the firm possession of resources, which are rare and difficult to imitate and replicate. For a critical survey of this ‘resource-based-view’ of strategic management see Foss (1997). 7

A different argument is however proposed by Eisenhardt and Martin (2000), who claim that dynamic

capabilities cannot be a source of sustainable competitive advantage. Although typically valuable and rare,

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dynamic capabilities would be for them ‘equifinal’, and hence neither inimitable nor immobile. 8

In this last account, in particular, the ‘dynamic capability’ of the firm is explicitly defined as operating on

such a chain, making it the shorter — i.e. with a superior ‘dynamic performance’ — the more ‘consistently’ the firm responds to its technological turbulence (Iansiti and Clark 1994: 561). 9

To be sure, in Iansiti and Clark’s framework (1994), such a capacity is paralleled to an ‘internal’ integration

capacity. Such a capacity is retained crucial in assisting the implementation of a new concept, and has to do with the establishment of proper organizational structures and management practices. See also Iansiti (1992, 1995). 10

‘Organization’ rather than ‘organizational’ is here used on purpose, to distinguish this specific point of view

from the ‘organizational’ view that instead encompasses all the approaches that are reviewed in this section. 11

Such items as ‘benchmarking’ and ‘best practices’ transfer among firms in fact implement this relational idea

in several management fields, first and above all, in ‘knowledge management’ (Cole 1999, California Management Review, Spring 1998, special issue). 12

Indeed, by engaging in those activities through which implicit knowledge is made more meaningful

(articulation), and by translating it into codified tools, such as blueprints and files (codification), firms ‘produce an improved understanding of the new and changing action-performance links and therefore result in adaptive adjustments to the existing sets of routines or in recognition of the need for more fundamental change’ (Zollo and Winter 1999: 14) 13

Original results instead emerge. That learning might lead the firms to different retention costs and thus to

two different change trajectories, or that search costs might preclude a laggard firm from catching up with an industry leader, are just two of them (Zott 2002). 14

This system of values ‘constitutes one of the preliminary requirements for the development of a district, and

one of the essential conditions of its reproduction’ (Becattini 1990: 39). Information and knowledge flow among people who can trust each other in fact reduce transaction costs and opportunistic behaviour and enhance the creation of new knowledge. 15

‘The territory should not be considered as something given a priori but rather the consequence of a

construction process (termed ‘constructed territory’), a result of the organizational strategies of the players and

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of the collective learning phenomena’ (Maillat 1995: 159). 16

First of all, they are both based on an integrated system where not only the elements but the relationships

between them are crucial. Secondly, they both give a central role to institutions in enhancing and supporting innovative activities. Finally, they both accept an evolutionary way of thinking about innovation and technological change. 17

A certain overlapping between the two approaches is also suggested by the relevant terminology, such as

when the RSI is defined as the place where ‘firms and other organisations are systematically engaged in interactive learning through an institutional milieu characterised by embeddedness’ (Cooke et al. 1998: 1581). 18

For an extensive discussion of this argument see Leoncini et al. (2004).

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