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Organisations, Innovation and Complexity: New Perspectives on the Knowledge Economy

9^th-10^th September 2004
University of Manchester, Manchester,
England, UK.

How Does The Firm Manage Internal Diversity? The Role of Internal Selection

Nadia Jacoby

jacoby@univ-paris1.fr

University Paris,
MATISSE-ISYS, France

Abstract

Product diversification and process innovation are sources of growth for the firm. The focus on the way firms succeed or fail with R&D is essential to understand the way they grow. The emergence of new ideas within the firm should be regulated. Internal selection is precisely the mechanism by which the firm controls internal diversity. Internal selection acts in particular on R&D projects according to several selection criteria, specific to the firm and to the projects under selection. Then the firm growth partially results from the internal selection process, since the firm entrance on new markets results from new product development.

This paper presents an evolutionary micro-simulation model developed in the Nelson & Winter (1982) tradition. This model allows a better understanding of the mechanisms according to which internal diversity is regulated, it highlights the impact of internal selection on firms performances.

Firms are engaged in production and R&D activities; the model includes only innovative firms. They carry out two kinds of research and development. The R&D for product diversification leads to the creation of a new production activity whereas R&D for process innovation allows to improve the productivity level of the production process. Firms don’t run any imitation process.

The diversification projects are estimated through their expected revenue per unit of capital, computed thanks to the expected productivity level of the project and the current price on the target market. When the internal selection process "stops" the project, the firm pursues the R&D activity if the available resources are sufficient. On the other side, the firm selects the process innovation according to its expected productivity level. Those estimations are endogenously computed.

Product diversification directly contributes to the growth of the firm, whereas process innovation contributes to the improvement of the productivity level of firm activities. Firms enter a new market only if the expected profitability of the R&D project at stake enforces the selection criteria. Entry is conditional upon the success of R&D.

Impact of internal selection processes on the performances of the firm is measured through several indicators like market shares, average profit level, average productivity level and firm survival rate.

Different types of selection mechanisms are explored so different configurations are run. Initially each of the 120 firms produces 12 different homogenous goods and makes the two types of R&D defined above. Firms are engaged in entry and exit processes. On the demand side of the model, there are 36 markets answering 36 different demands.

Finally, two main results are obtained:

a relation between internal selection, firm survival and diversification is clearly established. The stricter the internal selection, the stronger the diversification. And diversification appears as a necessary condition for the survival of the firms.
we confirm the results obtained by Klepper (1996, 2002) in term of firm survival rates and shakeout trends.

References

Cohendet P., Llerena P., Marengo L., (1998), « Theory of the Firm in an Evolutionary Perspective : a critical assessment », Second Annual Conference of International Society for New Institutional Economics, Paris, September 18-19.

Dosi G., Nelson R., Winter S., (2000), Nature on dynamics of organizational capabilities, Oxford University Press, New York.

Klepper S., (2002), “Firm survival and the evolution of oligopoly”, RAND Journal of Economics, vol.33, n°1, Spring, pp.37-61

Klepper S., (1996), “Entry, Exit, Growth, and Innovation over the Product Life Cycle”, The American Economic Review, vol.86, n°3, pp.562-583.

Llerena P, Oltra V., (2000), “Diversity of innovative strategy as a source of technological performance”, DRUID Working Paper, n°00-1, 26 pages.

Metcalfe S., Boden M., (1993), "Paradigms, strategies and the evolutionary basis of technological competition", in Swann (ed.) New technologies and the firm: innovation and competition, Routledge, pp. 83-102.

Nelson R., Winter S., (1982), An evolutionary Theory of Economic Change, Harvard University Press, Cambridge (MA).

Rose-Anderssen C., Allen P.M., Tsinopoulos C., McCarthy I., (2004), "Innovation in Manufacturing as an Evolutionary Complex System", Technovation, forthcoming.

Warglien M., (1995), « Hierarchical Selection and Organizational Adaptation », Industrial and Corporate Change Vol. 4, n°1 pp. 161-186.

Winter S., (1984), “Schumpeterian Competition in Alternative Technological Regimes”, Journal of Economic Behavior and Organization, vol.5, pp.287-320.

Yildizoglu M., (2001), “Modeling Adaptive Learning: R&D Strategies in the Model of Nelson & Winter (1982)”, http://yildizoglu.montesquieu.u-bordeaux.fr, 14 pages.

Key words : Diversity, Entry & Exit, Innovation, Internal Selection, Micro-Simulation

JEL classification : C60, D21, L1, L2

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