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The Theory of innovative enterprise

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The purpose of this paper is to outline a theory of innovative enterprise that provides microeconomic foundations for understanding the evolving relation between industrial (technological, market, and competitive) conditions that result in innovation and the institutional (financial, employment, and regulatory) conditions that support an innovative economy. Critical to building this link is an understanding of the organizational conditions of the business enterprise, and the ways in which these organizational conditions interact with institutional conditions across industrial activities to create the "social conditions of innovative enterprise". Insights into the social conditions of innovative enterprise derive from comparative-historical analysis of advanced economic development brought up to the present. Firstly, the author shows how, by transforming the standard neoclassical theory of the optimizing firm, we can 1) expose the fundamental problem of the "monopoly model" which, throughout the twentieth century and to the present, has underpinned the belief in the theory of the "perfect market" economy as a system of resource allocation that yields superior economic performance, and 2) clarify the need for a theory of the organizational, as well as industrial, conditions for innovative enterprise. Secondly, he then performs a similar theoretical transformation on the transaction-cost theory of the firm, as developed by Oliver Williamson, in which organizational conditions are deemed to be central but which, like the standard neoclassical theory of the firm, lacks a theory of innovative enterprise. On the basis of these theoretical transformations, the author argues that a theory of innovative enterprise must be able to comprehend the interaction of cognitive, behavioral, and strategic conditions -- that is, organizational conditions -- in the transformation of technological and market -- or industrial conditions. Thirdly, he shall consider the relation of the theory of innovative enterprise thus outlined to the "dynamic capabilities" perspective on the enterprise developed by US innovation economists during the 1990s. Having origins in the Williamsonian framework that stresses the importance of organizational conditions, dynamic capabilities theory has sought to combine findings from resource-based and evolutionary theories of the firm with empirical research, much of it industry-specific or enterprise-specific, in the fields of strategic management and the management of innovation. While he is in agreement with the emphasis of dynamic capabilities theory on the centrality of the organization of the innovation process, he argues that the dynamic capabilities approach has thus far ignored critical issues of strategic control within the innovative enterprise and the relation of strategic control to the organizational learning processes that are central to the development of an enterprise's core competences. Without an analysis of the integration of strategic control and organizational learning, a theory of the firm cannot address the central issues of the governance of innovative enterprise.

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