Kirsten Foss

The Entrepreneurial Organization of Heterogeneous Capital

Transaction cost, property rights, and resource-based approaches to the firm assume that assets, both tangible and intangible, are heterogeneous. Arranging these assets to minimize contractual hazards, to provide efficient investment incentives, or to exploit competitive advantage is conceived as the prime task of economic organization. None of these approaches, however, is based on a systematic theory of capital heterogeneity. In this paper we outline the approach to capital developed by the Austrian school of economics and show how Austrian capital theory provides a natural bridge between theory of entrepreneurship and the theory of the firm. We refine Austrian capital theory by defining capital heterogeneity in terms of subjectively perceived attributes, the functions, characteristics, and uses of capital assets. Such attributes are not given, but have to be created or discovered by means of entrepreneurial action. Conceiving entrepreneurship as the organization of heterogeneous capital provides new insights into the emergence, boundaries, and internal organization of the firm, and suggests testable implications about how entrepreneurship is manifested.

The next step in the evolution of the RBV: Integration with transaction cost economics

This essay addresses the role of transaction cost economics (TCE) in advancing the resource-based view. In particular, it is argued that TCE has the potential to remedy a number of weak spots in the RBV, such as the absence of attention in the RBV to the interaction between value creation and value appropriation. This and other weak spots in the RBV stem from not taking account of transaction costs to a sufficient extent. Integrating TCE with the RBV adds new insight into the analysis of sustained competitive advantage.

Original and Derived Judgment: An Entrepreneurial Theory of Economic Organization

Recent work links entrepreneurship to the economic theory of firm using the Knightian concept of entrepreneurship as judgment. When judgment is complementary to other assets, and these assets or their services are traded in well-functioning markets, it makes sense for entrepreneurs to hire labor and own assets. The entrepreneur’s role, then, is to arrange or organize the human and capital assets under his control. We extend this Knightian concept of the firm by developing a theory of delegation under Knightian uncertainty. What we call original judgment belongs exclusively to owners, but owners may delegate a wide range of decision rights to subordinates, who exercise derived judgment. We call these employees “proxy-entrepreneurs,” and ask how the firm’s organizational structure — its formal and informal systems of rewards and punishments, rules for settling disputes and renegotiating agreements, means of evaluating performance, and so on — can be designed to encourage forms of proxy-entrepreneurship that increase firm value while discouraging actions that destroy value. Building on key ideas from the

Assets, Attributes and Ownership

The notion of full asset ownership is important in economics, for example, in recent work on the boundaries of the firm. Much of this work has been taken up with the issue why it matters who owns an asset. However, recognizing that assets have multiple attributes, and that these may be subject to capture in a world of positive measurement and enforcement costs, implies that the notion of full asset ownership is problematic. New property rights theorists sidestep these issues by implicitly assuming that residual rights of control are perfectly enforced (i.e. full asset ownership obtains). We discuss the notion of property rights and ownership in a setting characterized by positive costs of enforcement, and suggest that in such a setting, the new property rights model is a part of a more overarching perspective, which also includes older contributions to property rights economics.

Theoretical isolation in contract theory: suppressing margins and entrepreneurship

We discuss contract theory from a combined Austrian/new institutional view. In the latter view, the world is seen as shot through with ignorance and transaction costs, but, as a tendency, entrepreneurial activity responds to the problems caused by these. All modelling must critically reflect this. This ontological commitment is contrasted to various isolations characteristic of contract theory, specifically the modelling strategy of introducing often ad hoc and unexplained constraints that suppress margins and possibilities of entrepreneurial actions that would be open to real-world decision-makers. We illustrate this by means of, for example, the treatment of asymmetric information under complete contracting and the notion of control rights under incomplete contracting.

TRANSACTION COSTS AND TECHNOLOGICAL DEVELOPMENT : THE CASE OF THE DANISH FRUIT AND VEGETABLE INDUSTRY

Abstract It is argued that technological change can be understood in terms of attempts to reduce transaction costs as well as production costs. Two types of paths of technological development are identified: a production cost minimizing path, and a transaction cost minimizing path. The creation of new technological opportunities underlying the path of production-cost-minimizing depends on the emergence of problems of optimizing the performance of products and processing technology. The exploitation of such opportunities may easily be interpreted within a production perspective since the economic consequences would be reduced production cost. The creation of new technological opportunities within the transaction-cost-minimizing path depends on the continual emergence of problems related to the control of variability in product quality or performance. The economic consequence from exploiting such opportunities, however, can only be interpreted in a transaction cost perspective, since the economic benefit is reduced cost of buying a product of a specific quality at a given price. In other words, an exchange (transaction cost) perspective on technological development is useful as a complementary perspective in addition to the conventional production perspective. The theoretical points are continuously illustrated by the case of technological development in the Danish fruit and vegetable industry.

Enhancing Information Usefulness by Line Managers’ Involvement in Cross-Unit Activities

Organization and management scholars have long advocated that efficient use of information is critical for firms to compete successfully in the modern marketplace. This study examines whether the use of managerial cross-unit involvement in an organization enhances managers’ propensity to use useful information provided by a functionally related unit in the organization. Senior line managers in a major global bank participated in our study in which they provided information related to their information processing and assessments of the usefulness of corporate audit information. We analyse the effect of line managers’ prior involvement with Corporate Audit using Throughput Modeling. This model allows us to understand how line managers’ cross-unit involvement influenced the way they process information received from Corporate Audit. Our results show that managers’ cross-unit involvement positively influences their assessment of information from Corporate Audit in a way that influences their propensity to use information from that unit. The results indicate that cross-unit involvement is more than an effective means of transmitting information — it can also be used as a means of building boundary-spanning capabilities in managers.

Organizing Economic Experiments: Property Rights and Firm Organization

Many economists, notably Austrian economists, have argued that the market process is essentially an experimental process. We briefly try to clarify this conceptualization, and then argue that we may understand the firm in much the same light. A basic view of the firm as an experimental entity is derived, drawing on property rights insights.

How Do Economic Crises Impact Firm Boundaries

How economic crises impact the boundaries of firms has been offered virtually no attention in the literature on the theory of the firm. I review the best-known theories of the firm and identify the variables that matter for the explanation of firm boundaries. I then examine how an economic crisis may impact these variables and change efficient firm boundaries. The various theories of the firm have difficulties explaining how firms efficiently adapt their boundaries to such prominent characteristics of economic crisis as declining demand and increased costs of external finance. However, all these theories stress uncertainty as an antecedent of firm organization, and as uncertainty is also an important characteristic of an economic crisis I examine how uncertainty is allowed to play out in the various theories in order to identify what predictions we can derive from the theory regarding changes in efficient firm boundaries as consequence of changes in uncertainty. The analysis suggests that we need to be more precise in describing the nature of the uncertainty that is assumed in the various theories. Moreover, allowing for changes in levels of uncertainty requires that we take the processes of boundary changes into account in the theory of firm boundaries.

Coasian and modern property rights economics

Laying the foundations of property rights economics stands out among Ronald Coases many seminal contributions. This approach had an impact on a number of fields in economics in, particularly, the 1960s and 1970s. The modern body of property rights economics mainly originates in the work Oliver Hart and is quite different in style, scope, and implications from the original property rights economics of Coase, Demsetz, Alchian, Cheung, Umbeck, Barzel, etc. Based on our earlier work on the subject (Foss and Foss, 2001), we argue that the change from Mark I to Mark II property rights economics led to a substantial narrowing of the scope of property rights economics, somewhat akin to a Kuhnian loss of content. In particular, Mark II property rights economics make strong assumptions concerning the definition and enforcement of ownership rights made which lead to many real life institutions and governance arrangements being excluded from consideration, and a much more narrow focus than that of the rich institutional research program initiated by Coase and his followers.