Evolutionary and competence-based theories of the fi rm

Around the 1980’s the critiques about contract theories of the fi rm were getting more intense, and consequently the so-called evolutionary and competence-based theories of the fi rm were born. Although forming less homogeneous groups, these theories focus basically on diff erent questions: they primarily wanted to explain the heterogeneity of fi rms; they were eager to know why fi rms diff er. In the present work I examine the critical remarks of the contract theories and the newly developed – earlier as well as present-day – theories of the major schools of economic thought.


INTRODUCTION
Th e contract theories of the fi rm compare the appearance of transaction costs in the state of equilibrium, in case of diff erent coordination structures and consider the structure of the lowest costs to be the most effi cient -introducing a static model as a matter of fact.Even Williamson admitted that examining fi rms in rapid innovation is a much more complicated task, than what his model can handle: the contract theories are not suitable for examining cases of defi cient equilibrium.Th e evolutionary branch of the theory of the fi rm rejects the effi ciency, equilibrium and analysis frame of the contract theories and emphasizes dynamic aspects and the role of 'real' uncertainty, which does not allow to calculate the expected values.Doing so, it places the fi rm in a dynamically changing, disequilibrial environment and considers it as an organization that has competences.

THE CRITIQUE OF CONTRACT THEORIES
Another one of the most important arguments against the contract theories is the completely diff erent approach of the role of the individual.As Hodgson (2002Hodgson ( /1998 1 :55-56) points out: there are representative, rational individuals with the same world model in Williamson's theory, who accept a contract or reject it and enter another contract due to the transaction costs of the economic environment, while in case of the evolutionary theories trust and loyalty (also) determine the human decision.
Th e contract theories assume that production costs are given and they do not change depending on different ways of coordination and transaction.According to Hodgson's arguments (2002Hodgson's arguments ( /1998:58) :58) it is regular that production -just as machines and tools do -depends on human activity,2 given that the willingness and motivation of workers to learn depend on the production organization and the property rights.Th at is the eff ort of the contract theories only to minimalize the transaction costs does not stand its ground.
Th erefore the contract theories and the evolutionary competence-based approach are considerably different, yet many authors try to fuse these two together in their works.Th e acceptability of hybrid explanations originates from the complex nature of the economic reality and from the fact that more causative mechanisms aff ect at the same time.Th e works of e.g.Richard Langlois and David Teece represent the approaches that are based on more theories, in which they emphasize the human learning and the improvement of competences and 'dynamic skills', while they accept the role of transaction costs to some extent.Th eir argument is that the fi rm does not come into existence because of the transaction costs, but because there are several possible constructions, when introducing very eff ective (market-like) incentives may destroy co-operation and learning (Hodgson 2002(Hodgson /1998:52):52).Figure 1 shows the connection between the theories.

EVOLUTIONARY AND COMPETENCEBASED THEORIES OF THE FIRM
Th e evolutionary and competence-based theory of the fi rm focuses on the problem of innovation, learning and steady competitive advantage and surveys the fi rm in the light of its own history.Doing so, the theory actually remarks upon that signifi cant change that culminates in the real world in the establishment of learning and teaching fi rms as a consequence of information society.It exchanges the rational actions to the regular actions of the competence-based theory of the fi rm that include human limits and confl icts.Th e rules evolve in an evolutionary process.Th us the evolutionary and competence-based theory of the fi rm is a dynamic theory, where the evolution of the fi rms is infl uenced by endogenous (inside-theorganization) factors (Hámori-Kapás 2002:15), and consequently it completely rejects the optimalizing (profi t-maximalizing) assumption of the neoclassical school of thought.It is not a unifi ed theory: it involves a wide range of methods.In the following chapters I review diff erent ideas that contribute to this theory of the fi rm probably the most signifi cantly.

THE RESOURCEBASED THEORY
One of the great bases of the theory is a new paradigm brought into focus by strategic management, namely the resource-based theory, by which we mean diverging, often rivalling opinions of many articles that have been published in the last 15 years in this topic.However the foundation of each idea is that fi rms cannot perform every activity equally well, their resources and skills are heterogeneous, and the effi ciency of each resource is also diff erent.
Th e competitive advantage depends on the diff erent skills of fi rms as well as the diff erent availability of fi rms to resources.Possessing resources that themselves or the way they are utilized cannot be imitated, the fi rm will get into a more advantageous position.Th e competitive advantage lasts until one of the competitors will be able to build this resource and/or the way it is utilized up in its own operation.So the resource market is imperfect and this imperfection leads to attaining rents.
Th e resource-based theory suggests building on and utilizing resources that will supposedly serve as permanent rents.Th ese are the so-called strategic resources, which have the following characteristics (Figure 2).If a resource meets every criteria mentioned above, then it is: − Of social character in that it is a result of business processes and interactions, and thus is embedded in the business environment, − Complex, − Implicit.
Th e strategic resources are the results of the organizational learning and knowledge, consequently the past and the history of the organization play a great role in their development.Th ey are fi rm-specifi c and are not linked to individuals, that is why they cannot be transferred easily from one fi rm to another.Th e development of these basic competences 3 -which form the bases of competitive advantage and permanent rents -is due to such resources (Kapás 2000a:38).Th e strategy has to declare what the fi rm has to do in order to possess such in-imitable strategic resources.
So the purport of the fi rm is a new combination of the factors of production and the economic functions (Székely 1995:2), which is practically an advanced form of the classical thought of Penrose (1959:24), that is the fi rm is a combination of factors of production, where the allocation between the diff erent fi elds of utilization is determined by administrative decisions.Penrose adds: the fi rm needs reserves to function stably (i.e. to handle uncertainty), which can be fi nancial, resource of labour reserves (Penrose 1959:94).
Consequently fi rms exist because they are able to coordinate the collective learning process more effi ciently than market organizations (Foss 2002(Foss /1996:161):161).Accordingly its boundary extends until the utilization of the resource is more effi cient inside the fi rm, than through the market mechanism.

THE COMPETENCE THEORY
Organizational competences can be traced back to individual competences, but they do not equal the simple sum of individual competences, because not only individual competences, but the way they are connected aff ect them.Th is means that the organizational competence is of social character and is embodied in the organizational structure.Competence is the only business input that possesses the above-mentioned characteristics, this is why it can be considered as the most important resource.According to one of the creators of the theory, Pelikan (1988), competence is an economic information, on which the transferability of the other scarce resources depends, but which itself cannot be transferred or be measured reliably.Carlsson-Eliasson adds (1991, cited by Kapás 2000a:40) that competence is the ability of the fi rm to exploit as well as to identify and expand its production potentials.Th e competences of the fi rm depend especially on the competences of the leader and eventually of the owners.
Th e scarcity of competence as a resource is a view of primary importance, because it is the eventual reason why fi rms cannot optimalize.According to the contract theories introduced in the previous chapter maximalizing was possible, because the already given competences and the ability to obtain new competences are not considered to be scarce.
Th e knowledge mentioned in the competence theory can only be obtained through 'learning-by-doing' and cannot be transferred, consequently the knowledge of the fi rm is identifi ed by implicit knowledge. 3According to Langlois and Robertson (1995:7), cited by Hodgson (2002Hodgson ( /1998:75):75), firms and other organizations consist of two differentiated, but changing parts.The first part, the inner core consists of individual, constitutional co-operating elements, which are inimitable and invulnerable.The remaining part of the organization consists of additional abilities, which are vulnerable and are not unique.The role of the inner core is the same as that of transaction costs or contracts in the contractual approach.(Kocsis-Szabó 2000:71) Th e implicit knowledge is the strategic tool -and here's the connection to the resource-based theory -that makes attaining the permanent rents possible.
It gives more emphasis to learning-by-doing, as the source of internal growth.Emphasizing learning and growth means, that -contrary to static and equilibrium-based approaches -the individual itself is developing.Due to the individual and situation-specifi c nature of knowledge, says Hodgson (2002Hodgson ( /1998:73):73), not every activity inside the fi rm can be contracted.

THE EVOLUTIONARY THEORY
According to the evolutionary theory the market competition creates an environment, which is similar to the natural selection: always the stronger individual survives.In this uncertain environment the behaviour of the actors is not predictable, but the evolutionary process ensures, that the signs of development can be observed in the aggregate (Hodgson 2002(Hodgson /1998:67):67).
Th e idea of natural selection was popular for a long time among talents, like Alfred Marshall and Th orstein Veblen, but after their death it fell into oblivion until co-authors Nelson and Winter brought it into focus again.According to them the problems of the real world are too complicated to be understood, so fi rms cannot maximalize among the single alternatives.Th is is why they use simple rules (routines) (Nelson-Winter 1982:35).Th us the basis of the evolutionary theory is bounded rationality, which is handled diff erently from Williamson's view, because it is not maximalizing, but a kind of compliance to rules is deduced from it.So the routine contains the regular, predictable aspects of the behaviour of the fi rm, by which the authors actually refer to the abilities (competences) of the fi rm (Kapás 2000a:42).According to Winter these routines are more or less permanent characteristics of the fi rm, which may help in preserving abilities and other forms of knowledge and which have the ability to imitate things to a certain degree by means of copying, mobility of individuals, receiving etc. Th at is routines can change as an eff ect of the leader's actions: in case the owners are content they sustain the routines (genetic stability), otherwise they search for better solutions (internal mutation mechanism).Th at is routines play the same role as genes in biological evolution theory (Nelson-Winter 1982:14).
With this three key concepts: routines (genes), searching (mutation) and selection, the theory actually introduces evolutionary dynamism in the theory of the fi rm and describes the industrial growth.
Th e theory exceeds the contract theories, in that it considers the fi rm as the bearer of a very special production knowledge at a given time (and not only as an answer given to an information problem), which often possesses characteristics that distinguish it from seemingly similar fi rms of the same industry (Nelson-Winter 1982:175).Such a fi rm is a unit that is able to obtain new routines, that is it is able to learn.Th e mechanisms that ensure the sustenance of the fi rm develop and change as a result of interactions between individuals that make up the fi rm, and the fi rm and its environment.Accordingly the fi rm is necessary, because it is the only possible organizational environment that ensures its sustenance and the adaptation to the environment (Solt 2003:113).
Th e theory -in spite of its obvious faults -contains many novelties and advantages.It brings focus on: -Irreversibility in time and continuous events, -Long-term development, contrary to short-term corrections, -Qualitative and quantitative changes, -Variations and diversity, -Disequilibrial and equilibrial situations, and -Systematic and permanent possible failure and through this -Non-optimalized behaviour (Hodgson 2002(Hodgson /1998:71):71).

THE FIRM, AS AN INFORMATION PROCESSING UNIT
Th e fi rm as an information processing unit theory closely relates to the evolutionary theory, it even extends it with raising bounded rationality from the level of individuals to fi rm level.Th e fi rm cannot remember every piece of information, that is why it codes it into rules (routine) (Kapás 2000a:45).It is also related to the contract theories, because it focuses on fi nding the cost minimalizing, information processing fi rm.It models the ability of the members of the organization of attaining, processing information.It assumes an uncertain, rapidly changing environment, which keeps contracts from being complete.One of the most important tasks of the fi rm in this environment is to collect and process information continuously.Th is information monitoring and processing ability is a rare and valuable resource.Th e fi rm has the advantage over the market of being able to collect and process information cheaper due to bounded rationality.
Th e fi rm is actually a communication network, aiming at minimalizing the costs of obtaining information and communicating.According to the model, communication is costly, because it takes time for members to perceive the information sent by others.

SUMMARY
Th e evolutionary and competence-based theory of the fi rm can be defi ned as a combination of the above described theories.So knowledge is the focus of the theory, which is disorganized and implicit.
Th e primary task of the fi rm is to collect and coordinate this disorganized knowledge.Th e fi rm is actually a common knowledge base, and it has an advantage over the market in coordinating this base.Th e cause of the existence of the fi rm is the demand for coordinating the disorganized knowledge and learning, that is the fi rm exists, because it can coordinate more effi ciently than the market.Th e effi ciency of the market lags behind the effi ciency of the fi rm in producing, storing and using the tacit knowledge.So it must be emphasized that the fi rm is not originally above the market, it is able to develop and coordinate abilities cheaper only in certain situations (Langlois 1992, idézi Kapás 1999b:831).
Th e question of the boundaries of the fi rm refers to whether the fi rm performs transactions internally or on the market.Th e question is naturally related to the size of the fi rm, as e.g. if a part of the market transactions become internal, the size of the fi rm increases necessarily.As the fi rm becomes larger, the task of the leader is harder -more and more developed leading competences are required to fulfi l the more complicated tasks.However competence is a scarce resource, that is why the possibility of an effi cient giant fi rm is quite small.
Th e boundaries of the fi rm are shaped by its basic competences, which are aggregated for a long time, are implicit, cannot be transferred to another fi rm and cannot be bought on the market.Th ese abilities determine what the fi rm can perform effi ciently and what the market.If the boundaries of the fi rm are related to the basic competences, a dynamic theory is developed, as the boundaries of the fi rm necessarily change, if the routines of the fi rm change.
According to the theory routine ensures the coherence between the three mechanisms of the organizational structure.Th e incentive system includes the payment and the monitoring system.Th e evolutionary theory of the fi rm lags behind the contract theories in explaining these aspects: it does not consider the problem of divergence of the ownership and management.In the future it has to be built in the theory.
Developing a common knowledge base is a precondition of coordination.It develops as an aggregate of the individual knowledge, but is much more than the simple numeric sum of the individual knowledge.Knowledge is disorganized inside the organization, but it is the task of the management to coordinate the disorganized knowledge of the individuals and form into a knowledge base.
Cognitive features are very important in the evolutionary theory of the fi rm.According to the theory -being dynamic -the cognitive abilities of the fi rm (e.g.cognition, comprehension) are also changing, and learning has a great role in this change.Learning is the process of changing the routines and developing new abilities.