The Organizational Impact of Technological Change: A Comparative Theory of National Institutional Factors

The organizational literature documents the upheaval that incumbent firms, across numerous industries, often experience when they confront technological change. Much of this work is based on evidence drawn from US firms. A separate literature drawn from institutional economics shows that technologies evolve differently in different countries. This may imply that incumbent and entrant firms in different countries may differ in their response to technological change. In fact, emerging comparative empirical studies of technical change in individual industries suggest that the effect of technical change upon incumbent firms is not always the same in different countries, even within the same industry. In particular, technological shifts that displace US incumbent firms in an industry often do not displace incumbent firms in Japan in the same industry. Explaining these comparative differences requires linking the institutional economics literature to the organizational literature on innovation. In particular, the ability of startup firms to exploit the opportunities of technological change accounts, in part, for the displacement of incumbent firms. Their ability in turn depends on the institutional environment, which influences the organizational constraints that incumbents and startups face in attracting people, capital, and customers. This paper offers a parsimonious theory of national institutional factors that promote or inhibit the formation of startup firms in the US and Japan. Three factors are proposed: the technical labor market, the venture capital market, and the structure of buyer-supplier ties. Complementarities between these factors cause them to work as a system, while their differences elevate or reduce the level of incentive constraints and appropriability constraints acting on incumbent and startup firms respectively. As a result, incumbents might be displaced in an industry in one country, while incumbent firms in the same industry in another country might persevere, due to the presence or absence of startup firms. This suggests that there may be no single best way to organize for innovation in different institutional settings; rather, firms must seek to exploit the virtues of their environment, even as they act to mitigate the hazards it poses.