Wellbeing Economics by Paul Dalziel & Caroline Saunders & Joe Saunders

Author:Paul Dalziel & Caroline Saunders & Joe Saunders
Language: eng
Format: epub
ISBN: 9783319931944
Publisher: Springer International Publishing

Firms and Capabilities

Firms are a key institution in any market economy. At the beginning of 2016, there were 5.5 million private sector businesses in the United Kingdom (Rhodes 2016, p. 5). Of these, 4.2 million were operated by sole proprietors with no employees. This section focuses on the other 1.3 million private sector businesses with at least one employee, which we call firms. The vast majority of firms employed fewer than ten people, but 40 per cent of total employment in all firms was accounted for by 7000 large businesses with at least 250 employees (ibid).

An important question posed initially by Ronald Coase (1937, p. 390) is “why a firm emerges at all in a specialised exchange economy”. Given the strengths of market transactions discussed in the previous section, why are any economic activities managed within firms, rather than all persons being self-employed and all transactions being organised through markets?

Coase’s insight was that market trades have their own transaction costs, including the cost of time needed to discover relevant market prices, negotiate separate contracts, and make allowances for contingencies and risks. Under some circumstances, these transaction costs are avoided “when the direction of resources is dependent on an entrepreneur” within a firm (idem, p. 393).

Coase’s explanation has been developed further, including by Nobel Laureates Oliver Williamson (2010) and Oliver Hart (2017). This research has highlighted other factors giving rise to firms. A firm is better able to invest in assets specifically designed for its chosen outputs, for example, and a firm might reduce the unit costs of production as the scale of its activity increases.

Building on that tradition, David Teece (1982) has created a capability theory of the firm.2 This conceptualises a firm as an ongoing institution that sustains two types of capabilities: operational capabilities, necessary for supplying to market the firm’s chosen outputs; and dynamic capabilities, driving entrepreneurial innovation within the firm (see also Teece et al. 1997). Dynamic capabilities are the more important, reflecting the crucial function of senior management to identify and exploit opportunities (Teece 2017a, p. 698):For applied purposes, dynamic capabilities can usefully be broken down into three primary clusters of activities: (1) identification, development, co-development and assessment of technological opportunities in relationship to customer needs (sensing); (2) mobilization of resources to address needs and opportunities, and to capture value from doing so (seizing); and (3) continued renewal (transforming).

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