Understanding Innovative Enterprise - Business History Around the World

What factors really determine the growth of a nation's economy? How are the real costs and benefits of generating growth actually shared amongst its citizens? These queries are as old as the study of economics itself. But orthodox modern economics has largely failed to provide comprehensive answers. As Distinguished Research Professor William Lazonick explains in this chapter of 'Business History Around the World', this intellectual deficiency is "neither inevitable nor accidental".

by William Lazonick
Last Updated: 23 Jul 2013

What determines the growth of an economy? How are the costs and benefits of generating growth actually shared amongst its citizens? These questions are as old as the study of economics itself. But modern economics has fundamentally failed in providing cogent, comprehensive answers.

In the view of Distinguished Research Professor William Lazonick, this intellectual deficiency is "neither inevitable nor accidental". Despite the 19th-century legacy of classical economics that focused on how economies develop, the intellectual commitments of 20th-century neoclassical economists have been to "individualistic ideology and ahistorical methodology". As a result, the neoclassicals failed to construct a theory of economic development that can comprehend the historical experiences of economic growth and income distribution in what are currently the most developed countries. As Lazonick explains, neoclassical economics has defined the scope and method of economics in ways that place the process of economic development beyond its analytical purview.

Lazonick advocates an analytical approach that is capable of integrating theory and history. What he terms an "historical-transformation methodology is "an approach that stands in sharp contrast to the constrained optimization methodology that conventional economists use to analyze the economy". To this end, the author focuses on the role of "innovative enterprise" in the development of the economy. Lazonick maintains that the innovative enterprise must be conceived as a social organisation that is integral to the processes of change that result in economic development. The investment strategy, organisational structure and productive capabilities of the innovative enterprise reflect to some extent the institutional environment in which it functions, although over the longer run enterprises that have grown powerful through innovation reshape the institutional environment in their own images.

Drawing on past research that he had conducted jointly with former INSEAD professor Mary O'Sullivan, Lazonick outlines what he terms the "social conditions of innovative enterprise" (SCIE) perspective. These social conditions involve complex interactions among industrial sectors, business organisations, and national institutions. The perspective seeks to reveal the dynamic interaction between business enterprises and the institutional environments in which they operate. SCIE also endeavours to help one to understand the implications of this interaction for the transformation of technological, market, and competitive conditions in different types of industrial activity. In applying SCIE to historical-transformation scenarios, Lazonick points to the rise of managerial enterprise, replacing proprietary enterprise, in enabling nations such as Germany, the United States, and Japan to emerge as global economic leaders in the 20th century.

In this context, the author assesses the applicability to understanding innovative enterprise today of the seminal works of Edith Penrose and Alfred Chandler on the evolution of the managerial corporation in the United States to the 1950s. Rooted as they are in time and place, the contributions Of Penrose and Chandler are not immediately applicable to the present. Nevertheless, they provide indispensable starting points for understanding the ongoing evolution of innovative enterprise both in the United States and elsewhere over the past half century. For example, while Penrose's theory emphasized the importance of the organizational integration of administrative, technical and professional personnel into the managerial structure of the modern corporation, it provided little guidance for understanding the erosion of cohesive managerial organisation in major US industrial corporations that occurred in the 1980s and 1990s, entailing as it did the devaluation of what were once highly productive and well-remunerated "human assets".

Lazonick concludes by cautioning that understanding innovative enterprise requires a break with the theory of the market economy with its view of the firm as a passive respondent to technological, market, and competitive conditions. Indeed, he argues that "an understanding of the process of economic development and the role of the business enterprise in it will require an intellectual revolution in economics - a transformation ... of the market to which economists sell their findings and the technologies that they use to obtain results".

Cambridge University Press, 2003

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