Thursday, 28 July 2016

Peter Klein on entrepreneurs and firms

In a recent article Peter Klein talks about Why entrepreneurs need firms, and the theory of the firm needs entrepreneurship theory. He writes,
And yet, there is much less work in this tradition explaining the emergence of the firm. Where do firms come from? Most are established by entrepreneurs, and indeed, the most common definition of “entrepreneur” for academics and practitioners is “one who forms a new business organization.” One would then think that entrepreneurship theory would be part of the theory of the firm. Put differently, entrepreneurs are individuals who establish, operate, reconfigure, dissolve, and otherwise work through firms; hence economic theories of the firm – as well as theories of the firm drawn from psychology, sociology, operations research, and so on – might be considered applications of entrepreneurship theory. Alas, neither is true; for the entrepreneurship field has its own research literature, largely divorced from the literatures on firm organization and firm strategy. The entrepreneurship literature focuses mostly on individuals, not organizations, and on firm creation, not firm operation.
There is much truth in what Klein says. The standard theory of the firm literature looks at three basic questions to do with Why firms exist, What the boundaries of firms are and What determines the internal organisation of firms. What it, by and large, doesn't consider is where firms come from. This is where the role of the entrepreneur is important.

But all is not lost. In Walker (forthcoming) I briefly discuss two recent attempts to integrate the theories of the firms and entrepreneurship, including work by Klein himself. These attempts are Spulber (2009) and Foss and Klein (2012). The Foss and Klein approach to the firm, like that of Spulber but unlike the more standard approaches, emphasises the role of the entrepreneur. Foss and Klein wish to explain the formation of, determination of the boundaries of and the internal organisation of the firm. The things that set Foss and Klein apart from the mainstream are the importance given in their theory to the entrepreneur and they develop their theory utilising a combination of Knightian uncertainty and Austrian capital theory. Spulber seeks to explain why firms exist, how firms are established, and what firms contribute to the economy. He sets out to create an approach to microeconomics in which entrepreneurs, firms, markets, and organisations are all endogenous. An even more recent contribution in this area is Bylund (2015). This paper attempts to explain how firm emerge and the role of firms in the market structure using the productive power of specialisation. The basic idea is that emergence is based on productivity efficiencies developed through technological specialisation. This approach leads an to understanding of the firm's function to the entrepreneur and its internal organisation and capabilities.

The Bylund, Foss and Klein and Spulber contributions open important new lines of inquiry for the theory of the firm since Hamlet really does need the Prince of Denmark.

  • Bylund, P.L. (2015). "Explaining firm emergence: Specialization, transaction costs, and the integration process", Managerial and Decision Economics, 36(4): 221-38.
  • Foss, Nicolai J. and Peter G. Klein (2012). Organizing Entrepreneurial Judgment: A New Approach to the Firm, Cambridge: Cambridge University Press.
  • Spulber, Daniel F. (2009). The Theory of the Firm: Microeconomics with Endogenous Entrepreneurs, Firms, Markets, and Organizations, Cambridge: Cambridge University Press.

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