Industrial policy, resource allocation and wealth creation; perspectives and experiences. PETER NOLAN and CHRISTOS PITELIS University of Cambridge Industrial policy, resource allocation and wealth creation; perspectives and experiences. PETER NOLAN and CHRISTOS PITELIS University of Cambridge Judge Business School The New Nature and Essence of the Firm Christos N. Pitelis and David J. Teece ENEF Conference Paris, September, 2009

Page 2 Main Points  Appropiability of returns from perceived advantages, such as innovation and action potential, helps engender organisation, as well as market and eco-system co- creation  Nature, Essence and Objective of Firms inseparable - Firms (organizations) exist because of their superior market co-creation capabilities and for value appropriation

Page 3 Market Failure – Firm Superiority Theories of the Firm - transaction costs / asset specificity (Coase/Williamson) - metering and (self-)monitoring (Alchian and Demsetz) - property rights-incomplete contracting (Grossman, Hart and Moore) - knowledge as a public good (Buckley and Casson) - uncertainty and insurance of the timid against risk (Knight) - co-specialised and complementary assets (Teece) - knowledge protection (Marglin, Liebeskind) - speed and efficiency of intra-firm transfer of tacit knowledge (Teece, Kogut and Zander) - coordination-continuity-learning advantages of firms (Demsetz, Kogut and Zander; Langlois and Robertson) - rivalry reduction-control advantages of firms (Hymer) - knowledge, innovation and productivity - engendered value creation advantages of firms (Penrose/Pitelis and Wahl) - firms better than markets in terms of motivation and enabling of employees (Arrow, Simon)

Page 4 The Nature and Objective of the Firm

Page 5 The Inseparability between Nature, Objective and Essence

Page 6 Market, Value and Price Co-Creation  Appropriability of value necessitates creation of value, as well as prices, which requires markets -Market extension and even creation discussed in IO and entrepreneurship literature  Market co-creation recognizes the social dimension and advantages of value creation - It involves the whole eco-system; such as customers, suppliers, competitors

Page 7 Market Co-creation for Value Appropriation and Dynamic Capabilities (DCs)  DCs in designing and setting up organizations involve identifying, redeploying, orchestrating and leading co- specialized assets, notably human  DCs in market co-creation involve sensing, committing, constructing  DCs in appropriation involve selection and innovation of ‘business models’ and the building of ‘relatively impregnable bases’ - Potential trade-off between DCs in value co-creation and value appropriation that needs to be managed intertemporally

Page 8 Organization, Appropriability and Value  Appropriability requires value capture strategy, of as much as possible co-created value from the members of the organisation, as well as the market and eco-system. - Organisation assists value co-creation, market co-creation (thus valorization), and appropriability through strategy - Markets and value cannot exist/be known a-priori as they are co-created in real time through purposive action - Existing and Created Market Failures can also motivate organisation, but market co-creation and/for value appropriation, is at least as important - Being part of the game helps value appropriation through knowledge, power and even mere recognition

Page 9 Conclusion  Appropriability (objective) engenders organisation (firm) and/for market co-creation (means) that helps co-create social value and prices, for private appropriation -Benefits of organization can also be sanctioned by law (for example, ‘limited liability’) and/or be related to power- monopoly - Market failure relevant, but fails to explain the emergence of markets to start with, and the role of agency, entrepreneurship and organization; unitary explanations of Nature will not do