The Firm as Social Networks: An Organisational Perspective

This paper offers an organizational perspective on the firm in new economic geographies. It starts with the premise of the firm as a production function in neoclassical economics and a cost minimisation device in transaction cost economics. By pointing out the inadequacy in these mainstream economic perspectives on the firm, I draw upon recent behavioral and managerial theories to develop a relational conception of the firm as social networks in which actors are embedded in ongoing power relations and discursive processes. In further elaborating this relational perspective on the firm as an organisational device, I show how the firm is governed through social relations among different actors, how it is a site of contested ideologies and political representations among these actors, and how space and geographical scales matter in shaping its social construction. Taken together, this organisational perspective aims to shift our research agenda in urban and regional development from promoting the growth of the firm per se to understanding how the firm serves as a relational institution that connects spatially differentiated actors in different places and regions. Introduction S ince Alfred Marshall’s characterisation of the representative firm, the theory of the firm has fascinated generations of economists and, more recently, other social scientists. As Williamson (1990: 1) notes, the theory of the firm is “one of the two key analytical constructs on which microeconomic theory rests (the other being the theory of consumer behavior).” Classical and neoclassical economics view the firm as simply a set of production units responding to competitive initiatives in accordance with the law of Henry Wai-chung Yeung, Ph.D., is an associate professor in economic geography at the Department of Geography, National University of Singapore. He is editor of Economic Geography, Environment and Planning A, and Review of International Political Economy. His email address is [email protected]. An earlier version of this paper was first presented at the Workshop on “ ‘The Firm’ in Economic Geography,” 9–11 March 2000, University of Portsmouth, UK and a research seminar hosted by the Department of Geography, University of Nottingham, UK. Participants at both occasions have offered very generous and helpful comments. I would also like to thank Christian Berndt, Tim Bunnel, Neil Coe, Tom Leinbach, Ann Markusen, Kris Olds, and Päivi Oinas for their very detailed comments and suggestions. The usual disclaimer applies. Received December 2004; revised February 2005 © 2005 Blackwell Publishing, 350 Main Street, Malden MA 02148 US and 9600 Garsington Road, Oxford OX4, 2DQ, UK. diminishing returns. Whereas the market is regarded as the most efficient means of organizing economic activities, the firm is simply seen as “a black box which responds directly to changes in costs and the pressures of the market” (Hodgson 1988: x). The firm converts inputs into outputs according to its production function and market demand. Demsetz (1988: 189; original italics) explains that in neoclassical economics, “the firm is defined, not to approximate the activities of a real firm, preor post-corporate organisation, but as the theoretical institution in which production (for others) takes place.” Arrow (1999: vii; quoted in Williamson 1999: 1089) observes recently that “[a]ny standard economic theory, not just neoclassical, starts from the existence of firms. Usually, the firm is a point or at any rate a black box.” As neoclassical economics is primarily concerned with issues of price equilibrium and optimal distribution of resources, the firm does not occupy an important position in its research agenda. More recent behavioral and managerial theories of the firm, however, have attempted to unpack the firm as a collection of productive resources (Garnsey 1998; Penrose 1995) and alternative governance structures (Williamson 1975, 1985, 1999) organised by managers with different expectations, bounded rationalities, and information matrix. The emergence of such a quasi-contractual approach to the theory of the firm has seriously challenged the neoclassical “black box” conception of the firm. In his classic paper, Coase (1937: 390) argues that “the main reason why it is profitable to establish a firm would seem to be that there is a cost of using the price mechanism.” His work is followed up much later by Williamson (1975, 1985, 1996) and Williamson and Winter (1991) who foreshadow the birth of the “new institutional economics.” Williamson goes one step further to explain the alternative “governance structures” in coordinating economic activities and economizing transaction costs within capitalist economic organisations. In this transaction cost approach, the firm is necessarily seen as “a nexus of treaties” made up of numerous contractual and non-contractual governance structures (Aoki, Gustafsson, and Williamson 1990). The firm becomes an alternative governance structure to the market. The approach is less concerned with the firm as a productive force in the economy than with the firm as an organizing entity in the economy. Given these different developments in the theory of the firm in neoclassical and institutional economics, how then is the firm conceived in economic geography today (see also Barnes 1996; Dicken and Malmberg 2001; Dicken and Thrift 1992; Taylor and Asheim 2001; Yeung 1998a, 2000a, 2001, 2002a)? Reflecting certain general theoretical developments in economics, the “firm” has been a contested analytical category in economic geography. Much neoclassical economic geography takes the firm as a self-contained and homogenous “black box” capable of producing economic outcomes in space. This conception of the firm is clearly evident in the “geography of enterprise” approach that was preoccupied with its locational and behavioral patterns in space. This approach viewed the firm as an unproblematic category. The emergence of a radical approach in the 1970s and 1980s led to a major theoretical and empirical reorientation of research in industrial (economic) geography. This radical literature subsumed the firm under dominant capitalist class relations such that capital’s logic explains the firm’s spatial behavior (see a review in Scott 308 GROWTH AND CHANGE, SUMMER 2005