The Innovating Firm: A Behavioural Theory of Corporate R & D

criticism of the neoclassical and statistical theories discussed in Chapter 3. However, Chapter 2 also develops the concept of hierarchical arrangement, or ord~ring, of R & D subsystems which is of use later in analysing the determinants of basic research activity. Chapter 3 discusses the problems of theory application in conditions of pervasive uncertainty. Three of the approaches discussed-neoclassical economics, decision-making under uncertainty, and behavioural theory-have a common bond in that they were initially developed and applied to problems other than research and development, but each has subsequently been suggested to be applicable to problems of R & D and technological change. A fourth economic approach developed by Penrose (1959) to deal with the growth of firms is also discussed, partly because of its potential application to the area of technological change, but also because it provides useful guidelines for subsequent theory-building, in conjunction with the behavioural theory of the firm. Chapters 2 and 3 together are intended to demonstrate the difficulties of applying received theory to technological change. Criticism is directed to theory application in this specific area and is not intended to be general criticism of the theories as such. It is in this context that Chapter 4 takes a wider look at corporate decision-making and resource allocation, with special reference to the role of technological change in this framework. The typically hierarchical nature of corporate resource allocation is pointed out, and the role of R & D as a specialised and institutionalised function in the modern corporation is argued. It is suggested that corporations must be regarded as open systems 'which maintain themselves through constant commerce with their environment, i.e. a consistent inflow and outflow of energy through permeable boundaries' (Katz and Kahn, 1966, pp. 18-19.) In this book this is interpreted to mean that decision-makers not only react to the corporate environment, but consciously and autonomously act to shape and mould the environment itself. This provides the basis for the development of the framework in Chapter 5. The arguments developed in the previous chapter contribute to the concept of the firm as a hierarchically organised open system in which R & D operates as a specialised function. Part II applies this open system interpretation in the empirical analyses of Chapters 6 to 8 inclusive. Chapter 6 is concerned with accounting for dissimilarities in budgeting conventions adopted by corporations operating under different circumstances in Western Europe and the United States. The evidence of a number of surveys and The Innovating Firm respects open-system theory is not a theory at all; it does not pretend to the specific sequences of cause and effect, the specific hypotheses and tests of hypotheses which are the basic elements of theory. Open-system theory is rather a framework, a meta-theory ' (p. 452). The approach provides a frame of reference within which lower-level hypotheses capable of empirical testing can be generated. The concepts and interpretations of the systems approach provide a perspective and basis for empirical analysis, not a set of ready-made hypotheses. Thus, rejection of a lower-level hypothesis need not imply rejection of the systems approach. This apparent irrefutability of the systems approach in no way invalidates its use. Most theoretical approaches incorporate variables and relationships at higher levels that are not directly observable, but which have operational correlates at lower levels; the relevance or otherwise of the systems approach will be debated on the basis of the performance of lower-level hypotheses. As far as the empirical hypotheses consistent with alternative theoretical approaches are concerned, hypotheses may be similar or conflicting between these different frameworks, or it may be that a hypothesis may have no corresponding or conflicting hypotheses in other approaches. The latter is particularly likely if one approach suggests a rich vein of testable lower-level hypotheses. These possibilities are of particular relevance as far as the regression analysis conducted in Chapter 7 is concerned. Some of the hypotheses may be consistent with the neoclassical theory of the firm, while with others it is difficult to see how they might be developed in a project-based theory of the firm framework. It will be argued that the systems approach must be judged on assessment of the lower-level hypotheses considered as a whole. The regression analysis of Chapter 7 appears to offer a good explanation, not only of the behaviour of R & D at industry levels, but also characteristics of uptake of basic research activity by corporations. Although conventionally it is generally assumed that resource allocation to this latter phenomenon is particularly difficult, if not impossible, to account for in economic analysis, Chapter 7 suggests that this may not be the case. Not all the lower-level hypotheses are supported by the evidence in this particular study, but it will be argued that the general performance of the regression analysis is good. The analysis is therefore intended to provide a useful though partial framework for the analysis of aspects of technological change in the corporation. One area of obvious relevance which is virtually neglected is that of selection of projects and resource allocation within the R & D ## Industrial Research and Development at Project Level in the Modern Corporation The existence of technological change has created numerous theoretical and empirical problems for economists. It directly challenges a basic assumption of neoclassical microeconomics that the state of technology is given; invention alters the production function of firms and/or the types of products produced, and the process by which such development occurs is as yet little understood. Firstly, the generation of radical innovation may involve complex and highly technical issues which are difficult to communicate from scientists and technologists to economists. Secondly, even if the problems of communication between disciplines could be solved, there is little evidence that professional R & D workers could articulate meaningful and useful models of R & D activity, as we hope to demonstrate later in this chapter. The inherent difficulties for model-building in this area are reinforced by the role of R & D as a peripheral industrial activity until relatively recently. Economic analysis has tended to concentrate on areas more amenable to treatment using its sophisticated and quantitatively based techniques, and when research and development (R & D) could no longer be ignored owing to its rapid post-war increase in developed countries, a number of approaches tested and accepted in other areas proved difficult, if not impossible, to apply to R & D work. This will be discussed further in Chapter 3, and specific approaches will be examined in this respect. However, before we can do so, it is necessary to analyse why and how research and development may present particular problems for corporate decision-makers, and this is the purpose of this chapter. With this aim in mind, the prime concern of the present chapter is with the effect of uncertainty on the applicability of rational models and 9 Front Matter....Pages i-xv Front Matter....Pages 1-1 Introduction....Pages 3-8 Industrial Research and Development at Project Level in the Modern Corporation....Pages 9-29 Models of Technological Change in the Firm....Pages 30-57 Industrial Research and Development at Functional Level in the Modern Corporation....Pages 58-84 The Framework....Pages 85-113 Front Matter....Pages 115-115 Budget Decision-Making for Research and Development....Pages 117-125 Distribution of R & D and Basic Research Activity in Industry....Pages 126-186 Rivalry, Learning and Variation in Innovative Activity....Pages 187-205 Technological Change in the Modern Corporation and Implications for the Theory of the Firm....Pages 206-214 Back Matter....Pages 215-266