Organisations, Innovation and Complexity:
New Perspectives on the Knowledge Economy
University of Manchester
9-10th September 2004
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How Does The Firm Manage Internal Diversity? The Role of Internal
Selection
Nadia Jacoby
jacoby@univ-paris1.fr
University Paris,
MATISSE-ISYS, France
Abstract
Product diversification and process innovation are
sources of growth for the firm. The focus on the way firms succeed
or fail with R&D is essential to understand the way they grow.
The emergence of new ideas within the firm should be regulated.
Internal selection is precisely the mechanism by which the firm
controls internal diversity. Internal selection acts in particular
on R&D projects according to several selection criteria, specific
to the firm and to the projects under selection. Then the firm
growth partially results from the internal selection process,
since the firm entrance on new markets results from new product
development.
This paper presents an evolutionary micro-simulation
model developed in the Nelson & Winter (1982) tradition. This
model allows a better understanding of the mechanisms according
to which internal diversity is regulated, it highlights the impact
of internal selection on firms performances.
Firms are engaged in production and R&D activities;
the model includes only innovative firms. They carry out two kinds
of research and development. The R&D for product diversification
leads to the creation of a new production activity whereas R&D
for process innovation allows to improve the productivity level
of the production process. Firms don’t run any imitation
process.
The diversification projects are estimated through
their expected revenue per unit of capital, computed thanks to
the expected productivity level of the project and the current
price on the target market. When the internal selection process
"stops" the project, the firm pursues the R&D activity
if the available resources are sufficient. On the other side,
the firm selects the process innovation according to its expected
productivity level. Those estimations are endogenously computed.
Product diversification directly contributes to
the growth of the firm, whereas process innovation contributes
to the improvement of the productivity level of firm activities.
Firms enter a new market only if the expected profitability of
the R&D project at stake enforces the selection criteria.
Entry is conditional upon the success of R&D.
Impact of internal selection processes on the performances
of the firm is measured through several indicators like market
shares, average profit level, average productivity level and firm
survival rate.
Different types of selection mechanisms are explored
so different configurations are run. Initially each of the 120
firms produces 12 different homogenous goods and makes the two
types of R&D defined above. Firms are engaged in entry and
exit processes. On the demand side of the model, there are 36
markets answering 36 different demands.
Finally, two main results are obtained:
- a relation between internal selection, firm survival and diversification
is clearly established. The stricter the internal selection,
the stronger the diversification. And diversification appears
as a necessary condition for the survival of the firms.
- we confirm the results obtained by Klepper (1996, 2002) in
term of firm survival rates and shakeout trends.
References
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14 pages.
Key words : Diversity, Entry &
Exit, Innovation, Internal Selection, Micro-Simulation
JEL classification : C60, D21,
L1, L2
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