Wednesday, May 27, 2009

A cognitive theory of the firm

I've been reading A cognitive theory of the firm: learning, governance and dynamic capabilities by Bart Nooteboom*, professor of innovation policy at Tilburg University (with thanks to publishers Edward Elgar for the review copy)

Nooteboom's core question is: what are the sources of innovation in firms? That's an important issue for a lot of people - managers and entrepreneurs, regulators and policy-makers, as well as economists. To address it, Nooteboom looks to concepts of cognition - a broad category of mental and social processes from rational inference and knowledge, through to value judgments and perception. It's an intriguing subject, though this isn't an easy introduction to it.

The main concepts are taken from social cognitive theory, a model of learning in which individuals learn through interactions with and from observation of others. Nooteboom takes a constructivist 'embodied cognition' view, as in the cognitive work of economist Friedrich Hayek, rather than the computational view currently popular in AI-focused cognitive science.

From the economic perspective, the theory draws on Joseph Schumpeter's proposal that innovation comes from novel combinations of resources. As per Hayek, the elements for these innovative combinations emerge from markets: the firm acting as an entrepreneurial vehicle for turning this innovation into marketable products or services, as per Edith Penrose.

The dilemma for innovative companies is thus between exploration and exploitation - whether to concentrate on developing new innovations, or on selling what you've already got. Exploration must derive from exploitation, Nooteboom argues, and be based on observations of how existing techologies are received by the market.

Nooteboom's key idea, also derived from Schumpeter, is that the firm develops a particular cognitive focus which distinguishes it from other firms or agents, and gives it a particular niche in the market. That can apply to one-man firms, but Nooteboom also considers the role of larger organisations in narrowing the cognitive distance between individual managers and employees (the managerial-speak version of this, I guess, would be 'singing from the same hymnsheet').

That's the nub of the theory, which the book sets out in much more detail. Disappointingly, for me at least, the detail is long on the theory but very short on actual practical applications. Over 100 pages pass before there's even a brief real-world example to illustrate what's being talked about. There's a sprinkling of other illustrative examples in later chapters on relationships between firms (including network and cluster effects), and the evolution of firms and industries, which do help illuminate the often abstract-seeming theory. More would have been very welcome.

The book is very much a resource for theorists working in the same area (and, to be fair, primarily intended as such). Getting the most from it will probably require more rather more specialised background knowledge than I've got - although some of the ideas here might prove valuable resources for further research, I suspect the book won't offer much directly to those people working at the sharp end of innovation.

* - intriguingly, Nooteboom is also working on a philosophical tome Transhumanism: How to affirm life and be a good person without help from God; a reply to Nietzsche.

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