A theory of the cultural evolution of the firm: the intra-organizational ecology of memes

The transaction cost and knowledge-based theories of the firm are not mutually contradictory and, in fact, can be considered complementary. They share many of the same assumptions, in particular the assumption that business organizations exist because they offer some economic advantage to members. Conner and Prahalad (1996: 478) go so far as to say that the primary contribution of the knowledge-based view is to round out transaction cost theory by recognizing 'knowledge-based transaction costs'. No matter how modest an advance this may sound, it moves the knowledge-based view several strides closer to the goal, first articulated by Williamson and Ouchi (1981: 347), of drawing upon the insights of organization theory to enhance purely economic theories of the firm. The theory of the firm that this article proposes builds upon the knowledge-based view to bring us still closer to realizing that goal.

Our theory conceptualizes the firm not merely as a knowledge-bearing entity, but as a culture-bearing entity, wherein the concept of culture includes shared knowledge, but also the other modes and forms of shared beliefs, meanings, values, behaviors, language, and symbols in the firm. It is important to emphasize that some elements of culture in the organization will enhance the organization's performance and further the interests of its members; others will not. A descriptive theory of the firm must be able to explain both. We posit a set of mechanisms to explain how organizations evolve as cultures, while avoiding the narrow functionalist assumption that all is for the best in this best of possible worlds. To understand why a cultural theory of the firm, and in particular, a theory of the cultural evolution of the firm, is a necessary move, we need to be specific both about the ways in which the knowledge-based view has advanced beyond the transaction cost perspective and the ways in which it remains captive to economic theories of the firm. The knowledge-based view improves upon transaction cost theory in the way it defines firms, in the fundamental assumptions it makes about organizational behavior, and in the perspective it takes toward firms. In each of these three areas, though, certain limiting commitments of the knowledge-based view prevent it from going as far as it should in leveraging organization theory to provide a satisfactory, fully rounded theory of the firm. After outlining these advantages and limitations, we describe why a theory of the cultural evolution of the firm is well suited to capture the improvements, while overcoming the constraints.

Defining Characteristics of the Firm

The first advantage of the knowledge-based view, at least as expressed by authors such as Kogut and Zander (1992), over transaction cost economics is that it employs a more robust definition of what a firm is and how firms differ from markets. In transaction cost economics, authority relations define the difference between a market and a firm (Coase 1937: 392). The distinction works like this. Imagine actors A and B who desire to form a joint enterprise and are deciding whether to do so in the market or as a firm. In a market, A and B would contract with each other for specified outputs. In a firm, A would employ B, and would have authority to manage the actions of B. It is this assumption of hierarchy as the defining element of a firm that leads Williamson to call his research program 'Markets and Hierarchies'. Where hierarchies differ from markets is in the control they exert. In a market, A and B remain autonomous. In a firm, B fully submits to the control of A, or of the firm more generally.