627

Markets and organizations as coherent

systems of innovation
Mario Amendola a and Jean-Luc Gaffard *,b
’ Uniuersifyof Rome, “La Sapienza “, Via Andrea Cesalpino. 00161 Rome, Italy
’ University of Nice - Sophia Antipolk, and CNRS - LA TAPSES. Ar>enue Albert Einstein, 06560 Valbonne, France

Finai version received May 1993

The firm, its tasks and the way in which it relates to the
market appear in a different light with respect to the standard
theory. within the perspective of a process of innovation
interpreted as a creation of resources. The main problem with
a similar process - a learning process which essentially con-
sists of the structuring of new and totally original productive
options - is to make it viable. This implies that markets and
organizations should not be looked at as distinct institutions
whose respective efficiency must be tested with respect to a
problem of allocation of given resources, but rather consid-
ered as a system whose coherence depends on being able to
render a process of creation of new specific resources viable.
1. Introduction
A clear understanding of the nature and the
characteristics of the innovation process calis for
a different image of the firm, and a different
interpretation of its task, with respect to the
standard theory. In particular, this task appears
as that of making viable a process of change that
comes essentially down to a creation of resources.
This process, a process of learning and struc-
turing of altogether new productive options, im-
plies redefining intra and inter relations that make
the firm change its configuration and articulation
in a context that gets itself modified and rede-
fined together with the firm. In this light, markets
and organizations do not appear as distinct insti-
* Corresponding author: CNRS-LATAPSES, Avenue Albert
Einstein, 06560 Valbonne, France.
Research Policy 23 (1994) 627-635
North-Holland
tutions whose respective efficiency must be tested
with respect to a problem of allocation of given
resources, but rather as a system whose coher-
ence depends on the ability to make a process of
creation of new specific resources viable.
Sections 1 and 2 focus on the intrinsic time
dimension of innovation interpreted as a process
of creation of resources, and on its implications.
In particular, the appearance of a finance con-
straint and of a human constraint, as the result of
the distortion in productive capacity brought
about by the breaking of an equilibrium configu-
ration, is stressed. The role of the firm in releas-
ing these constraints, the main aspect of the
problem of the viability of the innovation process,
is analyzed in section 3, while section 4, in the
same perspective, proposes the interpretation of
the relation between markets and organizations
mentioned above. Finally, section 5 presents some
conjectures as to the viability of an innovation
process in relation to two polar cases of innova-
tion systems.
2. The time dimension of innovation
Innovation has an intrinsic time dimension.
This clearly emerges when innovation is rightly
interpreted as the breaking of a regime, be it a
circular flow, a steady-state, or else, which brings
about a distortion of productive capacity and
hence implies the appearance of a lapse of time,
during which the costs of productive activity can-
not be covered by the proceeds from current
production.

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628 M. Amendola and J. L. Gaffard / Muskets and orgunizations

This time dimension has been systematically possible to portray innovation as the adoption in
ignored by economic theory. The most important production of advances (in processes or in prod-
consequence is that technology, in the dominant ucts) brought about previously and independently
view, has been essentially dissociated from pro- by specific teams (R&D departments, engineer-
duction, as in the representations in terms of ing laboratories), physically and intellectually sep-
production functions or technology matrixes. In arated from the manufacturing site. In the same
these and similar models, technology appears in way, once production has been carried out, an
fact as a specific solution (with its own physical external demand is called in to absorb the new
counterpart, the productive capacity embodying output, or the greater output at a lower cost, thus
it) to a particular problem, where both the prob- obtained.
lem (namely the given output to be obtained) and This image, today, is gradually shading off as
its solution (how to obtain it) are defined inde- the result both of deep structural and organiza-
pendently of the production process actualiy car- tional modifications and of a better understand-
ried out. Technology is thus defined in general ing of the way innovation takes place. In sectors
and abstract terms, namefy in terms of technical related to the technologies which are experienc-
coefficients. These are themselves expressed in ing the most dramatic advances, but not only in
general terms, that is, in terms of generic re- them, production is carried out more and more
sources which exist in their own right and can be by the research groups themselves, along with the
combined in different proportions to shape dif- development of the know-how. Interaction of pro-
ferent kinds of production processes. Technical ject teams with manufacturing engineers and with
progress, on the other hand, is the appearance of market personnel is becoming the most typical
a superior solution (where ‘superior’ boils down feature of production processes. Growing interac-
to less inputs for the required output) to the tions between activities, characterized by retroac-
given problem, whether it involves a change in tions along the innovative chain, imply that the
the combination of resources or not. Accordingly, borders between them can hardly be traced and
innovation is reduced to the adoption/diffusion the activities themselves hardly recognized. The
in production of a superior technique, thus de- chain-link model suggested by Kline and Rosen-
fined. berg [131 clearly stresses this point. On the other
In this perspective, the focus is not so much on hand, interactions also concern horizontal and
production as a process (with its essential time verticat relations with other firms (upward suppli-
articulation) as on the productive configuration ers and downward users), in a perspective that
(productive capacity), which is the (physical) ex- also blurs the borders between the firm and its
pression of a particular way to solve a certain environment, as these are continuously redefined
problem. In the same way, the analysis of techni- while the process of change goes on.
cal progress does not deal with the process In this context, generic inputs and, in particu-
through which a change in technology comes lar, a generic labour force, play a less and less
about, but with the rcsuIts of this change, that is, relevant role. Both the definition of the charac-
with the characteristics of the new productive teristics of the process of production and its ef-
configuration (compared to those of the old one) fective articulation in time and in a changing
and with the implications of its adoption for the environment, often take place while the process
economy. Even if this analytical framework may, itself is being carried out. This, as we shall see,
in the past, have proved useful for dealing with a points to a specialization process and hence to
certain industrial world and its changes? it is the focus on specific resources (specialized infor-
doubtful whether this is any longer the case. mation, particular skills and qualifications.. . ).
The image of the process of production (and This increasing integration of the process of
the associated vision of advances in technology) production, and of production itself, in the envi-
to which it refers, is in fact that of a linear ronment takes widely different forms. Thus, in
process made up of a succession of separate and particular, the trend towards a personalization of
not interacting activities: research and develop- production in response to a more and more spe-
ment, manufacturing, marketing of the products. cific and complex demand, implies that the de-
The sequential ordering of these phases makes it mand itself tends to become a thorough input of
 M. Amendola and J.L. Gaffard / Markets and organizations 629

the process of production: as is more and more learning process for the human resource involved
frequently the case, when the customer takes part in it, which necessarily takes place over time. This
in the specification and the design of the product also determines the actual articulation of the
required and/or in the research of the solution process of production and hence the way it gets
to (or even in the very definition of) his produc- integrated in(to>? the (also changing) environ-
tive problem. ment.
The image of a process of production that The time dimension of the phenomenon of
consists in operating a given productive capacity innovation then comes clearly to light in this
to transform generic inputs into finished goods in different perspective. This stressed in the first
order to meet the requirements of an external place the problem that productive capacity must
demand, thus gives way to an activity of research, be built before it can be made use of: a problem
co-ordination and more often through creation, that has been mostly dealt with by cancelling it.
of the ingredients more suited to finding a solu- Different assumptions (concerning the nature of
tion to production problems (and hence to satisfy- the process of production, its organization, the
ing requirements) that often arise within the pro- characteristics of the commodities involved.. . >
cess itself. The essence of the process of produc- and reference to particular analytical contexts
tion, therefore, is no longer embodied in devices (like stationary states and the likes, in which
and equipment, but lies in the characteristics of symmetric relations among variables prevail) do
the specific inputs involved, which contribute to the trick by making a synchronic representation
defining the profile of the process and its effec- of production possible. This guarantees that in
tive articulation while getting themselves modi- the most important equilibrium models inputs
fied contextually. and output are analytically, and from an account-
ing viewpoint, contemporaneous, so that there is
always an output against which costs can be set
3. Creation of resources versus allocation of re- and a current productive activity out of which
sources they can be financed.
This is no longer possible when innovation is
What matters, however, is not so much a dif- interpreted as the breaking of a regime which
ferent definition of the process of production as brings back the articulation in time of the phase
the different interpretation of technology that of construction and that of utilisation of produc-
looking at production in a different perspective tive capacity as an essential aspect of the process
suggests, and the implications of this for the of production. In fact, when we are dealing with
analysis of innovation. innovation we are considering a process of con-
Firstly technology is no longer dissociated from struction of new forms of production, just
production. Innovation, in fact, actually takes sketched out at the outset, which will only take
place through production and is interpreted as a on precise definition along the way and therefore
process by which new productive options are implies the appearance of an output (in some
shaped, rather than as the simple adoption of sense new) only at the end of it. Thus, while this
some way given techniques. We are thus con- process is going on, production can no longer be
fronted with an essentially different problem that synchronised, with the consequence that in each
calls for an analytical approach suited to it. given period costs are actually, and analytically,
The first step in this direction is to consider dissociated from receipts. They acquire thus the
the relevant features of a process of innovation of nature of ‘sunk’ costs [71 that can only be recov-
this kind. Its integration in the environment and ered after a lapse of time: which implies the
the importance acquired in it by specific re- appearance of a financial constraint, already
sources - machines, specialized equipment and, stressed by Schumpeter [161 when discussing the
even more relevant, specific information and par- role of credit in innovation.
ticular skills and qualifications-have already As a matter of fact in this context, as Hicks
been mentioned. What must be stressed, how- ([lo], pp. 116-119) has pointed out, each particu-
ever, is that the specific character of these re- lar investment (i.e. the investment expenditure of
sources is itself acquired through a process, a each period of time) belongs to a bundle of
630 M. Amendola and J.L. Gaffard / Markets and organizations
investments characterised by complementarity
over time. It can then happen that a single invest-
ment does not increase the discounted net differ-
ence between proceeds and costs, but we shall
have to go the whole length of time of the invest-
ment project for it ‘to pay for itself’ (as the result
of an increase in the range of productive options).
Thus it is quite clear that, in the investment
decision making, the innovative firm is concerned
rather with “developing routines to deal with
learning and option value” ([14], p. 48) than with
the standard discounted cash flow criterion.
However, even if at the end the gain from
realising the whole innovative project outweighs
its cost, sunk costs are likely to appear on the way
and hence a financial constraint arises. This con-
straint can be made less stringent by adequate
policy measures, which can help to cope with the
liquidity problem raised by the time articulation
of the innovation process. This opens the impor-
tant chapter of the monetary aspects of the pro-
cess of innovation and, as we shall see, stresses
the essential role of the firm in dealing with this
kind of problem.
The crucial character of the time dimension of
the process of innovation is also pointed out by
the role of human resources, not only those in-
volved in research activities, in this process. This
appears in fact more and more as a process of
enrichment of the human resources which can
only take place sequentialIy in time, while experi-
menting and carrying on new productive options.
Thus, in the same way as physical productive
capacity (machines) the human resource acquires
a specific character through a process: it must be
shaped before it can be utilised in new forms.
However, the time articulation of this specifica-
tion process does not imply only the appearance
of a financial constraint, as with ‘machines’. We
are in fact no longer dealing with a generic labour
input, available for use in all sorts of productions,
but with a resource which undergoes particular
specification processes. Another constraint, a hu-
man resource constraint, must therefore neces-
sarily appear whenever a new productive problem
is considered to which the existing skills are hardly
or only partially suited. And this is a constraint
that no policy can clear away, but will only gradu-
ally be released in time as learning, which is
related to the new productive option, takes place
while this option is structured and developed.
The process through which specific resources
acquire and embody particular characteristics and
skills, is then clearly not in the nature of an
allocation but in that of a thorough creation of
resources. This creation, as previously stated, is
essentially a learning process that is related, how-
ever, not only to the particular productive option
actually being defined (and hence resulting in a
given productive capacity, with the specific physi-
cal assets, forms of organization and skills and
qualifications of the labour input that it implies),
but also, and at the same time, to the abstract
capacity of conceiving and implementing new
productive options in general (and hence result-
ing in an enrichment of the potential creativeness
of the human resource>.
Reference to specific resources is certainly not
new. However, as already mentioned, we can look
at the specific character of resources in two dif-
ferent ways. We can focus on the particular fea-
tures of the physical assets and the skills and
qualifications of the labour force that charac-
terise a given productive configuration: which is
what we do when, in the standard theory, we
consider the firm, fully identified with the pro-
duction process, as a simple link between the
output currently produced and inputs entirely
specialised to it. Or we can stress the potential
capability of devising and implementing other
productive options besides the one actually being
developed, a capability which is brought about by
the learning process and which makes the existing
resources appear in a way ‘in excess’, as already
pointed out by Penrose [15] and more recently
underlined by Teece [Ml. ’ Current output, and
the productive capacity behind it, is then just the
way in which at a given moment the firm makes
partial use of its resources. ’
It is this second aspect, of course, that is
relevant when we are dealing with innovation
’ This is clearly not the same thing as slack resources (inven-
tories, excess capacity) built up by the firm as a means to
adapt to uncertainty due to an exogenously changing envi-
ronment, that is, as a means to be flexible in the passive
sense of being able to ‘respond’ to oncoming uncertain
events. Resources in excess as we have just defined them
are instead the expression of an active flexibility which
consists in the capacity of creating new and different op-
tions.
* This, as we shall see in a moment, also leads to a different
definition of the firm.
 M. Amendola and J.L. Gaffard / Markets and organizarions
interpreted as creation of new productive op-
tions. While, in fact, specificity referred to the
attributes of a particular productive, configura-
tion points to the difficulty of redeploying re-
sources outside the given productive option. 3
When it is interpreted as the result of a process
bringing about resources ‘in excess’ as we have
defined them, it highlights instead the possibility
of shifting these resources to different uses and,
in particular, to the structuring of new productive
options. 4 Furthermore, this makes the existence
of resources ‘in excess’ the necessary condition
for processes of change to be undertaken.
4. The firm and its task
In conclusion, focus on the time dimension of
the innovation process implies that any attempt
to model this process must take into account both
the essential monetary aspect of the process itself
and the crucial role that specific resources, and,
in particular, the human resource, play in it. This
goes much beyond simply considering the inter
temporal complementarities of the production
process.
Production interpreted as a sequential process
in time by which productive options come about
appears, in fact, as just stressed, as a learning
process that results in a creation of resources.
Changes in inputs and in output make it no
longer possible to define a production function in
general and abstract terms, and the dual cost
function obtained from an optimisation process
over a given production set. Costs appear then in
a different light and raise a different problem.
The outstanding character of the production pro-
cess as we now interpret it, in fact, is that inputs
come before output in an essential way. Costs
cannot be set against current output and are
dissociated from proceeds: in a process of change
what happens in each period, and not what hap-
pens over the whole sequence of periods, comes
3 That is, to ‘the degree to which assets are redeployed to
alternative uses and by alternative users without sacrifice of
productive value’ ([14], p. 142).
4 This implies that while in an ex-post perspective both physi-
cal assets and labour inputs can be put on the same level,
human resources alone can be considered as resources ‘in
excess’ in an ex ante perspective.
631
into light, This points to a problem of ‘sunk costs’
in the form of a lag between the time profile of
output (proceeds) and that of inputs fexpendi-
ture) as the result of the crucial time dimension
of the process of change. As a matter of fact,
specific assets always imply sunk costs. The prob-
lem that these raise, however, in the context
envisaged, is other than the usual problem of how
to appropriate the quasi-rents which are the
return of sunk investments, and it reflects the
different perspective from which we look at the
specific character of resources. Our focus, in fact,
is not on this specific character in itself, and
hence on how specificity is going to be rewarded,
but on the process by which new (specific) re-
sources are created. How to deal with the sunk
costs implied by this process is what now matters.
The standard efficiency problem, choice of the
optimal allocation that minimises costs, is no
longer relevant: as a matter of fact, as we have
just seen, it is a problem that cannot even be
properly defined. ’
This also implies a different definition of the
firm and of its task. In this context, in fact, the
firm cannot be identified with a production func-
tion defined by the technolo~, as in the standard
theory. Technology is the outcome of a process
which must be organised and carried out: organi-
zation leads technology. The task of the firm is
then still co-ordination; no longer, though, in the
sense of allocating given resources, but in that of
organising the process of change so as to make it
viable. This is a task for which the firm as an
organization is particularly suited. While the
problem of distributing the return of sunk invest-
ments can in fact be solved by the market or by
particular contractual agreements, dealing with
the sunk costs implied by a change interpreted as
a learning process requires establishing a wide
range of co-operative relationships over time:
not only internally, but also, as we shall see,
between different firms, between firms and banks,
and so on.
’ Not only production and cost function cannot be specified:
the mere presence of resources ‘in excess’-that is, re-
sources whose tasks (and the relative transactions) cannot
be fuily specified but which are a necessary condition for
the firm to be able to undertake a process of change,
prevents the firm itself from being efficient in the short
term.
632 M. Amendola and J.L. Gaffard / Markets and organizations

This different image of the firm, associated of allocation of resources. In the different per-
with a different interpretation of production, also spective proposed here, instead, markets and or-
implies a different relationship with the environ- ganizations are not distinct institutions. ’ They
ment. As long as we keep looking in an ex-post must rather be considered together, as a coherent
perspective at a firm whose boundaries are de- (or not) economic system that makes (or does not
fined by the technology and which must relate to make) viable a creation of new specific resources.
a given market to carry out its allocative task, we In other words, from substitutes in a process of
stick to the idea of environment as an exogenous allocation they become complements in a process
constraint. But when we move the attention to a of creation of resources.
process of change that the firm itself must organ- A system of innovation (be it a firm, a group of
ise, and that involves learning and structuring firms, or else) is characterised by a coherent
anew, the environment necessarily becomes a organizational design, that is, by some combina-
strategic variable, to be moulded according to tion between forms of co-ordination (horizontal
and in function of the strategy pursued [l]. or hierarchical) and incentive modes (market ori-
In conclusion, we move from the conventional ented contracts or rank hierarchies) [5]. How to
‘constraints to decisions’ model of mainstream make an innovation system viable is a problem
economics towards a ‘constraints-decisions-con- whose solution implies the building up of a satis-
straints’ model in which the environment is modi- factory set of complementarities (via co-ordina-
fied in response to the oncoming events. This tion and incentive modes) among internal as well
model points to an image of the firm that over- as external factors, which become specific re-
comes both the distinction between a micro and a sources of the transformation process [l]. How-
macro definition and that between the firm itself ever, this solution is never unique: different com-
and its environment. Organising and implement- binations of co-ordination forms and incentive
ing a process of change implies in fact at the modes may correspond to several efficient sys-
same time redefining intra and inter relationships tems. 9 Small changes in the relevant factors, as
which make the firm change its configuration and we shall see, may involve, in fact, a different
articulation within a context that gets itself modi- articulation over time of the sequence “con-
fied and redefined together with the firm. ’ straints-decisions-constraints” (which is the
backbone of an innovation process), thus deter-
mining a new profile of the process itself.
5. Markets and organizations Considering markets and organizations to-
gether is certainly not new in the literature.
The real problem to which the theory of the Kaldor [11,12] has directed the attention to this
firm must be able to give an answer then, is how point. In his growth theory he focuses on dynamic
cooperative or non co-operative intra and inter increasing returns and on the role of merchants
firms relations make a process of change viable, in “cumulative causation”, that is, in transmitting
not what are the boundaries between firms and the expansion from one sector to another. In this
markets as the Coasian tradition suggests. In this analysis the size of markets is not exogenous: it
tradition markets and organizations are strictly depends on the organization of the firm (i.e. on
defined in terms of their own transaction costs 7 the division of labour) and, more fundamentally,
and the analysis comes to a comparison of their
respective efficiency with reference to a problem
’ In this perspective ‘production’ is at the centre of the stage,
and much more so as it is interpreted as ‘creation’. In this
’ The expression ‘within a context’ appears then rather inap- case we cannot retain the standard viewpoint. In fact, “. as
propriate as the boundaries between the context itself and soon as firms are elaborated to become more than simple
the firm shade off during the process of change, to reappear nodes in a network of transactions, to be producers-trans-
at the end of it (if these processes may be reckoned to have formers of “factors” into products (and much more when
an end). they are considered as transformers of the factors themselces,
’ “The economic world of the neo classical textbooks is a italics added) difficult and important questions arise for the
world of transactions.. . A fundamental feature of the new theory” [17, p. 261.
institutional economics is that it retains the centrality of ’ ‘Efficiency’ in the sense stressed here, that is, in relation to
markets and exchanges” [17, p. 261. the viability of a process of change.
 M. Amendola and J.L. Gajfard / Markets and orgunizations
on the articulation between this organization and
that of the market itself. Growth based on in-
creasing returns (which are the result of a greater
division of labour) becomes cumulative when the
market works in such a way that the intermedi-
aries (the merchants) are Ied to piIe up stocks.
This theoretical approach, which focuses on
the way markets are organised, breaks with the
traditional division between micro and macro
analysis. What matters is not the optimising be-
haviour of individual agents, but the working of
markets in view of, in our parlance, making the
process of change viabfe. rr3
A similar radical departure from the tradi-
tional approach can be found in Hicks [lo] who
conceives of two ways in which the markets work.
In the first case, most of the manufactured goods
are half-finished goods and they are traded on
competitive wholesalers’ markets. In the second
case, goods become much more various, which
implies intermediaries (merchants) who act as the
manufacturers’ agents. From the one economy to
the other the productive organization changes, as
there is a sort of vertical integration between
manufacturers and wholesalers, and simultane-
ously a diversified market emerges which has a
tendency to be a fix-price market.
interaction of markets and organizations, and
their st~cturing as a coherent system in view of
the viability of processes of economic change,
especialfy af innovation, sketch, therefore, the
framework for a theory of the firm seen as the
main actor of a process of creation of new re-
sources.
6. Coherent innovation systems
The viability of a process of change, as we
have stressed, depends on the possibility of re-
ieasing at the right moment the financial and the
human resource constraints. Different market/
” In particular, Kaldor I121 distinguishes between two stages
of development, characterized mainly by different defini-
tions of the manufacturers as ‘price takers’ or ‘price mak-
ers’, which in fact refers to different modes of articutation
between markets and organizations. From one stage to the
folfowing, both organizational forms and the way markets
work change; but in both cases markets and organizations
perform together the common task of bringing about new
specific resources.
633
organization modes, at the basis of firms’ perfor-
mances, need therefore to be tested in this sense
to verify whether or not they are apt to make a
process of change viable.
In what follows we shall make some conjec-
tures about the ways in which different systems
affect the interaction between the financial and
the human resource constraint over the process
of change. To set the stage for the analysis we
need, in the first place, a representation of pro-
duction that makes it possible to exhibit situa-
tions in which inputs come before output in an
essential way and hence costs can be dissociated
in time from proceeds. The Neo-Austrian model
[8,9], which portrays the production process as a
scheme for transforming ‘in time’ a flow of
fprimary) labour inputs into a flow of final out-
put, and considers exphcitfg a phase of eonstruc-
tion and (following it) a phase of utihsation of
fixed capital goods, which are thus internal to the
particular process within which they are pro-
duced -provides a convenient framework. As a
matter of fact, full vertical integration makes it
possible to focus on the inter-temporal comple-
mentarity of production and the unilateral depen-
dence of successive events on the previous ones
that come to light in a process of change.
The consequences of the breaking of an equi-
librium configuration can then be brought to hght:
first of all the distortion in the age structure of
productive capacity which implies a lag between
the time profile of proceeds and that of expendi-
ture and hence the appearance of a financial
constraint. I1
The ~~trodu~t~on of learning (and hence the
consideration of the rate of specific human re-
sources) in this model @I, completes the picture,
by coupling the financial constraint with a human
I1 In a Neo-Austrian model the structure of productive capac-
ity shown by the number of elementary production pro-
cesses of different age carried on, enters both the cost and
the proceeds functions of a firm but in a different way. AII
processes, whether in the construction or in the utilization
phase, are considered in the cost function, while only the
processes already in the phase of utilization are taken into
account in the proceeds function. This different spccifica-
tion does not show in equilibriums where a synchronic
representation of production is possible, but it reappears
out of equilibrium, stressing the existence of costs not
covered by current production and hence requiring addi-
tional financial resources.
634 M. Amendola and J, L. Ga&wd / Markets and organizations

resource constraint which is likely to appear span of time, this would make things even worse.
whenever innovative production processes arc The excess demand for some or all types of
undertaken, that impIy considering new produc- labour l3 would push up wages determined
tion problems to which existing skills and capabil- through spot market contracting and this coufd
ities are hardly or only partially suited. further enhance the existing financial constraint.
The activity of the firm in organising a process A subsequent decrease in wages brought about by
of change concerns both internal relations (with a fall in labour demand as the result of a worsen-
the employees) and external relations (with the ing of the financial position would not help. As a
external sources of finance-banks, private matter of fact ffuctuations in wages stir fluctua-
lenders, financial intermediaries-and with other tions in investment i4 that result in stronger dis-
firms). Two polar cases will be singled out in this tortions of productive capacity, growing sunk costs
context, in line with the analysis proposed by and hence an even greater need for additional
Aoki 14-61. ” One case is characterised by a financial resources. Dealing with the finance con-
structureless labour market, where wages are de- straint appears then as the most important prob-
termined by spot market contracting, a market- lem in the case of an ‘unorganised market’.
oriented financia1 system, and non co-operative With organised markets for labour and finance
firm to firm relationships (in particular, between and co-operative relations between firms, instead,
firms and their subcontractors). The other, on the the human resource constraint is likely to prevail
contrary, by a somewhat institutionally restrained and hence sustaining the learning process is
iabour market, a bank-oriented financial system, paramount in view of the viability of the process
and co-operative firm to firm relationships. of change. As a matter of fact, institutional rela-
In the first case, labelled by Hicks [lo] as the tions tend to ease the financial constraint brought
case of an ‘unorganised market’, a financial con- about by innovative choices. Consider for simplic-
straint generally prevails over the human re- ity the extreme case of the Main Bank in the
source constraint as the result of the breaking of Japanese experience. ” This is explicitly pledged
an equilibrium configuration. This is mainly so to a behaviour aimed at dealing with the sunk
because of the behaviour of the external sources costs incurred by innovative firms, which consists
of finance (shareholders, bondholders, banks, fi- in counteracting falls, or increases beyond a cer-
nancial intermediaries. . . ): a behaviour aimed at tain point (that might be risky) in the growth rate.
spreading risks so as to maximise portfolios val- On the other hand, if wages do not fluctuate in
ues, not at taking care of the sunk costs of inno- response to excesses in demand or supply of
vative firms. This imphes a redistribution of fi- Iabour but are institutionally restrained, e.g. are
nancial assets towards the firm when things go linked to the growth of the proceeds of the firm,
well, proceeds accrue and external financing is the wage bill will go up or down with the internal
less needed, and away from the firm when in- financial resources. This prevents strong fluctua-
stead it would be most needed, because of a tions in the resources available for investments,
(temporary) shrinking of the liquidity brought with the result of a smaller distortion in produc-
about by current productive activity when innova- tive capacity, Iess sunk costs and a reduced need
tion is under way. The consequence is a strength- for external financing.
ening of the financial constraint originally result- Focus on learning processes shifts the atten-
ing from the distortion in the age structure of tion to firm to firm relations which, by the way,
productive capacity. may also help to release further the financial
If, on the other hand, the human resource constraint. Co-operation, whether in the form of
constraint should prevail for a more or less short
Most likely when the situation of the labour market reflects
I2 However, although the stage and the ingredients are quite what is going on in the firms.
similar, we take up an entirely different problem. While in Increases in the wage bill reduce the resources available
fact Aoki still focuses on the image of a firm solving for investment: of course, when a tight financial situation
problems of allocation of resources in an equilibrium per- exists, as in the case considered.
spective, we consider firms dealing with the problem of The Main Bank is the manager of a loan consortium which
making viable an out of equilibrium process of creation of closely monitors the activity of a firm and is responsible for
new resources. rescue operations when these are required.
 M. Amendola and J.L. Gaffard / Markets and organizations 635

subcontracting or else, is in fact a way to share References

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