Innovation and institutional change: the transition to a sustainable ...

Theoretical perspectives 33
within firms, between firms, through contracts and contacts, and on markets.
Williamson’s thesis is that when transactions become more uncertain and
asset specific, they are more likely to be produced in-house because choice
of that institutional form leads to most efficient transaction costs.
Williamson has been criticised for treatment of institutions as representing a
mere choice of actors wishing to reduce transaction costs or the “efficient
solution to certain economic problems” (Granovetter, 1985: 488), instead of
taking into account the way transactions take place in a web of social
relations (Granovetter, 1985). Outside the firms this may imply that personal
relationships, friendships, and trust that is built up lowers transaction costs
(drawing on the normative pillar of institutions), while inside the firm a web
of informal relationships may reduce the expected efficiency of hierarchical
decision making (Granovetter, 1985: 502). Following this, Granovetter’s
thesis opposite to Williamson is that pressures towards vertical integration
should be absent in a market where “a stable network of relations mediates
complex transactions and generates standards of behavior between firms”
(Granovetter, 1985: 503). Williamson’s static transaction cost theory is
recently also modified towards a dynamic theory of transactions that
incorporates a more cognitive approach to actor behaviour, focuses on
innovation and learning, and brings in trust next to deceit (Nooteboom,
1999). Particularly relevant is his focus on cognitive scope and his argument
that people and firms need outside source of cognition and competence to
complement their own, especially for innovations. Thus, for firms, inter-firm
linkages may produce more innovative behavior than relationships between
vertically or horizontally integrated business units. Interactions between
units with shared standards, norms, and (business) culture produces less
novel ideas and practices than interaction between firms with differences in
experiences, standards, norms and business culture. Although Nooteboom
does not mention it explicitly, he touches here upon some of the key ideas in
social network theory, about the way social structure may affect economic
outcomes, such as innovative processes (Granovetter, 1985; 2005).
A much broader notion of institutions that affect transaction costs and
economic performance is adopted by North (1990). According to North
(1990: 3) “institutions are the rules of the game in a society or, more
formally, the humanly devised constraints that shape human interaction”. In
his definition of institutions, formal constraints through regulations and
informal constraints through culturally established norms are the basic
elements. An important point North raises is that history matters, implying
that institutions evolve along a certain path that is not easily re-directed or
fundamentally modified. North argues that institutions show path-dependent
features in a similar way as is shown for technologies (David, 1985; Arthur,
1988).