firms as the source of innovation and growth: the evolution of technological competence

Abstract. It is argued that the ®rm is the principal source of innovationand growth, a device for the establishment of technological competence,and for its continued development over time. Markets, products andbackground knowledge may change quite dramatically over time. Yet as aresult of the cumulative nature of learning in the production processes of®rms, the pro®le of corporate technological competence will tend to persistover quite long periods, provided there is institutional continuity. Withinthe same ®rm, competence may evolve into related areas, but the ®rm'stechnological origins will remain identi®able in its subsequent trajectories.However, if the institution itself changes more dramatically, this techno-logical persistence may be disrupted. Supporting evidence is provided fromdata on the patenting of 30 large US and European companies, which havebeen continuously active since the interwar period. The science and theknowledge base, and the composition of products and markets may shiftquite radically, but the ®rm's productive and technological system itself ispotentially more stable. The ®rm provides a vehicle for potential institu-tional continuity and a device for managing transitions within the eco-nomic system.

Key words: Corporate technological competence ± Technologicalpersistence ± Firms ± Innovation ± Growth

JEL-classi®cation: L23, O31, N80

*We are grateful for the helpful comments on an earlier draft of Mark Casson,Giovanni Dosi and two anonymous referees.

Correspondence to: J. Cantwell

J Evol Econ (1999) 9: 331±366

Firms as the source of innovation and growth:the evolution of technological competence*

John Cantwell1, Felicia Fai2

1 Economics Department, University of Reading, PO Box 218, Whiteknights,Reading RG6 6AA, UK(e-mail: [email protected])2 School of Management, University of Bath, Claverton Down, Bath BA2 7AY, UK(e-mail: [email protected])

1 The theme: ®rms innovate and create pro®tsthrough learning in production

In this paper the ®rm is considered to be the principal source of innovationand growth. This contrasts with more traditional perspectives which tend todepict the market as the main source of growth, exogenous to any indi-vidual ®rm, as expressed in Adam Smith's famous dictum that the divisionof labour is determined by the extent of the market. It is true that AdamSmith conceived of an economy as at the same time both a labouring orproductive and an exchange society. Beneath the exchange of productsSmith perceived an exchange of the labouring activities of di�erent pro-ducers, and the market simply facilitated the growth of production. Like theother classical economists, Smith based his analysis on the creation ofwealth through production rather than through exchange or trade (Walshand Gram, 1980; Pasinetti, 1981; Hicks, 1983). Yet Smith tended to think ofthe economy as a whole by analogy with a giant workshop, and so he sawno need to distinguish between the technical division of labour within the®rm and the wider division of labour in society at large. Hence, the way inwhich the ®rm organises production, and thereby gradually learns over timeto improve the technology of production, was not explicitly considered.

The essential idea here instead is that technological innovation mainlytakes the form of ®rm-speci®c learning in production, by way of a processof cumulative and incremental problem-solving activity, as documentedthrough extensive studies of the history of technology by Rosenberg (1976,1982). The outcome of this ®rm-speci®c learning process in production isthe creation of tacit capability or corporate technological competence, thatrequires the generation of specially tailored knowledge inputs, the compo-sition of which inputs re¯ects the company's distinctive ®elds of techno-logical specialisation and the focus of its learning activity. Thus, in thispaper we use the structure of technological knowledge inputs generated bylarge ®rms as a proxy for the areas of focus of their innovative problem-solving in production. Such ®rm-led innovation is crucial to economicgrowth. The positive impact of the technological accumulation of ®rms ontheir rate of pro®t, and hence on their growth rate, can be modelled as aprocess by which lower production costs and enhanced product quality orattractiveness raises productivity (the value of output per worker) ahead ofincreases in wage rates (Cantwell, 1989, 1992). This technological learningor steady improvement in production occurs within ®rms and is organisedby them, but it is sometimes facilitated through inter-®rm co-operation.Moreover, in developing their capability to learn and in their problem-solving activity itself, ®rms draw on their interaction with other local in-stitutions, with downstream markets, and with the local science-base(Nelson, 1996). Because each ®rm's technological learning is to some extentparticular to the problems encountered in its own production facilities (itsown products and processes), each ®rm tends to follow a distinctive path ortechnological trajectory (Dosi, 1982, 1988), which can then be measured bythe speci®city of the specialised composition of the inputs of technologicalknowledge that it requires to ful®ll its own particular problem-solvingagenda.

332 J. Cantwell, F. Fai

Perhaps unsurprisingly, this view in evolutionary economics that growthdepends upon ®rm-level technological competence broadly de®ned, as dis-tinct from product market activity, has been closely echoed in the mana-gerial literature, and especially in the area of technology management.Clark (1985), Kodama (1992), Utterback (1994) and Christensen (1997)among others have, like Rosenberg, depicted the building of corporatetechnological competence as the evolutionary outcome of problem-solvinge�orts to improve production processes and product design, in interactionwith (but conceptually separate from) consumer demands. In any industry,the form of production expertise ranges widely and di�ers between ®rms, sothe nature of a company's technological competence cannot be character-ised by the products it makes or the markets it serves. For example, thecompetence needed to produce computer disk drives has evolved over timefrom mechanical engineering towards microelectronic circuit design, ma-terials science, magnetics and thin ®lm photolithography (Christensen, 1993,1997).

While on the surface innovation is commonly observed through themarket phenomena of the emergence of new products and the diversi®ca-tion or di�erentiation of existing products, the underlying capacity tochange what markets receive is provided by the corporate capability tocreate and re®ne to a viable point new products and processes, which restson the cumulative generation of technological competence in ®rms. Thus,our focus of attention is the analysis of how corporate technologicalcompetence evolves and diversi®es over time, as measured by the pro®les oftechnological specialisation of large ®rms, as opposed to what these ®rmsproduce. Learning in production creates the capability base of ®rms as ameans to innovation and growth, a capability that is better captured by thediverse ®elds of technological expertise of a company than it is by the ®rm'sproduct areas. Since corporate learning is gradual and path-dependent itprovides the basis of institutional stability and continuity in evolution, eventhough it promotes change and di�erentiation in markets when seen fromthe standpoint of consumers, or the customers and suppliers of a large ®rm.

Thus, in this more recent evolutionary perspective, the ®rm organisesand initiates economic development in interaction with the growth ofmarkets (a view akin to that of Chandler ± see Teece, 1993). In this view, the®rm is a device for the establishment of locally speci®c productive ortechnological competence, and its continued development over time. The®rm becomes a repository of competence or productive expertise, and aninstitutional device for learning and accumulating such (Winter, 1988).Thus, the ®rm must be viewed as an institution in its own right, irrespectiveof the inspiration for innovation sometimes provided by markets, or of howwell markets do or do not work as a general co-ordinator of economicactivity.

In what follows, we begin by exploring various aspects of innovationthrough ®rm-speci®c learning in production, which are suggested by thenew evolutionary view of the ®rm, and of its importance. We examine howthe persistence of pro®les of corporate technological specialisation mayarise through the path-dependency of ®rm-based learning; and review therelationship with some other established theories of the ®rm, of growth, and

Firms as the source of innovation and growth 333

of models of innovation. We go on then to present some empirical evidenceon the existence of corporate technological persistence over long historicalperiods. For this purpose we rely on records of the US patenting of thelargest US and European ®rms from the turn of the century onwards.

2 The persistent characteristics of innovation within ®rms,but of variety between ®rms

A number of insights emerge from focusing upon the path-dependent na-ture of the evolution of pro®les of corporate technological competence, asthe outcome of internal learning processes in the production of ®rms. Onewhich will be emphasised below concerns the elements of stability that maycharacterise economic growth, despite the unpredictable and open-endednature of technological change. Firms evolve typically along paths in whichtheir own past history plays a critical role, rather than through a series ofdiscrete and unrelated steps. At the level of industries, because there is avariety of technological paths or lines of experimentation across ®rms, agreater degree of continuity in the established pro®le of ®rms in the industryis preserved at times when the principal ®elds of technological opportunitieschange since the new growth areas will be in the portfolios of at least someexisting companies (Nelson and Winter, 1982; Eliasson, 1991). Nor needthis necessarily imply dramatic substitution e�ects between established®rms, given the interaction between ®rms in their learning activities, whichmeans that although corporate paths are distinct they are not entirely in-dependent of one another. Thus, Cantwell and Andersen (1996) ®nd thatthe composition of technological leadership across ®rms in an industrytends to shift only gradually. Patel and Pavitt (1998) have suggested thatnewly emergent ®elds are now more commonly synthesised with establishedtechnologies in broader systems, rather than leading to a competence-de-stroying displacement of older technological activities of the kind envisagedby Tushman and Anderson (1986).

In other recent technology management literature it has been arguedthat the cross-company distribution of leadership may be shifted by occa-sional radical discontinuities (Utterback, 1994); but whether existing leaderslose their position depends not on any inability to adapt their competencebase, but rather on their capacity to recognise new technological oppor-tunities or applications given the constraints of responding primarily to theneeds of their established customers (Christensen and Rosenbloom, 1995;Christensen, 1997; Pavitt, 1998). Indeed, Klepper and Simons (1997) arguethat a radical shakeout in the composition of established ®rms is just aslikely to be associated with a consolidation of leading companies, eventuallybeing able to drive out newer entrants as they build dominance from theirearly-established lines of competence. To anticipate our argument below,Schumpeter's notion of creative destruction applies more at the level ofproducts or markets than it does at the level of technologies or ®rms.

Allied to this are insights with respect to the nature of technological co-operation between ®rms, which from the competence-based perspectiveof the ®rm (Teece, Rumelt, Dosi and Winter, 1994) is not reducible to


market-like exchanges of technological knowledge. Firms may co-operatedirectly in their learning activities, within which context exchanges of tech-nological knowledge (sometimes embodied in patents or machinery) are justpart of a broader story. Corporate problem-solving in production is alsofacilitated by a wider public di�usion of certain types of generic knowledge,and by co-operation with other institutions such as universities. As argued byLoasby (1991), the well-developed principles of the co-ordination of a givenset of activities through the exchange of some given set of items (normallythrough the market mechanism) are unlikely to be applicable to the analysisof the co-ordination of evolutionary learning and novelty-generatingprocesses, the latter being an open-ended and continuous process.

3 Enhancing learning in productionversus transactional e�ciency and capital accumulation

In the light of our earlier remarks on the central role of the creation ofcorporate technological competence along persistent lines in larger ®rms asa means of innovation and growth, we elaborate further upon our approachthrough a comparison between it and the most common alternative per-spectives on the foundations of companies, growth and technological de-velopment. In this section we consider alternative views of the nature of the®rm, the nature of technological competence and of whether competence isnecessary for growth, while in the following section we examine the standardalternative approaches to the determinants of technological change.The need for non-market forms of co-ordination of creative processes asopposed to the co-ordination of well-established activities gives rise to anunderstanding of those aspects of organisational form that are associatedwith corporate technological learning, that are not properly analysedthrough the now fashionable transaction cost approach, which is betterdesigned for the study of other aspects of the scope of the ®rm (Foss, 1993).In the evolutionary competence-based view of the ®rm the main issue is how®rms develop their own internal organisational routines, and inter-®rmalliances for technological co-operation, in such a way as to enhance theproblem-solving e�orts of each company in production. Hence, it is thecompetence-based approach to the ®rm that constitutes the context of ourdiscussion, rather than the alternative transaction cost approach, in whichthe central question is the extent to which alternative organisational formsincrease the e�ciency of the exchange process as such. In the Coasiantheory of the ®rm the organisation of production within the ®rm may beconsidered, but only when couched in terms of exchange or market-likerelationships, which is inadequate for the study of the ®rm as an organiserof productive learning and competence-building.

By shifting attention towards the active learning processes organised by®rms within production, one might also contrast the original classicalperspective on economic growth as a process of capital accumulation withthe broader notion of corporate technological accumulation. In the earlierclassical approach the source of growth was to be found in the opening upof markets (and in the market-making function of merchants or ®rms),


rather than in the technologically creative e�orts of companies in theirspecialised ®elds of competence. So in the classical theory there was nonecessary link between growth or capital accumulation on the one hand andcorporate technological competence and innovation on the other. AdamSmith's original theory of growth considered the direction of causation tobe capital accumulation leading to technological accumulation ± the ex-tension of the division of labour would call forth learning by doing, anincrease in individual skills, and greater inventiveness. Historically, Smith'sperception was quite accurate, as it was the expansion of markets in mer-cantilist times that broke down the old feudal barriers, and enabled pro-ducers to think beyond the boundaries of their own local communities orguilds; and it was the pro®ts from trade that allowed them to accumulatecapital (or to draw on an accumulated capital through ®nanciers), and so tobegin organising new systems of production. Initially, in the earliest fac-tories, technologies were not very di�erent from those in operation in theputting-out system, but the specialisation of individual workers was greater.

However, increasingly in the nineteenth century and still more in thetwentieth century, technological accumulation (founded upon the collectivebuilding up of tacit capability in the production teams of ®rms ± a non-codi®able element of technology) via learning processes has driven capitalaccumulation rather than the other way around. So to understand growthwe need to know more about how the underlying technological competenceof ®rms evolves over time. The industrialisation of countries relied on thedevelopment of social or tacit capability principally within local ®rms, andwith it labour productivity rose enormously, and hence real wages andincomes were pulled up. Since that time, huge disparities in income levelshave arisen between countries, re¯ecting the varying extent to which theyhave accumulated technological expertise and the associated capitalequipment in the source of economic growth. The industrialised countrieshave higher levels of labour productivity, and correspondingly higher realwages. This re¯ects not just a greater capital stock, but a more complex andsophisticated type of social organisation, largely embodied within theroutines and working practices of ®rms. From this point of view, the dif-ference e.g. between India and Japan is not fundamentally a di�erent `en-dowment' of capital or even skilled engineers and scientists, but above all adi�erence in social organisation in the ®rms of each country, and in inter-®rm connections.

Initially in the nineteenth century through mechanisation, science wasutilised to improve productivity more consistently by innovation. The basisof longer term pro®ts now shifted away from the growth of markets andtrade in established products (the sphere of exchange), and came to begrounded on innovation which regularly transformed production systems,as documented by Marx, and emphasised by Schumpeter in what becameknown as one of his central theoretical contributions. The transformationof production systems relied upon the creation of technological competenceof a locally speci®c kind, in specialised ®elds and embodied in the collectivecorporate capabilities of the larger companies. The early pro®le of tech-nological accumulation of each country in the nineteenth century still partlyre¯ected local resource availability and needs. Thus, for example, the


advantage of US ®rms in woodworking and later oil-related technology, theadvantage of British companies in metal working and coal-related tech-nology, and the subsequent German corporate technological leadership inarti®cial dyestu�s and hence chemicals (Rosenberg, 1976). Subsequently,technological accumulation followed a path-dependent but generally lesseasily predictable course. This raises the question of the speed at whichcorporate technological trajectories can be shifted over time, which weexamine closely later.

Just as the continuous problem-solving or learning within production(documented by Rosenberg, 1982) gives rise to social or organisationalcapabilities, so too it implies that production is technology-producing aswell as technology-dependent (as noted by Richardson, 1972). Firms re-quire specialised technological competence in order to produce attractiveproducts by e�cient methods in their respective industries, but it is bylearning in production that they continue to develop their ®rm-speci®ccapabilities. The evolutionary analysis of ®rm-led economic developmentcan be traced back to Marshall, Penrose and Richardson, as well as to themore recent contribution of Nelson and Winter (Loasby, 1991). ``Thepoint is not that production is thus dependent on the state of the arts, butthat it has to be undertaken (as Mrs Penrose has so very well explained)by human organisations embodying speci®cally appropriate experienceand skill'' (Richardson, 1972, pp. 230±231). The association between the®elds of current technological competence and the ®elds in which learningoccurs and new competence is created suggests that the pro®les of com-petence of established ®rms may tend not to shift dramatically, at leastover shorter periods of time. We return to this hypothesis in the latter partof the paper.

Much of the later neoclassical growth theory was even further removedfrom an appreciation of the role of constructing technological competencein speci®c ®rms, since technology was typically regarded as an exogenousin¯uence (a subject for engineering but not economics), which would alterthe position of the production function or, in a few more sophisticatedaccounts, technology was depicted as akin to a further factor of production(e.g. in the form of human capital). However, technology is ®rm-speci®cand tied to the institutional structure of the countries in which it is devel-oped due to its component of tacit capability. It is not bought and sold in a`factor market', but is the outcome of an internal collective learning processwithin ®rms. Thus, technology is not a tradable factor of production, but ismore in the nature of social organisation or capability. This does not fea-ture in conventional production functions, and is not reducible to individual``human capital'' (for which there may be a skilled labour market), but isembodied in the collective expertise and organisational routines of ®rms.The speci®city of corporate technological capability can be appreciatedthrough the distinctiveness of patterns of technological specialisation ofcompanies (Cantwell, 1993; Cantwell and Barrera, 1998), which is in turnrelated to the speci®city of types of knowledge they require as inputs intocontinued learning and the extension and improvement of technologicalcompetence.


4 The purposeful organisation of improved productionby ®rms versus the `linear' and `demand-pull' models of innovation

Understanding technological development as a process of competencecreation within the ®rm also implies a new perspective on the conventionaldebate over the determinants of technological change. Again, our purposein brie¯y expanding upon the comparison of our approach with that of thestandard received models of technological change is not to make use ofthese models, but rather to demonstrate how our emphasis on competencecreation in development ®ts into the wider literature, and to call attention tothe broader implications of our argument. The essential contribution ofcompetence was recognised by Marshall, in his statement that ``capitalconsists in great part of knowledge and organisation'' (cited in Loasby,1991, p. 39). Like in more recent evolutionary accounts, Marshall's ®rmsused their knowledge of their trade to experiment with products and pro-cesses in the context of their own productive circumstances; and given theresulting variety between ®rms, inter-company networks were akin to each®rm's `external organisation'. The ®rm's internal and external organisationeach de®ned a set of productive capabilities which are missed from theconventional production function. These capabilities are the outcome ofactive innovative learning on the part of the ®rms. Hence, ``the productiveopportunity of a ®rm will change even in the absence of any change inexternal circumstances or in fundamental technological knowledge'' (Pen-rose, 1959, p. 56).

Thus, technological competence is the result of lengthy learning pro-cesses within production in the ®rm, in interaction with both the upstreamelements of the scienti®c base and corporate R&D, and also downstreamcomplementary or co-specialised assets and markets (see Fig. 1). CorporateR&D and distribution networks may be vertically integrated within the ®rm(or involve inter-company networks), but the science base and productmarkets are external to it. The view that it is learning within production inthe ®rm that should be seen as the centre of gravity of technological changemight be contrasted with both the more traditional ``linear model'' ofcausation of the early Schumpeter (from invention to commercialisation),or the ``demand-pull'' or market-led model of Schmookler. These oldertheories based themselves on considerations largely external to individual®rms and hence the process of competence creation ± the push of new

Fig. 1. Learning as the principal source of innovation, in interaction with upstream anddownstream assets


knowledge, or the pull of market growth. Instead, in the new view theprincipal source of innovation and growth is learning within the productionprocesses of ®rms, learning that generates tacit capabilities of a locallyspeci®c kind in each ®rm, and which distinguishes ®rms from one another.

Corporate R&D contributes to technological innovation by providing asupply of potentially public knowledge which is used as an input into thesystematic development of tacit capability through the evolution of thecollaborative skills and organisational routines of production teams. Cor-porate R&D provides an input into technological learning that is partly acommissioned response to the needs that arise from the problem-solvingactivities of ®rms in production. Therefore, it is misleading to think of R&Das in general driving innovation (even though it may play a leading role inthe science-based sectors), since it also re¯ects what is achieved in thebroader learning process, and thus what types of knowledge have becomeuseful to the ®rm or at least worth exploring. Hence, appreciating thatinnovation is a collective learning process organised by ®rms helps to re-solve the old debate over whether the essential source of technologicalchange is science or research-push (sometimes called technology-push bythose using the old narrower `engineering' or `blueprint' de®nition oftechnology) or demand-pull (Mowery and Rosenberg, 1979). Innovativelearning instead gathers a certain cumulative and incremental logic of itsown, which interacts with but is not driven by the development of eitherscience or market demand, as argued similarly by Clark (1985). Technologya�ects science and demand as much as the other way round. For example,the improvement of instrument technology has had a major impact on whatis feasible in various branches of science (Rosenberg, 1994). Likewise, it isthe steady progress of computer technology that has created the growth indemand for computerised equipment rather than some exogenous change inconsumer tastes or preferences. A crucial implication for our argument isthat technological change may disrupt the external spheres quite dramati-cally ± giving rise to new areas of scienti®c endeavour (Nelson and Ro-senberg, 1998) and a stream of new products and markets ± but beneaththese disruptions lies a steadier and more incremental learning process ofgradually accumulating specialised capabilities especially within the largest®rms.

5 The co-ordination of learning in productionby ®rms, by non-market as well as market mechanisms

The fact that the creation of technological competence is a ®rm-speci®cprocess associated within the formation of distinctive capabilities in sur-viving companies should not be taken to imply that the learning e�orts of®rms are entirely independent of one another. While the innovative learningactivities of ®rms within production are not a simple response to marketsignals, learning interacts with and is facilitated by market exchanges be-tween ®rms themselves, and between ®rms and consumers. These learningactivities are also facilitated by the continuous gradual di�usion ofnew technological knowledge of a public kind, and by the non-market


co-ordination of learning between ®rms, as well as interchanges between®rms and other institutions (such as universities). Each ®rm may follow adistinctive path of learning or technological trajectory, but certain aspectsof its learning activities may be commonly co-ordinated with other com-panies where the activities are closely complementary to one another andcan be arranged in a mutually supportive fashion (Cantwell and Barrera,1998). Such close technological co-operation tends to arise more frequentlyover shorter geographical distances, which at a country level may beassociated with clustered combinations of ®rms and other local institutionsconstituting `national systems of innovation' (Nelson, 1993).

It is possible to distinguish between two types of technological co-op-eration between ®rms. Co-operation may consist simply of an exchange ofknowledge (each exchange being a discrete act), or it may extend beyondthis to co-operative learning, involving the co-ordination of learning pro-cesses themselves (Cantwell and Barrera, 1998). While the market mecha-nism may be an adequate means of co-ordinating the exchange ofestablished items of knowledge or patents etc., it is inadequate for co-ordinating the learning process by which knowledge grows over time (Lo-asby, 1991). Co-ordinating learning processes, as opposed to co-ordinatinga given set of goods or techniques, requires a mode of co-ordination whichhas su�cient ¯exibility to allow for experimentation and the continuingprovision of variety. While co-operative learning encompasses contractualexchanges such as cross-licensing agreements, these market exchanges tendto become more a product of the common learning process rather than theother way round.

The co-ordination of learning in production between ®rms becomesmore likely if the capabilities of ®rms are closely complementary to oneanother, such that their learning activities are highly interrelated (Rich-ardson, 1972). The degree of complementarity between the technologicaltraditions of ®rms a�ects the costs of transferring knowledge between them,and the ease of implementing knowledge generated out of one tradition inthe context of another, as well as the scale of potential bene®ts that mayarise from co-operative learning. For this reason, when the technologicaltraditions of two companies are quite di�erent, the costs of imitation in aless amenable environment may exceed the original costs of innovation(Mans®eld, Schwartz and Wagner, 1981; Klevorick, Levin, Nelson andWinter, 1987). Since it is in large part an outcome of the ®rm's ownproblem-solving agenda, the new technological knowledge generated by a®rm tends to be more valuable in combination with the tacit capability ofthe same ®rm, and ®rms whose capabilities are closely complementary to itsown (Cantwell, 1995).

Note also that the usual dichotomy between the ®rm and the marketmay be unhelpful in this context. Both a simple exchange of knowledge andwider-ranging co-operative learning may occur within a ®rm or between®rms. It is only in the case of the exchange of discrete items of knowledgethat a transaction cost analysis may play an important role in explainingwhether the exchange occurs solely within the ®rm or through marketsexternal to the ®rm. Indeed, even with a simple exchange of knowledge,there may be other inputs into the respective learning activities of partner


companies, which are not exhausted or covered by market transactions(Richardson, 1972). With co-operative learning, market-like exchanges tendto become a by-product of the continuous learning process. Moreover,whether co-operation extends this far depends mainly on the conditions oflearning in each ®rm (or in di�erent parts of the same ®rm), rather than onthe conditions of exchange arrangements between ®rms (or between sepa-rate production facilities).

6 The implication: the gradual, path-dependent evolutionof technological competence

The implication of this alternative interpretation of the ®rm as a device forcompetence accumulation hence facilitating economic development andgrowth, is that as a result of the cumulative nature of learning, the un-derlying ®elds of technological competence (or social capability) tend tochange only very slowly. Competence or capability evolves gradually withinthe production processes of established ®rms, even though markets andproducts themselves change quite dramatically over longer historical peri-ods and will in¯uence the direction taken by ®rms. Thus, the ®rm provideselements of institutional continuity over time in its function as a repositoryof speci®c ®elds of competence.

Arising out of this is the hypothesis that competence within ®rms willtend to persist over quite long periods of time, providing there is institu-tional continuity. Within the same ®rm, competence may evolve into re-lated areas or may become relatedly diversi®ed from an established base,but the ®rm's technological origins will remain identi®able in its subsequenttrajectories. However, where the institution itself changes more dramati-cally, this technological persistence maybe severely disrupted e.g. wherethere are major mergers or acquisitions, or as in Germany, post-war re-construction.

7 Organisation of the data

Patent statistics present a potentially very rich source of empirical evidenceon questions related to technology (see Schmookler, 1966; Scherer et al.,1959; Pavitt, 1988; and Griliches, 1990). The learning process which gen-erates accumulated capability relies on inputs of new knowledge and in-ventions, and so long as the pattern of knowledge requirements thus re¯ectsthe underlying distribution of technological competence across ®rms, cor-porate patents may be used as a proxy for the underlying pattern of tech-nological change, and not merely as a direct measure of inventions. Here,we measure technological activity using a count of patents granted in theperiod 1901±90, which are accumulated into stocks over the period 1930±90using the perpetual inventory method, as in vintage capital models.Straight-line depreciation for the separate contribution of each new item oftechnological knowledge is allowed for over a thirty year period, this beingthe normal expected lifetime of the capital in which the knowledge is


partially embodied1. It is argued that US patent data provide the mostuseful basis for international comparisons, given the common screeningprocedures imposed by the US Patent O�ce (Soete, 1987; Pavitt, 1988).Additionally, as the US is the world's largest single market, it is likely that®rms (especially large ones), will register for a patent there after patenting intheir home countries. It is also reasonable to assume that such foreignpatents registered in the US are likely to be on average of higher quality orsigni®cance. US patents reveal to which ®rm each patent was granted, andwith which type of technological activity the patent is associated.

The source of the data analysed in this paper is a database formed fromUS patent records held at the University of Reading. This covers patentsgranted in the US between 1890 and 1990. Each patent is classi®ed by theyear in which it was granted and by the type of technological activity withwhich it is most associated. Information was collected manually from theUS Index of Patents and the US Patent O�ce Gazette on all patents thatwere assigned to the major US-owned and European-owned large ®rmsbetween 1890 and 1969. From 1969 onwards, equivalent information hasbeen computerised by the US Patent O�ce and incorporated into the da-tabase, and the Patent O�ce also provided a technological classi®cation ofall patents granted from 1890 onwards at a detailed level of disaggregationusing the US patent class system.

As argued above, we need to distinguish between the ®elds of techno-logical competence of a ®rm, and its range of products or industry of output.Corporate technological competence is not acquired through markets butderives from internal processes of learning and problem-solving in produc-tion, the specialised focus of which can be captured by the ®elds of know-ledge inputs that the ®rm creates in response to the needs of its specialisedproblem-solving. The ®elds of knowledge of a ®rm in turn can be representedby the categories of the US patent classi®cation scheme which characterisethe patents it has been granted. Therefore, in classifying the ®elds of creativecompetence of each ®rm directly from the composition of its patents, weavoid the di�culties of establishing a concordance between the US patentclassi®cations and the standard industrial classi®cations (Silverman, 1998).A concordance has been required especially by those that wish to use thepatent class system instead as a proxy for the industry in which the resultanttechnologies are eventually used (Schmookler, 1966), which is the industryof the principal customers of the ®rms that mainly create a given kind oftechnology if these ®rms produce intermediate products.

Looking within the innovating ®rms themselves, our hypothesis of path-dependence and persistence in the pro®les of corporate technological spe-cialisation comes not from the characteristics of the knowledge generationprocess (R&D) itself, but from the structure of downstream learning andproblem-solving which calls for the creation of specialised knowledge inputsin speci®c ®elds. Thus, our use of patent statistics regards them as a measure

1We stress that thirty years is the average expected lifetime of the capital and acknowledgethat there is large variance in the life expectancy of capital between di�erent items. Wealso stress that the lifetime of capital is very di�erent to the lifetime of a US patent itselfwhich is about 17 years (Griliches, 1990, pp. 1662).


of inputs (into innovation) and not outputs (from R&D); that is, codi®edknowledge inputs into the processes of problem-solving and learning inproduction, through which technological competence is created. Of course,this does imply that there may still be potential problems with an input-based classi®cation scheme derived from the patent class system, given theway in which technologies from di�erent disciplinary foundations may beintegrated, and given some arbitrariness in the division between certainpatent classes. We have tried to alleviate this di�culty by devising a clas-si®cation scheme that groups together patent classes that are the mosttechnologically related, as is described further below. Firms may be sepa-rated ®rst into broadly de®ned and distinct industrial areas, and within eachsuch area the range of technologies in which ®rms are active tend to bediverse, and the ®elds of technological specialisation or competence di�erbetween companies in the same industry. Therefore, our selection of ®rmsand industry groupings is distinct from the way in which we allocate thepatents received by these ®rms to various technological areas. We deal nowwith each of these in turn.

7.1 Allocation of ®rms to industrial sectors in the database

The ®rms selected for the patent database were identi®ed in three ways. The®rst group consisted of those ®rms which have accounted for the highestlevels of US patenting after 1969; the second group comprised of other US,German or British ®rms which were historically among the largest 200industrial corporations in each of these countries (derived from lists inChandler, 1990); and the third group was made up of other companieswhich featured prominently in the US patent records of earlier years. Ineach case, patents were counted as belonging to a common corporategroup, or ®rm, where they were assigned to a�liates of a parent company.In total, the US patenting of 867 companies or a�liates were traced his-torically and together they comprise 284 corporate groups or ®rms. Births,deaths, mergers and acquisitions as well as the occasional movement of®rms between industries (sometimes associated with historical changes inownership) have been taken into account.

Each corporate group was allocated to an industry on the basis of itsprimary ®eld of production. These industries have been combined into fourmajor industrial groups on the basis of the types of technology that havebeen most characteristically developed by the ®rms in question: (i) Chem-icals [chemicals, pharmaceutical, textiles and clothing, coal and petroleumproducts (oil)]; (ii) Electrical [electrical equipment, o�ce equipment (com-puting)]; (iii) Mechanical [food, drinks, metals, mechanical engineering,paper and paper products, printing and publishing, non-metallic mineralproducts, professional and scienti®c instruments, other manufacturing]; and(iv) Transport [motor vehicles, aircraft (aerospace), other transport equip-ment, rubber and plastic products (tyres)]. Collectively, these will be re-ferred to as the CEMT industrial groupings. Of the 284 corporate groups intotal, 82 are in the Chemical group, 45 in Electrical, 107 in Mechanical and50 are allocated to Transport.


7.2 Selection of ®rms for this study

For this particular study only ®rms that were active throughout the rele-vant historical period were included ± that is, those which have been pat-enting throughout the period 1930±90. As corporate patenting took o� inthe interwar period, a cut o� point earlier than 1930 would signi®cantlyreduce the number of ®rms considered in this paper. Also, in an e�ort toreduce the small number problems which may arise, especially in relationto the earlier part of our period of analysis, ®rms were required to possessan accumulated stock of at least 225 patents by 1930. For the purposesof analytical continuity, the following ®rms have either been consolidatedinto the relevant historical corporate groups despite subsequent de-merg-ers or separations: IG Farben/Bayer/BASF/Hoechst, Swiss IG/Ciba/Geigy/Sandoz; or are referred to under the heading of their earliest and histori-cally most important company name e.g. Allied Chemical, Standard Oil(New Jersey), United Aircraft and Westinghouse Air Brake. This gave 30®rms in total: 6 chemical, 7 electrical, 11 mechanical, and 6 transport ®rmsall of which were historically very large and in many cases, continue to beso today.

7.3 Allocation of patents to technological ®elds in the database

As the system of patent classes used by the US Patent O�ce changes, thePatent O�ce reclassi®es all earlier patents accordingly, so fortunately theclassi®cation is historically consistent. Furthermore, where patents wereassigned to several ®elds, the primary classi®cation was used in all cases.Various broad categories of technological activity can be derived by allo-cating classes or sub-classes to common groups of activity. For this purposepatents registered in sub-classes have been allocated to one of 399 tech-nological classes, which in turn have been subsumed into one of 56 tech-nological sectors. To illustrate, patents belonging to some of the subclassesthat fall within US patent class 62, refrigeration, comprise a group that hasbeen assigned to the technological sector chemical processes, while the re-maining patents that fall under other subclasses within refrigeration, con-stitute a di�erent sector which has been allocated to general electricalequipment. These 56 technological sectors can in turn be allocated to one of®ve broad technological ®elds ± chemical, electrical and electronic, me-chanical, transport and `other' non-industrial sectors (CEMTO collective-ly). Given these 56 groups of technological activity, it should be stressedthat in this paper, not all the sectors are included for any one industrialgroup of ®rms. The reasons for this are given in the next section.

7.4 Selection of technological sectors for the study

As potential small number problems exist, particularly for the earlier periodof our analysis, the risk of this was reduced by conducting the analysis ofthe sectoral activity of the ®rms in each industrial group, in two alternative


ways. In the ®rst case, a restriction on the minimum size of corporatepatenting for a sector to be included was imposed on the volume of activityin 1930, to facilitate a consistent comparison between the 1930±60 and1960±90 periods; while, in the second case, the restriction applied to theyear 1960, to focus upon changes in the composition of corporate techno-logical activity in the period 1960±90, in its own right.

The ®rst criterion required sectors to possess an accumulated patentstock of 100 patents or more in 1930 (abbreviated as ``pat30 > 100''hereafter), and this restriction gave the following number of relevant sectorsout of a possible total of 56, for each industrial group: 11 for chemical®rms, 24 for electrical, 22 for mechanical, 15 for transport ®rms. This wasthe basis of analysis for both sub-periods; 1930±1960 and 1960±1990, andthe entire 1930±1990 period. The second criterion for selection was thatsectors had to have 500 patents or more by 1960 (pat60 > 500). This gave22 relevant sectors in chemicals, 21 in electrical, 16 in mechanical and 14 inthe transport industrial group. Obviously in a number of cases, the relevantsectors on this second criterion did not have su�cient numbers of patents inthe earlier sub-period 1930±1960 to be analysed without encountering smallnumber problems, so the analysis has been con®ned to the 1960±1990 sub-period. The full list of the relevant sectors under both criteria is given inTable 1.

An interesting feature of Table 1 is that it shows that the number ofsectors arising on the pat60>500 criterion is double that arising from thepat30>100 criterion for the chemical group of ®rms, yet for the other threeindustrial groups they are fewer in number. This is because the accumulatedpatent stocks of the chemical technological sectors rose signi®cantly overthe course of the twentieth century (as they did in electrical/electronictechnologies also). However, the relative starting levels in the chemical andelectrical technological groups were quite di�erent in 1930 but have con-verged over time (Andersen, 1998). This ``catch-up'' by chemical technol-ogies in patent stock is a re¯ection of the fact that many of the fastestgrowing areas of technological opportunity throughout the course of thetwentieth century presented themselves in chemical technological areas.However, the accumulated patent stock for mechanical and transporttechnologies rose far less signi®cantly, both being particularly a�ected by adrop in the war/immediate postwar period with recovery only being initi-ated from 1960 onwards (Andersen, 1998). This explains why more sectorsare picked up by the chemical industrial group on the pat60>500 criterion,relative to the other industrial groupings.

Our conjecture is that as technological opportunities were greatest inchemicals it would be natural for chemical ®rms to exploit these opportu-nities. However it is likely that these opportunities required chemical ®rmsnot only to diversify their scienti®c knowledge and expertise in chemistry, butperhaps also into the related areas of the development of equipment to createthe new chemical products and the processes undertaken to make them. Thechemical ®rms may therefore have entered into mechanical or other ®eldsin a manner relatedly-linked to their interest in the chemical aspect of thisactivity. This would not be altogether surprising as it has been docu-mented by Patel and Pavitt (1994) that although mechanical technologies


Table 1. Selected technological sectors of patenting activity for the CEMT industrialgroups

Sector of activity (tech 56 sector) pat30 > 100 pat60 > 500

1.1: ChemicalDistillation processes XInorganic chemicals X XChemical processes X XPhotographic chemistry XCleaning agents or other compositions X XSynthetic resins and ®bres X XBleaching and dyeing X XOther organic compounds X XPharmaceuticals and biotechnology X XMetallurgical processes XMiscellaneous metal products XChemical and allied equipment X XAssembly and material handling equipment XMining equipment XTextile clothing and machinery XOther specialised machinery XOther general industrial equipment X XOther general electrical equipment X XRubber and plastic products XNon-metallic mineral products XCoal and petroleum products X XOther instruments and controls X

Total 11 22

1.2: ElectricalChemical processes X XMetallurgical processes X XMiscellaneous metal products X XChemical and allied equipment X XMetal working equipment X XAssembly and material handling equipment X XTextile and clothing machinery X XOther specialised machinery X XOther general industrial equipment X XMechanical calculators and typewriters X XPower plants XTelecommunications X XOther electrical communication systems X XSpecial radio systems X XImage and sound equipment X XIllumination devices X XElectrical devices and systems X XOther general electrical equipment X XSemiconductors XO�ce equipment and data processing systems X XRailways and railway equipment XOther transport equipment XNon-metallic mineral products X X


Table 1 (continued)

Other instruments and controls X XOther manufacturing and non-industrial X

Total 24 21

1.3: MechanicalChemical processes XPhotographic chemistry XCleaning agents and other compositions XSynthetic ®bres and resins XOther organic compounds XMetallurgical processes XMiscellaneous metal products X XChemical and allied equipment X XMetal working equipment X XBuilding material processing equipment XAssembly and material handling equipment X XAgricultural equipment X XTextile and clothing machinery X XPrinting and publishing machinery XOther specialised machinery X XOther general industrial equipment X XElectrical devices and systems X XOther general electrical equipment X XInternal combustion engines XRailways and railway equipment XOther transport equipment XTextiles, clothing and leather XNon-metallic mineral products X XPhotographic equipment XOther instruments and controls X XOther manufacturing and non-industrial X

Total 22 16

1.4: TransportChemical processes X XSynthetic ®bres and resins X XMetallurgical processes X XMiscellaneous metal products X XChemical and allied equipment X XMetal working equipment X XOther specialised machinery X XOther general industrial equipment X XPower plants XElectrical devices and systems XOther general electrical equipment X XInternal combustion engines X XMotor vehicles XAircraft X XOther transport equipment XRubber and plastic products XOther instruments and controls X X

Total 15 14


are perceived to be mature, they are still extremely pervasive acrossindustrial groups and have an extended life span as they are adopted andadapted to new uses in di�erent industrial areas. In fact, an inspection ofTable 1 shows that few of the `additional' technological sectors which ariseon the pat60>500 basis for the chemical industrial group are chemicaltechnologies (except for `distillation processes' and `photographic chemis-try') but actually include a substantial number of mechanical technologiese.g. `metallurgical processes', `miscellaneous metal products', a transporttechnology ± `rubber and plastic products' and `other instruments andcontrols' from other non-industrial technologies (see Table 1.1). At thesame time there is a complementary development of activity in chemicaltechnological sectors within the mechanical industrial group under thepat60>500, for example `chemical processes', `photographic chemistry',etc. (see Table 1.3). Thus, the large number of technological sectors on thepat60>500 basis in the chemical industrial grouping, is likely to be relatedto the proliferation of technological opportunities within the chemicaltechnological ®eld either through backward integration into the extractionof certain chemical elements, or into related engineering- or science-basedareas. For example, it is reasonably easy to intuitively see the links betweenthe extraction of chemical elements, including metals thus the reliance onmining and mining equipment, metallurgical process technology, miscella-neous metal products and other instruments and controls. In contrast, theelectrical/electronic, mechanical and transport industries actually experi-ence a net loss of a number of mechanical and transport technologies whencomparing the pat30>100 technologies to the pat60>500 sectors(Tables 1.2 to 1.4). Whilst this can be accounted for in the two engineeringindustrial groups by a relative lack of technological opportunity, in theelectrical/electronic case this loss is harder to justify. Great technologicalopportunities were also available to ®rms in this industry but di�erent innature to those available in chemicals. Many electrical/electronic oppor-tunities can be associated with the rise of the `semiconductor' and indeed wesee this arising as an area in which signi®cant patenting activity had beenachieved by 1960. However, another source of technological opportunityhas been electronic and computing software (von Tunzelmann, 1998) butthis post-dates the 1960 cut o� point for our sectors' selection criterion andis also an area in which the propensity to patent was low. Thus we can onlyadvance that the opportunities within the electrical/electronic industrialgroup have been more focused in highly pervasive technologies like `semi-conductors' and software and are more than o�set by the lack of oppor-tunities in several transport and mechanical technologies in which theindustry was formerly active.

We emphasise again that the sectoral classi®cation of patents, as ourproxy for the composition of corporate technological competence in thelargest ®rms, must be distinguished from the main industrial output of thecompanies to whom the patents may be assigned. Most large companieshave engaged in at least some development in most of the general spheres oftechnological activity, irrespective of which industry in which they operate.This is the case for both relatively more mature industries, such as in thedevelopment of the petrochemical industry in which the more obvious need


to draw upon organic chemistry is combined with the need to be skilled inelectronic technology for remote sensing technology; and more recently inareas such as the rigid disk drive industry where electronic, mechanical andmaterials based technologies are required (Christensen, 1993, 1997). How-ever, the phenomenon of companies operating in technological areas out-side those more typically associated with their industry might be expected tobecome even more commonplace in recent times where technological fusionhas been seen to be occurring (Kodama, 1986, 1992). Thus for example, ofthe 24 sectors selected on the pat30>100 basis for the electrical industryonly nine of these are electrical technological sectors, the remainder com-prise of 11 mechanical, two transport, one chemical and one `other' non-industrial technological sector respectively.

There are many well documented arguments which demonstrate theneed for caution in the use of patent statistics (Basberg, 1987; Pavitt, 1988;Griliches, 1990; Archibugi, 1992; Patel and Pavitt, 1997, 1998). However, anumber of the di�culties in the use of patent data have been avoided in ourapproach through relevant disaggregation and the construction of an ap-propriate index. Inter-industry di�erences in patenting propensity are re-duced as the paper deals with intra-industry comparisons only, althoughadmittedly the industrial groups are de®ned very broadly, especially the`mechanical' group. It is recognised that inter-sectoral (across technological®elds) or inter-®rm di�erences in the propensity to patent may arise, butthese are controlled for here by the use of the Revealed TechnologicalAdvantage (RTA) index (Cantwell, 1989, 1993; Cantwell and Andersen,1996; Patel and Pavitt, 1997, 1998). The RTA relates a ®rm's technologicaladvantage in a spectrum of technological activity to that of other ®rms inthe same industry. The RTA of a ®rm in a particular sector of technologicalactivity is given by the ®rm's share in that sector, of US patents granted toall companies in the same industrial group, relative to the ®rm's overallshare of all US patents assigned to all ®rms in the industry in question. If Pij

denotes the number of US patents granted in technological activity i to ®rmj in a particular industry, the RTA index is de®ned as:

RTAij � Pij=RjPij

ÿ �= RiPij=RijPij

ÿ � �1�The index varies around unity, such that a value in excess of one shows thatthe ®rm is comparatively advantaged in that sector of activity in relation toother ®rms in its industrial group, and a value less than one reveals acomparative disadvantage. In this manner inter-sectoral di�erences in thepropensity to patent are normalised in the numerator of the RTA index, andinter-®rm di�erences are normalised in the denominator. There still remainsthe possibility of intra-®rm and intra-sectoral di�erences in the propensity topatent, but it is likely that the respective variances of these two factors aresystematically lower than the inter-®rm and inter-sectoral di�erences.

8 The empirical methodology

To examine the changes in a ®rm's pattern of technological specialisationover time, the RTA distribution for each ®rm has been calculated for 1930,


1960 and 1990 and the correlation between the sectoral distribution of theRTA index at time t and an earlier time period t ÿ 1 (or t ÿ 2) is estimatedthrough a simple linear cross-sector regression of the following kind:

RTAit � a� bRTAitÿ1 � eit �2�

Where i refers to the sector of technological activity at time t, and theresidual eit is independent of RTAit)1 (which assumption is valid if the RTAindex is roughly normally distributed, as Cantwell (1991) has shown it tendsto be with adequate numbers of patents). In this study three regressions areconsidered: RTA1960 on RTA1930, RTA1990 on RTA1960 (this one is runtwice, once for each of the two alternative sectoral restrictions), andRTA1990 on RTA1930. The full results are given in appendix tables which areavailable from the authors on request.

Persistence in this paper is taken to mean that the cross-sectoral tech-nological pro®le of a company's pattern of technological specialisation isstable and not subject to much inter-sectoral mobility in the RTA distri-bution over time. The extent of mobility can be measured by Pearson'scorrelation coe�cient q (Hart, 1983). If the estimate of q is given by q̂, then(1ÿ q̂) measures the size of the ``mobility e�ect'', while the magnitude of q̂gives a positive indicator of the strength with which the ®rm's pro®le oftechnological specialisation persist. In an equation with a single indepen-dent variable the t-test of whether b̂ is signi®cantly di�erent from zero isequivalent to the F-test of the signi®cance of q̂ (persistence), and henceconstitutes an inverse test of the extent of mobility. If b̂ is not signi®cantlygreater than or di�erent from zero, the t-test implies that q̂ is signi®cantlyless than one and the mobility e�ect (1ÿ q̂) is thus signi®cantly greater thanzero.

When b̂ is either not signi®cantly di�erent from zero, or signi®cantly lessthan zero, persistence cannot be said to exist in the pro®le of technologicalspecialisation of the ®rm. In fact, in the latter case, the ranking of thesectors becomes reversed; that is, previously disadvantaged sectors tend tobecome areas of technological advantage and vice versa. However, this goescompletely against the expectation that patterns of technological speciali-sation tend to persist over time, which implies that b̂ > 0.

In the case of countries as opposed to ®rms, it has been observed thattechnological pro®les tend to persist for approximately 20 years (Pavitt,1987; Cantwell, 1991), but to diversify incrementally and hence to shiftmore signi®cantly over longer periods of say 50 years, or more. Here weexplore whether the same tendency towards diversi®cation through diver-sifying incremental change is also true at the ®rm level. By diversifyingincremental change, we are referring speci®cally to the tendency for a ®rmto gradually move into new areas in which it has made comparatively littlee�ort in the past, and so to become more evenly balanced in terms of itsrelative advantage among sectors of technological activity over time. In-cremental change may also work in the opposite direction to lead the ®rm tobecome even more specialised and advantaged in its existing areas ofstrength, constituting a reinforcement of the ®rm's existing pattern oftechnological specialisation. Thus, diversifying incremental change is to be


distinguished from reinforcing incremental change. The extent of diversi-fying incremental change may be measured by (1ÿ b̂) ± the ``regressione�ect''.

Diversifying incremental change however, is not in itself a su�cientcondition for technological diversi®cation. Indeed, diversi®cation may oc-cur as long as a weak regression e�ect (1ÿ b̂) is su�cient to outweigh aweak mobility e�ect (1ÿ q̂), and so it is necessary to use a stronger measureof diversi®cation.

It is possible to measure a ®rm's degree of technological specialisationwith conventional measures of concentration such as the estimated standarddeviation (r̂), or the estimated variance (r̂2) of its RTA index but we havechosen to use the coe�cient of variation (CV) of the RTA index acrosstechnological sectors. This is related to the standard deviation measure inthe following manner:

CVRTA � rRTA=lRTA � 100% �3�

The CV is a more suitable indicator of diversi®cation for our purposes as ityields two advantages over the use of the standard deviation. Firstly, ittakes into account the possibility of a changing mean RTA value in the®rm's technological pro®le over time and secondly, it is better related tomore frequently used measures of diversi®cation such as the Her®ndahlIndex2. However, whilst the CV is a positive measure of concentration, it isan inverse measure of diversi®cation. Thus for ease of exposition, we havechosen to use the inverse of the estimated coe�cient of variation ± 1=CV̂ , asa positive indicator of diversi®cation. If 1=CV̂ rises over time the ®rmdemonstrates that its technological pro®le has become more diversi®ed overtime whilst a fall demonstrates concentration.

In the following, we shall focus on the evidence for the notion of per-sistence in the pro®les of technological specialisation as depicted in Tables 2to 6. For those ®rms which display non-persistence, the issue of diversi®-cation is less relevant. In the cases in which persistence has been found to bestrong, we go on to explore whether persistence is compatible with theevolution of the ®rm's competence into areas of related diversi®cation(Granstrand and SjoÈ lander, 1990; Oskarsson, 1990, 1993; Patel and Pavitt,1997, 1998).

9 Results

9.1 Cross-industrial group results

The results derived from the regression analysis have been summarised inTables 2 to 6. At a very broad level, Table 2 clearly shows persistence to bea dominant feature of the technological pro®les of the selected very large

2 The Her®ndahl Index (H), is represented by the equation H � (CV2+1)/n, where n isthe number of sectors in the distribution. The use of the CV measure here for a ®xed n is inpractice equivalent to the Her®ndahl Index (see Hart, 1971).


®rms in each CEMT group ± irrespective of the time period (see total ofpersistence column). In accordance with our expectation, persistence erodedsomewhat over the longer overall time period. However, this erosion overlonger periods was not as great as we might have anticipated. The numberof ®rms displaying signi®cant persistence only fell from 26 and 27 in the twosub-periods respectively, to 22 in the overall period. Thus, persistence wasnot only very widely spread across all our large ®rms in the CEMT in-dustrial groupings, but also lasted over very long periods of time ± in excessof ®fty years, compared to 20 years or so at the country level.

Table 2. Evidence of persistence and diversi®cation among all ®rms in the CEMTgroupsa

Persistenceq̂ signi®cantly >0

Non-persistenceq̂ signi®cantly <0or not signi®cantlydi�erent from 0

Totals(Rows)

Early sub-period: RTA60 on RTA30 (Pat30 > 100)Concentration 1C 3E 2M 1T 1C 1T 2C 3E 2M 2T

1/CV̂ falls 7 2 9Diversi®cation 3C 4E 9M 3T 1C 1T 4C 4E 9M 4T

1/CV̂ rises 19 2 21

Totals 4C 7E 11M 4T 2C 2T(Columns) 26 4

Late sub-period: RTA90 on RTA60 (Pat30 > 100)Concentration 4E 3M 4T 4E 3M 4T

1/CV̂ falls 11 11Diversi®cation 5C 2E 7M 2T 1C 1E 1M 6C 3E 8M 2T

1/CV̂ rises 16 3 19

Totals 5C 6E 10M 6T 1C 1E 1M(Columns) 27 3

Late sub-period: RTA90 on RTA60 (Pat60 > 500)Concentration 3E 3M 3T 1M 3E 4M 3T

1/CV̂ falls 9 1 10Diversi®cation 5C 4E 7M 2T 1C 1T 6C 4E 7M 3T

1/CV̂ rises 18 2 20

Totals 5C 7E 10M 5T 1C 1M 1T(Columns) 27 3

Overall period: RTA90 on RTA30 (Pat30 > 100)Concentration 1C 1E 1M 2T 1C 1T 2C 1E 1M 3T

1/CV̂ falls 5 2 7Diversi®cation 3C 3E 9M 2T 1C 3E 1M 1T 4C 6E 10M 3T

1/CV̂ rises 17 6 23

Totals 4C 4E 10M 4T 2C 3E 1M 2T(Columns) 22 8

aNumbers in bold re¯ect number of ®rms out of 30 that possessed a particular combi-nation of the characteristics of persistence and diversi®cation in their pro®les of techno-logical activity.


We can also see from Table 2, that in the cases where there was per-sistence, there was also strong evidence of diversi®cation. In general, itseems that approximately two thirds of the selected ®rms in all CEMTgroups experienced a degree of diversi®cation in each time period underconsideration, whether there was technological persistence or not. It is alsoevident that diversi®cation within a persistent technological pro®le was atleast as widespread in the earlier sub-period, if not marginally more so thanthat which has occurred in the later sub-period 1960±90. This calls intoquestion whether diversi®cation in modern times is occurring with in-creasing frequency within ®rms, due to formerly distinct branches oftechnology becoming more interrelated (Granstrand and SjoÈ lander, 1990).

9.2 Individual industrial group results

At the level of the individual industrial groupings, persistence was stronglydisplayed within all CEMT groups in every period (see Table 2). Thenumber of historically large ®rms in the chemical and mechanical industrialgroups displaying persistence over time was more or less stable in eachperiod, but in the electrical group there was a tendency for persistence to beeroded over very long periods, and for the transport group of ®rms per-sistence appears to have strengthened in the later sub-period. However, atthis point it is necessary to convey a caveat regarding the highly hetero-geneous mechanical industrial group.

As the mechanical group is more broadly de®ned and heterogeneousthan any other, as a by-product of aggregation across a wider range ofcompanies, each ®rm would be measured as having a historically narrower,more concentrated focus of technological specialisation. This is re¯ected inthe initial levels of the cross-sectoral coe�cients of variation of the RTAdistributions of these ®rms. In 1930, the coe�cients of variation among themechanical group of ®rms were higher than for any other industrialgrouping (details available on request). For example, the photographiccompanies were strongly focused in photographic instruments relative to(e.g. textile) and other ®rms. Because the ®rms of each separate industryexhibit a distinct pro®le of technological specialisation (Patel and Pavitt,1997, 1998), ®rms in the more widely de®ned mechanical group will tend toshow particularly persistent technological pro®les.

With respect to technological diversi®cation, at the level of the indi-vidual industrial groupings, only within the chemical group did the numberof ®rms displaying diversi®cation within persistent technological pro®lesincrease between the two sub-periods. Among the electrical, mechanical andtransport groups there has been an apparent tendency for very large ®rmsto continue to hold persistent technological pro®les, whilst only diversifyingmore slowly (if at all) out of their established areas of relative advantage.This may be slightly misleading in that fewer technological sectors are se-lected on the pat60>500 basis relative to those selected on the pat30>100basis for the EM and T industrial groups whereas the number of techno-logical sectors for the chemical industrial group reaching the new criteriondoubles as discussed earlier.


9.3 Chemical group results

At the ®rm level, Table 3 shows that persistence was a strong feature amongvery large chemical ®rms. Of those big chemical ®rms with persistent pro-®les of technological specialisation, three have experienced continuous di-versi®cation. These are the IG Farben group of ®rms, Union Carbide andStandard Oil (see Table 3). In addition Du Pont, which has not possessed aconsistently persistent pro®le, did nevertheless undergo continuous diver-si®cation within its technological pro®le. This is in agreement with otheraccounts of Du Pont's deliberate pursuit of continuous diversi®cation(Hounshell and Smith, 1988; Hounshell, 1992).

The exception to persistence was Allied Chemical which maintained anon-persistent pro®le in each period although its diversi®cation behaviourdi�ered between the two sub-periods. This is not surprising as AlliedChemical underwent major changes in its structure during this time. Be-tween 1935 and the 1960's, Allied Chemical focused upon the production ofthe basic chemicals which had hitherto, made the company pro®table butcontinued investment in R&D was lacking and the plants became increas-ingly obsolete. This would account for the non-persistence yet concentra-tion observed here. In the early 1960's Allied made its ®rst entry intoaerospace manufacturing via an acquisition and through the 1960's and`70's the company refocused from basic and intermediate chemicals andrelated products, towards oil and gas and further towards other morepro®table and faster-growing, high value-added products based on ad-vanced technology. By the mid-1980's Allied Chemical had renamed itselfAllied Signal to re¯ect the change in its interests from chemicals to aero-space, electronic materials, polymers, etc. (International Directory ofCompany Histories). This again ®ts well with the observed lack of persis-tence combined with diversi®cation in the 1960±90 sub-period. As one cansee, Allied Chemical's institutional history has been far from consistent overtime, and consequently the mobility e�ect is very high (especially in the1960±90 period).

9.4 Electrical/electronic group results

Among electrical ®rms (see Table 4) persistence was an overwhelming trendin both sub-periods, but this trend was somewhat weaker when viewed overthe larger period, over which Siemens, RCA, and AEG all displayed non-persistent technological pro®les. This suggests that the technological evo-lution of these ®rms was more akin to the observed behaviour of countries,in which technological pro®les tended to persist for approximately twentyor thirty years, but to break down over longer periods of sixty years (Pavitt,1987; Cantwell, 1991). Closer analysis of the regression results showed thatRCA and AEG both had signi®cant but weaker persistence in 1930±60,than in 1960±90, when it was very strong. However, persistence in 1930±90over all was very weak.

Among those electrical ®rms with persistent pro®les, the diversi®cationthat occurred over the sub-period 1930±60 was more widespread than thatwhich occurred over the period 1960±90. However, this may be somewhat


misleading, and may be due, at least in part, to a signi®cant shift in thetechnological areas of interest to these selected ®rms because on thepat60>500 basis, the extent of diversi®cation in persistent patterns oftechnological specialisation among this group of ®rms remains just as wide-spread as that which occurred in 1930±60 on the pat30>100 basis. Theonly ®rm to have consistently experienced diversi®cation was Siemens, irre-spective of the presence or absence of persistence in its technological pro®le.

The changing pattern of persistence but constant presence of diversi®-cation in Siemens' pro®le can be explained by substantial change occurringin the pro®le of Siemens away from those sectors which were of importancein the early sub-period, to those which were of greater importance in thelater sub-period. Siemens played a prominent role in the production ofmilitary goods and equipment during both World Wars, and this probablydominates its technological pro®le even though it moved towards morecommercial areas such as consumer radio receivers in the interwar period.

Table 3. Evidence of persistence and diversi®cation among chemical ®rms



Early sub-period RTA60 on RTA30 (Pat30 > 100)Concentration

1/CV̂ fallsSwiss IG/Ciba/Geigy/Sandoz Allied Chemical

Diversi®cation1/CV̂ rises

IG Farben/Bayer/BASF/HoechstUnion Carbide

Du Pont

Standard Oil

Late sub-period RTA90 on RTA60 (Pat30 > 100)Concentration

1/CV̂ fallsAllied Chemical


IG Farben/Bayer/BASF/HoechstSwiss IG/Ciba/Geigy/SandozStandard OilDu PontUnion Carbide

Late sub-period RTA90 on RTA60 (Pat60 > 500)Concentration

1/CV̂ fallsAllied Chemical


IG Farben/Bayer/BASF/HoechstSwiss IG/Ciba/Geigy/SandozStandard OilDu PontUnion Carbide

Overall period RTA90 on RTA30 (Pat30 > 100)Concentration

1/CV̂ fallsSwiss IG/Ciba/Geigy/Sandoz Allied Chemical


IG Farben/Bayer/BASF/HoechstStandard Oil

Du Pont

Union Carbide


Post-WWII however, having been severely a�ected by the German defeat,the company moved more into railroad, medical, telephone and powergenerating equipment and consumer-electronics products also. Its growth inthis period warranted the organisational restructuring of the company in1966 which further enhanced its success. By the late 1970's Siemens haddisplaced Westinghouse Electric as General Electric's major world widecompetitor in many product areas. In the 1980's Siemens looked towards itslong term strategy and undertook an ambitious and expensive programmeof acquisitions and R&D to make itself into a world-leader in high tech-nology. This account would seem to lend support to the empirical ®ndingsof persistence and diversi®cation in our analysis here for each of the timeintervals we cover.

Overall, the majority of historically large electrical ®rms appear to pos-sess technological pro®les which have been strongly persistent, but which

Table 4. Evidence of persistence and diversi®cation among electrical ®rms



Early sub-period RTA60 on RTA30 (Pat30 > 100)Concentration General Electric1/CV̂ falls Westinghouse Electric

SingerDiversi®cation Siemens1/CV̂ rises AT&T

RCAAEG

Late sub-period RTA90 on RTA60 (Pat30 > 100)Concentration General Electric1/CV̂ falls RCA

AT&TAEG

Diversi®cation Singer Siemens1/CV̂ rises Westinghouse Electric

Late sub-period RTA90 on RTA60 (Pat60 > 500)Concentration RCA1/CV̂ falls AT&T

AEGDiversi®cation General Electric1/CV̂ rises Westinghouse Electric

SiemensSinger

Overall period RTA90 on RTA30 (Pat30 > 100)Concentration1/CV̂ falls

General Electric

Diversi®cation AT&T Siemens1/CV̂ rises Westinghouse Electric RCA

Singer AEG


experienced waves of both concentration and diversi®cation. WestinghouseElectric, Singer and General Electric (the latter on pat60>500 only), allconcentrated between 1930±60 yet diversi®ed from 1960±90. The conversepattern was observed for AT&T, AEG and RCA.

9.5 Mechanical group results

Table 5 shows, persistence in the technological pro®les of the large me-chanical ®rms again to be the dominant pattern in every time period, butthe earlier caveat applies.

Krupp is the exception but its lack of persistence in the later sub-periodcan be explained by the fact that post-WWII, the allied forces ordered thedivestiture of Krupp's coal and steel assets. This may have forced/enabledKrupp to rebuild and consolidate its interests in fabrication, trading andengineering and may have initiated the move in its interests into the tech-nological sectors which were of importance in 1960±90 on the pat60>500basis. These areas subsequently became the focus of Krupp's production inthe late 1970's and `80s and such behaviour might account for why in 1960±90 on the pat30>100 basis, Krupp possesses a diversifying but non-per-sistent in its technological pro®le.

Table 5 indicates that large mechanical ®rms also display strong supportfor diversi®cation in their technological pro®les, with diversi®cation havingbeen more widespread in 1930±1960 than in 1960±90. A number of ®rmsconsistently showed diversi®cation to be occurring in their persistent pro-®les in each period, namely: US Steel, Allis Chalmers, American Can,Bethlehem Steel and Vickers (only on the pat30>100 basis). These ®rmsthen conform quite well to the view that pro®les of technological compe-tence are path-dependent and cumulative in nature, but diversify incre-mentally. Note that not a single mechanical ®rm became consistently moreconcentrated.

9.6 Transport group results

Among transport ®rms (Table 6), persistence was again the strongest traitof the technological pro®le of ®rms in every period although Firestone andUnited Aircraft provide the exceptions. However, like Allied Chemicalabove, this outcome for United Aircraft is not entirely unexpected, as it iswell known that the ®rm is a substantially di�erent entity now (as UnitedTechnologies) to that which it was in 1930. At that time, United Aircraftwas a monopoly in the US aeronautics industry and it continued to growthrough a process of acquisition and merger. This policy appears to haveled to diversifying incremental change, but a lack of technological persis-tence in the early sub-period. United Aircraft continued to diversify in the1960's and `70's to the extent that by 1975, its original company name nolonger re¯ected the diversity of its interests and so they renamed themselvesUnited Technologies. Growth through acquisitions continued until the mid1980's after which a programme of business rationalisation and organisa-tional restructuring was implemented.


Table 5. Evidence of persistence and diversi®cation among mechanical ®rms

Persistencep̂ signi®cantly >0

Non-persistencep̂ signi®cantly <0or not signi®cantlydi�erent from 0

Early sub-period: RTA60 on RTA30 (Pat30 > 100)Concentration Emhart

1/CV̂ falls Westinghouse Air BrakeDiversi®cation Krupp

1/CV̂ rises Eastman KodakDeereUS SteelAllis ChalmersInternational HarvesterAmerican CanBethlehem SteelVickers

Late sub-period: RTA90 on RTA60 (Pat30 > 100)Concentration Eastman Kodak

1/CV̂ falls DeereInternational Harvester

Diversi®cation Emhart Krupp1/CV̂ rises US Steel

Allis ChalmersAmerican CanBethlehem SteelVickersWestinghouse Air Brake

Late sub-period: RTA90 on RTA60 (Pat60 > 500)Concentration Eastman Kodak Vickers

1/CV̂ falls DeereInternational Harvester

Diversi®cation Emhart1/CV̂ rises Westinghouse Air Brake

KruppUS SteelAllis ChalmersAmerican CanBethlehem Steel

Overall period: RTA90 on RTA30 (Pat30 > 100)Concentration

1/CV̂ fallsEmhart

Diversi®cation Deere Krupp1/CV̂ rises International Harvester

Westinghouse Air BrakeEastman KodakUS SteelAllis ChalmersAmerican CanBethlehem SteelVickers


Within those transport ®rms that did possess persistent pro®les oftechnological specialisation, a greater number experienced diversi®cationover the early sub-period than over the later sub-period. In fact, what isdemonstrated by these large transport ®rms is an increasing tendency to-wards the further concentration of their pro®les of technological compe-tence over time. Only Bendix has simultaneously experienced consistentdiversi®cation and persistence, although on balance it appears that auto-motive ®rms experienced diversi®cation in the presence or absence of per-sistence, whereas the tyre companies have had an apparent tendency toconcentrate over time.

From these results, it can be seen that in accordance with our theoreticalexpectations, persistence in the pro®les of technological competence was astrong characteristic of most historically large ®rms in each CEMT group ineach period. A lack of persistence may occur but largely in those ®rmswhich have experienced a disruption in corporate organisational activity(i.e. Allied Chemical, United Aircraft), or those which experienced post-warrestructuring3. However, the degree to which persistence was widespreadamongst ®rms did fall a little over much longer periods of time. This sug-gests that persistence did erode gradually, at least in some ®rms. However,the length of time over which persistence remained was found to be greaterthan 60 years in the majority of cases. This con®rms the hypothesis thatvery large ®rms provide considerably more stability over time than has beenfound for the case of countries, despite possibly profound changes in thecomposition of the science-base and of market demands.

At the same time, diversi®cation has been found to be a widespreadphenomenon among very large companies. More interestingly, it appears tohave been more widespread historically than in recent decades, albeitmarginally. The exception was the group of chemical ®rms, in which di-versi®cation has been an increasingly pervasive feature. This would seem tocontradict the implications that derive from other studies that the currenttechnologically complex environment would seem to be leading ®rms tobecome more multi-technology, even if they become more focused in theirproducts and business units (Granstrand and SjoÈ lander, 1990; Markidesand Williamson, 1994, 1996). Whilst this is an intriguing result we have notsought to investigate here why this might be so, this is undertaken in an-other paper (Fai and Cantwell, 1999). What we can say from the con®nes ofthe focus of this paper is that strong persistence in the technological pro®leof a ®rm's competencies does not apparently preclude the occurrence ofsimultaneous technological diversi®cation. The two are not mutually ex-clusive. Although technological diversi®cation has been a prevalent feature

3We acknowledge that it is somewhat misleading to continue to treat the consolidatedcorporate groups of IG Farben and Swiss IG as single entities in their own right in thepost-war period. This formulation was necessary to have a consistent basis for comparisonbetween 1930 and 1990. The persistence in these ®rms after the war is therefore merelyhypothetical. However, analysis of the individual ®rms that made up these consolidatedcorporate groups suggests that within the individual ®rms themselves, persistence in theirindividual technological pro®les continued to be a strong feature in the post-war period to1990.


among very large ®rms it has been incremental in nature, and is unlikely toundermine the persistence of the principal technological activities of largecompanies, even over very long time scales of 60 years or so. Despite thepersistence in the highest ranked areas of technological development, the®rm's pro®le of specialisation does tend to broaden through a process ofincremental diversi®cation in the majority of the largest US and European®rms. However, diversi®cation is not a process of continuous drift assometimes implicitly supposed, but tends to occur in speci®c phases orperiods in the face of occasional structural shifts across various ®rms in anindustry. For example, the technological diversi®cation that occurred in1940±60 was due to ®rms moving into related product markets (Chandler,1990) and so involved them incrementally extending their capabilities intonew but related directions. The technological diversi®cation observed in1980±90 however, is not so obviously an outcome of product market di-versi®cation, but more a necessity for operating in an increasingly complexand rapidly changing technological environment, and the capacity forcorporate fusion of newly related technologies into integrated systems(Kodama, 1992). Again this issue is explored in greater depth in Fai andCantwell (1999).

Table 6. Evidence of persistence and diversi®cation among transport ®rms


Non-persistenceq̂ signi®cantly <0 or notsigni®cantly di�erent from 0

Early sub-period RTA60 on RTA30 (Pat30 > 100)Concentration

1/CV̂ fallsBF Goodrich Firestone Tyre & Rubber

Diversi®cation General Motors United Aircraft1/CV̂ rises Goodyear Tyre & Rubber

Bendix

Late sub-period RTA90 on RTA60 (Pat30 > 100)Concentration General Motors

1/CV̂ falls Goodyear Tyre & RubberBF GoodrichFirestone Tyre & Rubber

Diversi®cation United Aircraft1/CV̂ rises Bendix

Late sub-period RTA90 on RTA60 (Pat60 > 500)Concentration Goodyear Tyre & Rubber

1/CV̂ falls BF GoodrichFirestone Tyre & Rubber

Diversi®cation General Motors United Aircraft1/CV̂ rises Bendix

Overall Period RTA90 on RTA30 (Pat30 > 100)Concentration Goodyear Tyre & Rubber Firestone Tyre & Rubber

1/CV̂ falls BF GoodrichDiversi®cation General Motors United Aircraft

1/CV̂ rises Bendix


10 Summary and conclusions

This paper has provided evidence in support of the proposition that verylarge ®rms tend to possess persistent patterns of technological specialisation,which implies path-dependency in the technological development of ®rms.While technological path-dependency in such ®rms is strong over relativelylong periods of about 30 years, it weakens somewhat over very long periodsof time. However, it seems that over long periods the pro®les of techno-logical competence of the largest ®rms tend to persist much more than theequivalent patterns of technological comparative advantage of countries.

The reason for the strength of persistence may lie with the greater degreeof institutional continuity among the majority of large ®rms. When thisinstitutional continuity is disrupted the behaviour of the ®rm is more akinto that of a country (see Cantwell, 1991); as we saw here, with AlliedChemical.

We have shown here that even when persistence is strong in the tech-nological pro®le of a ®rm diversifying incremental change often occurs, andalmost always results in diversi®ed technological activity. However, whenpersistence is prevalent but there is a lack of diversifying incrementalchange, the outstanding tendency has been for ®rms to increase the con-centration of their patterns of technological specialisation. This historicalanalysis has also highlighted that for most of our selected ®rms, diversifyingincremental change has also been a strong feature in the early part of the1930±90 period. It appears that ®rms will engage in diversi®cation in thosetechnological areas of importance to the prevailing technological paradigm.However, when a change in paradigm occurs, they tend to hold on to theirestablished areas of technological expertise, whilst engaging in experimentalmoves in the new technological sectors of apparent importance in the newparadigm.

From these results, we draw two conclusions; ®rst, with respect to theimplications for the theory of the ®rm and second, with respect to publicpolicy. For the theory of the ®rm, the existence of technological persistencein institutions with historical continuity provides evidence that ®rms de-velop their underlying ®elds of technological competence through a graduallearning process, even though these may be extended incrementally to takeadvantage of new knowledge and new market needs when required. Thisview of the ®rm as a repository of accumulated social capability, and acohesive social organisation which learns in order to innovate and changeits system of production over time, therefore holds advantages over a Co-asian transactions cost based theory in the analysis of corporate growth ordevelopment. Being a theory of exchange, the transaction cost approachdeals essentially only with the potentially public element of technologywhich can be traded or exchanged, and thus holds no obvious place for thenotions of technological competence or productive capability which canonly be accumulated through internal learning processes within the ®rm,and which thereby provides ®rms with the characteristics of technologicalpersistence or stability.

The implication of our ®ndings for public policy is that in order tosupport innovation, what is needed are measures to deal with institutional


failures ± measures which address the development of more sophisticatedsystems of production and the e�orts devoted to collective learning within®rms ± rather than market failure and malfunction. This may be contrastedwith the conventional neoclassical view of technology policy as a remedyfor market failure (Lall, 1994).

There is a direct analogy here between the theory of the ®rm and thepublic policy debate, with respect to whether the focus of attention shouldbe on the learning capabilities of institutions (and institutional failures tolearn and innovate), or on the market (and market failure). In each casewhat really matters is not so much how well markets work (or don't), buthow tacit social capability is generated through collective learning processesin production. Improving these learning processes normally means that theinstitutions must be adapted, with reference to their organisation of socialrelationships which are not (even potentially) market exchanges or trans-actions in the usual economists' sense. The role of governments is to helplower the costs and facilitate the creation of tacit capability in ®rms, ad-dressing the problem of the development of more sophisticated systems ofproduction, and increasing the propensity to seek pro®ts through outward-looking innovation, rather than through wage-cutting or the search forpositions of protected market power (Cantwell, 1999).

In addition, the inadequacy of ``new growth theory'' is highlighted, sinceif ®rms are not making the required investments in capability building andtechnological accumulation, it is insu�cient for the government to merelysupport the provision of more education and skills which are not then indemand by local ®rms. The most successful countries tend to be those inwhich government support for science and technology over a wide rangehas the vocal backing of innovative local ®rms, which wish to draw on andinteract with knowledge and skills from many diverse areas, as opposed topurely market-based national innovation systems following a laissez-faireideology (with allowance for `market failure') in which the public support ofresearch is focused upon the areas of the most direct and immediate marketpotential for local companies (Nelson, 1993; Pavitt, 1995).

Many writers on technological change have emphasised its tendency totransform and disrupt economies from time to time and over longer peri-ods, not least Schumpeter in his notion of creative destruction. This papero�ers a rather di�erent perspective. Other authors have focused on spheresof activity that are largely exogenous to individual ®rms: the science and theknowledge base, and the composition of products and markets. Thesespheres of activity do indeed change quite dramatically over time, andespecially over longer periods, but many large ®rms survive despite thesechanges. The ®rm provides a vehicle for potential institutional continuity,and a means by which (through learning and experimentation) tacit capa-bility or competence can be transformed to relate to and encompass a newbody of knowledge, and to produce di�erent products and serve and help tocreate new markets. Such a transformation may imply that the survival ofthe ®rm depends in the longer term upon the management of divisional andother organisational restructuring, but the ®rm's productive and techno-logical system itself is potentially more stable. Thus, the ®rm provides ameans for preserving a greater social continuity, and a device for managing


transitions within the economic system. Our argument is consistent withthat of Levinthal (1998), that punctuated equilibrium in technologicalevolution is due to new applications of established incrementally changingtechnologies (speciation), which gives rise to further corporate adaptationand may sometimes precipitate creative destruction in product markets.Just as an inter-®rm variety of technological paths may serve as an aid tostability in a changing environment (Eliasson, 1991), so too will the path-dependency itself of technological learning within each ®rm.

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