Why Do Firms Differ? 65 even highlight, firm differences, and differences them, or at least I do, with very little theoretical that matter. One cannot study the computer insight into why IBM is different, or Toyota, and industry sensitively without paying attention to so what le peculiarities of IBM. The recent history of There has been a certain amount of recent the automobile industry cannot be understood theoretical work by economists that looks inside without understanding Toyoto and G M. But as of firms, at their structure, and thus seems to the Baumol, Blackman, and Wolff book testifies, give promise of a theoretical window for a deeper the theoretical preconceptions shared by most look into why firms differ. The chapters by economists lead them to ignore firm differences, Holmstrom and Tirole, and by Williamson, report unless compelled to attend to them on such work. The questions explor Several recent developments in theoretical surveyed work include what determines, through economics would appear to be changing this make or buy decisions, the boundaries of a firm somewhat. Thus the same summer that Made how it is organized, the relative bargaining power in America, and Productivity and American of owners, managers, and workers, etc, But Leadership were published, the long awaited again, the ultimate reason for why firms differ also. Included in the chapters were several that some chance event, or some initial condito Handbook of Industrial Organization(1989)was is rather superficial. Implicitly they differ becaus survey theoretical work that does recognize firm made different choices profitable differences In my view, recent theoretical developments There are, first of all, the essays by Ordover in neoclassical theory have loosened two of the and Saloner, and by Gilbert, which are expressly theoretical constraints making it difficult if not concerned with theoretical that aims to impossible to see firm differences as important explain firm differences, or at least some conse- Economists are getting away from the theoretical quences of firm differences. In the models tethers of static general equilibrium theory and reported, there usually is an incumbent in the are treating technology as a variable not a given industry, or in the production of a particular And they are trying to look inside the black box oroduct, who has certain advantages over firms of the firm. However, for the most part there who might think of joining the action. The has been failure to get away from the third presence of these advantages, or threats of action tether--taking a firms choice sets as obvious to should a newcomer try to encroach, is enough it and the best choice similarly clear and obvious to make the advantages durable. Gilbert deals And because of that, the reasons for firm more generally with models where there are costs differences, in technology or organization, are to firms of changing their market positions. ultimately driven back to differences in initial However, with few exceptions the models sur- conditions, or to the luck of a draw, which may veyed in these chapters do not consider in much make choice sets different. Given the same depth or detail original sources of firm differences. conditions, all firms will do the same thing Reinganum's chapter, which surveys modern As I indicated above, I certainly do not want neoclassical models of technological innovation, to play down the role of environment in is focused on what certainly is an important constraining and molding what firms do. And I source of such differences--industrial R&D and do not want to play down the role of chance in e innovation R&D makes possible. In the causing large and durable subsequent differences models she surveys, a firms technology may among firms. But in my view the models most differ from a rival's because of the luck of an economists keep playing with do not effectively R&d draw, with the advantages made durable come to grips with what lies behind the firm by patent protection or subsequent learning curve differences highlighted in Made in America, or advantages. Given an initial difference, firms the implications of those differences may face different incentives and thus find The reason, I want to argue, is that while the different courses of action most profitable. surveyed work purports to be concerned with However, while these models may rationalize innovation,, with the introduction of something the observation that firms possess different new to the economy in the form of new technology technologies, the answers as to why certainly or a new way of organizing a firm, the models aren't very deep. And one comes away from in question completely miss what is involved