Strategic Management Journal, VoL. 12, 61-74(1991) WHY DO FIRMS DIFFER, AND HOW DOES IT MATTER? RICHARDR. NELSON School of International and Public Affairs, Columbia University New York, U.S.A. for students of business management and strategy, firm differences are at the heart of their inquiry. This paper explores the reasons behind this stark difference in viewpoint It argues that economists really ought to recognize firm differences explicity INTRODUCTION position certainly has been influenced by the work of scholars of firm management who have This paper is concerned with the sources and persuasively documented significant differences nificance of interfirm differences, from the among firms in an industry in behavior and viewpoint of an economist. How might an performance, and proposed that these difference economist's perspective on this differ, say, from largely reflect different choices made by firms that of a student of business management? I However, because the interests of those authors would argue that the most important difference have differed from the interests of economists, is that economists tend to see firms as players in almost no attention has been paid to the industry a multi actor economic game, and their interest or economy wide implications of such different is in the game and its outcomes, rather than in choices. Thus while the management literature the particular play or performance of individual provides a start for my argument, there is much firms. That is, economists are interested that I need to build myself, in cooperation with how the automobile industry works, and its like thinking friends erformance in ns. and not It should be recognized that, in trying to General Motors or Toyota per se, but only insofar make a case for the economic significance of as the particularities of these firms influence the discretionary firm differences, I and my co industry more broadly. This perspective is quite arguers are fighting against a strong tide in different, it seems to me, than that of a student economics, particularly in theoretical economics, behavior and performance of individual firms in such differences. The argument in economics is their own righ not that firms are all alike; economists recognize My objective in this essay is to make a strong that computer firms differ from textile firms, and case for the economic significance, in the sense in both industries, German firms almost certainly above, of discretionary firm differences. My differ from Taiwanese firms. Rather, the position is that the differences arent discretionary, but rather reflect differences in the contexts in which Key words: Firms, innovation, evolution, competition firms operate: computer design and production