406 G. S. Hansen and B. Wernerfelt Table 2. Correlation matrix of variables in models FIRMTT IND丌 RELMS SIZE HRM EMPH GOAL. EMPH 1.000 IND丌 0.293 1.000 RELMS 0.119 0.075 SIZE 0.259 0.07 0.37 1.000 HRM. EMPH 0.600 0.110 -0.162 1.000 GOAL, EMPH 0.438 0.053 0.021 0.064 0.545 1.000 GOAL. EMPH variable keeps the latter insignifi- Variance decomposition cant. When run as two models with the variables kept separate, the GOAL. EMPH variable is To decompose the interfirm variance in profit positive and significant at the 0.005 level. The rates we will start with the combined model and organizational model alone explains substantially use f-tests to see if there are significant differences more of the profit variance than the economic in the amount of explained variance as we drop model alone. Given the extremely large number either group of variables from the complete of surveys used to formulate the measures, and model. Figure 2 starts at the bottom with the the long history of importance in the management of the F-test between it and the two submodels literature of motivating employees and goal Finally, the two submodels are tested from the theory(Locke, 1978), the results are not overly null model. This method is presented by Kmenta surprising to organization theorists (although those from an economic perspective may find (1971)and utilized by Schmalensee(1985) them noteworthy) Both economic and organizational factors are highly bethe at either level the organizational factors explain Integrated model more variance than the economic factors To The third, or integrated, model of firm perfor- formally analyze this, Table 4 gives the incremen- mance is also highly significant. The signs of the tal contributions to R2 for the economic and coefficients are in the expected direction, and it organizational models(Theil, 1971). Three thing explains even more of the firm's performance are important. First, both the models explain ubstantial amounts of firm profitability. Second with an R2 of 0.457. The RELMS variable is the organizational factors account for about twice now significant and with the expected sign as much variance as the economic factors.And indicating the importance of the firm's market third, the models are approximately orthogonal chare relative to its major competitors. However the GOAL. EMPH variable remains insignificant. Suggesting that these are indeed two independent It is worth noting that the R2 of this me only slightly smaller than the sum of the R2 values of the two partial models. So our specific economic and organizational factors appear to CONCLUSIONS AND IMPLICATIONS be roughly independent contributors to perfo We integrated two sample models of firm mance performance, one from the economic paradigm and one from the organizational paradigm. The results confirm the nodel, that climate is the effect of numerous environmental of both sets of factors in explaining perfo ormance We are not arguing that these underl However, the results also indicate that organi dog businesses or weak competiti variance in firm profit rates as economic factors Regarding the mod ality. There are